Quick or acid-test ratio, 848, a measure of liquidity that compares only the most liquid assets...

 

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Quick or acid-test ratio, 848, a measure of liquidity that compares only the most liquid assets to current liabilities. Return on sales, 856, a measure of the efficiency of a firm that is computed by dividing net income by sales. Return on stockholders' equity, 857, a measure that can be used to compare against other return measures (e.g.. preferred dividend rates and bond rates). It is computed by dividing net income less preferred dividends by the average common stockholders' equity. Return on total assets, 856, the result of dividing net income plus the after-tax cost of interest by the average total assets. Times-interest-earned ratio, 853, a leverage ratio that uses the income statement to assess a company's ability to service its debt. It is computed by dividing net income before taxes and interest by interest expense. Vertical analysis, 840, a type of analysis that expresses the line item as a percentage of some other line item for the same period. 1. Financial Statement Analysis Shera Company just completed its second year of operations. The comparative income state- ments for these years are as follows: Sales revenue Cost of goods sold Gross margin Operating expenses Interest expenses Income before taxes Income taxes Net income 20X1 $500,000 300,000 $200,000 (80,000) (20,000) Current assets Long-term assets Total assets Current liabilities Long-term liabilities Total liabilities Common stock Retained earnings Total equity $100,000 34,000 $ 66,000 n22 Selected information from the balance sheet for 20X1 is also given. 20X2 $800.000 464.000 $336,000 (164,000) (20,000) $152,000 51,680 $100,320 $100,000 400,000 $500,000 $ 80,000 220,000 $300,000 $100,000 100,000 $200,000 Shera had 100,000 shares of stock outstanding. At the end of 20X2, a share had a market val- ue of $1.80. The shares outstanding have not changed since the original issue. Dividends of $30,000 were paid in 20X2. Total assets have not changed during 20X2. Required: 1. Using 20X1 as a base period, express all line items of the income statements as a percentage of the corresponding base period item. 2. Express each line item of the two income statements as a percentage of sales. 3. Comment on the trends revealed by the computations in Requirements 1 and 2. 4. Compute the following ratios for 20X2: (a) current ratio, (b) debt ratio, (c) return on total assets, (d) times-interest-earned ratio, (e) earnings per share, and (f) dividend yield. Quick or acid-test ratio, 848, a measure of liquidity that compares only the most liquid assets to current liabilities. Return on sales, 856, a measure of the efficiency of a firm that is computed by dividing net income by sales. Return on stockholders' equity, 857, a measure that can be used to compare against other return measures (e.g.. preferred dividend rates and bond rates). It is computed by dividing net income less preferred dividends by the average common stockholders' equity. Return on total assets, 856, the result of dividing net income plus the after-tax cost of interest by the average total assets. Times-interest-earned ratio, 853, a leverage ratio that uses the income statement to assess a company's ability to service its debt. It is computed by dividing net income before taxes and interest by interest expense. Vertical analysis, 840, a type of analysis that expresses the line item as a percentage of some other line item for the same period. 1. Financial Statement Analysis Shera Company just completed its second year of operations. The comparative income state- ments for these years are as follows: Sales revenue Cost of goods sold Gross margin Operating expenses Interest expenses Income before taxes Income taxes Net income 20X1 $500,000 300,000 $200,000 (80,000) (20,000) Current assets Long-term assets Total assets Current liabilities Long-term liabilities Total liabilities Common stock Retained earnings Total equity $100,000 34,000 $ 66,000 n22 Selected information from the balance sheet for 20X1 is also given. 20X2 $800.000 464.000 $336,000 (164,000) (20,000) $152,000 51,680 $100,320 $100,000 400,000 $500,000 $ 80,000 220,000 $300,000 $100,000 100,000 $200,000 Shera had 100,000 shares of stock outstanding. At the end of 20X2, a share had a market val- ue of $1.80. The shares outstanding have not changed since the original issue. Dividends of $30,000 were paid in 20X2. Total assets have not changed during 20X2. Required: 1. Using 20X1 as a base period, express all line items of the income statements as a percentage of the corresponding base period item. 2. Express each line item of the two income statements as a percentage of sales. 3. Comment on the trends revealed by the computations in Requirements 1 and 2. 4. Compute the following ratios for 20X2: (a) current ratio, (b) debt ratio, (c) return on total assets, (d) times-interest-earned ratio, (e) earnings per share, and (f) dividend yield.

Answer rating: 100% (QA)

2 Vertical analysis Sales revenue Cost of goods sold Gross margin Operating expenses Interest expens... View the full answer