CASE 4

With reference to the 4C Companys unadjusted trial balance, balance sheet,

and income statement (Case 2) for the year ending December 31, 0007, calcu- late each of the following. (This is the first year of 4C Companys operation.

When averages are called for but only beginning numbers are available, use the

ending numbers shown in Case 2 financial statements.)

a. Working capital

b. Current ratio

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194 CHAPTER 4 RATIO ANALYSIS

c. Quick ratio

d. Credit card receivables average collection period (Credit card sales revenue

is 60% of total sales revenue.)

e. Accounts receivable average collection period (Accounts receivable is 10%

of total sales revenue.)

f. Net return on assets

g. Net income to total sales revenue ratio

h. Return on stockholders equity

i. Food inventory turnover ratio

j. Beverage inventory turnover ratio

k. Cost of sales, food percentage

l. Cost of sales, beverage percentage

1. To conserve cash during the first year of operation, Mr. Driver limited his

salary to $1,500 per month. Explain whether the funds being withdrawn

as a salary are considered as a deductible operating expense to the 4C

Company.

2. Prepare a short discussion of each calculated ratio, which you believe may

be unsatisfactory, and explain why.

3. It appears that 4C has a good liquid cash position, and Mr. Driver is con- sidering using $20,000 of 4C cash to redeem some of his shares of com- mon stock before the final financial statements of the current year are pre- pared. He asks for your opinion. Recalculate any of the preceding ratios

that will be affected by the repurchase of the stock and discuss the effects

if the stock repurchase is made.