Quiz 11: Financial Statement Analysis

Business

(a) Calculate working capital at December 31, 2016: Working capital measures the firm's ability to meet the current obligations as and when they are due. The working capital is the excess of current assets over current liabilities. The working capital is calculated by deducting the current liabilities from the current assets as shown below: img Therefore, working capital is $80,000. (b) Calculate current ratio as at December 31, 2016: Current ratio is a measure to evaluate the liquidity to compare the time between firms. The current ratio is calculated by dividing the current assets with the current liabilities as shown below: img Therefore, current ratio is 3. (c) Calculate acid-test ratio at December 31, 2016: Quick ratio is a conservative assessment of the firm's bill paying ability. It excludes inventories and other non-liquid current assets in determining the ratio. Use the following formula to calculate the quick ratio: img Therefore, acid-test ratio is 1.5.

(a) Calculate Inventory turnover ratio for 2016: Inventory turnover ratio measures the firm's efficiency in managing inventory. As the inventory is carried at cost, the cost of goods sold is used in the formula to calculate the inventory turnover ratio. Use the following formula to calculate the inventory turnover ratio: img Therefore, Inventory turnover ratio is 4. (b) Calculate the number of days' sales in inventory: Number of days' sale in inventory determine the average number of days' needed to sell the inventory during one accounting cycle. It is calculated by dividing the accounts receivable at the year end with the average day's sales. Use the following formula to calculate the number of days' sales in inventory: img Therefore, the number of days' sales in inventory is 98. (c) Calculate accounts receivable turnover ratio: Accounts receivable turnover ratio measures the accounts receivables attained from the credit sales generated. The accounts receivable turnover is calculated by dividing the net sales with the average accounts receivable as shown below: img . Therefore, accounts receivable turnover ratio is 25 times. (d) Calculate number of day's sales in accounts receivable: Number of day's sales in receivables determines the average number of day's to collect an accounts receivable. This is calculated by dividing the accounts receivable turnover ratio with the average day's sales as shown below: img Therefore, the number of day's sales in accounts receivable is 16 days.

(a) Calculate the return on investment: As per the DuPont Model, the margin would express the net income from the dollar sales generated. Similarly, turnover shows the efficiency of assets used to generate the sales. As per the model, the return on investment is the product of margin and turnover. Use the following formula to calculate the return on investment: img Hence, the return on investment is 6%. (b) Calculate the return on equity: The return on equity is the rate earned by the stockholders. The return on equity is calculated by dividing the net income with the average stockholder's equity. Use the following formula to calculate the return on equity: img Hence, the return on equity is 10%. (c) Determine the price earnings ratio: The ratio expresses the relative expensiveness of a share of firm's common stock. It is calculated by dividing the market price with the earnings per share. Use the following formula to calculate the price earnings ratio: img . Hence, the price earnings ratio is 16. (d) Calculate the dividend payout ratio: This ratio expresses the proportion of earnings paid as dividends to common stockholders. This ratio is calculated by dividing the annual dividend per share with the earnings per share. Use the following formula to calculate the dividend payout ratio: img Hence, the dividend payout ratio is 40%. (e) Calculate dividend yield: This ratio expresses the rate of return of stockholders represented by the annual cash dividend. The dividend yield is calculated by dividing the annual dividend per share with the market price per share of stock. Use the following formula to calculate the dividend yield: img Hence, the dividend yield is 2.5%.