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Week Five Exercise Assignment

Carefully review the Grading Rubric for the criteria that will be used to evaluate your

assignment.

Week Five Exercise Assignment

Financial Ratios

1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close

of business on July 10:

Edison

Cash

$4,000

Short-term investments 3,000

Accounts receivable

2,000

Inventory

1,000

Prepaid expenses

800

Accounts payable

200

Notes payable: short-term 3,100

Accrued payables

300

Long-term liabilities

3,800

Stagg

$2,500

2,500

2,500

2,500

800

200

3,100

300

3,800

Thornton

$1,000

2,000

3,000

4,000

800

200

3,100

300

3,800

a. Compute the current and quick ratios for each of the three companies. (Round

calculations to two decimal places.) Which firm is the most liquid? Why?

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

20X5

Net credit sales

$832,000

Cost of goods sold

440,000

Cash, Dec. 31

125,000

Average Accounts receivable 180,000

Average Inventory

70,000

Accounts payable, Dec. 31 115,000

20X4

$760,000

350,000

110,000

140,000

50,000

108,000

a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds

all calculations to two decimal places.

3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock

outstanding. The company reported the following information for 20X7:

Net sales

Interest expense

Income tax expense

Preferred dividends

Net income

Average assets

Average common stockholders’

$1,500,000

$120,000

$80,000

$25,000

$130,000

$1,100,000

$400,000

equity

a. Compute the profit margin ratio, the return on equity and the return on assets, rounding

calculations to two decimal places.

b. Does the firm have positive or negative financial leverage? Briefly explain.

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from

the 20X1 and 20X2 financial statements follow.

20X2

Current Assets

Property, Plant, and Equipment

(net)

Intangibles

Current Liabilities

Long-Term Liabilities

Stockholders’ Equity

Net Sales

Cost of Goods Sold

Operating Expenses

20X1

$76,000

99,000

$80,000

90,000

25,000

40,800

143,000

16,200

500,000

332,500

93,500

50,000

48,000

160,000

12,000

500,000

350,000

85,000

Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your

work.

5. Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from

the 20X1 and 20X2 financial statements follow.

20X2

Current Assets

Property, Plant, and Equipment

(net)

20X1

$ 76,000

99,000

$ 80,000

90,000

Intangibles

Current Liabilities

Long-Term Liabilities

Stockholders’ Equity

Net Sales

Cost of Goods Sold

Operating Expenses

25,000

40,800

143,000

16,200

500,000

332,500

93,500

50,000

48,000

160,000

12,000

500,000

350,000

85,000

Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

6.

Ratio computation. The financial statements of the Lone Pine Company follow.

LONE PINE COMPANY

Comparative Balance Sheets

December 31, 20X2 and 20X1 ($000 Omitted)

20X2

20X1

Assets

Current Assets

Cash and Short-Term Investments

Accounts Receivable (net)

Inventories

Total Current Assets

Property, Plant, and Equipment

Land

Buildings and Equipment (net)

Total Property, Plant, and

Equipment

Total Assets

Liabilities and Stockholders’ Equity

Current Liabilities

Accounts Payable

Notes Payable

Total Current Liabilities

Long-Term Liabilities

Bonds Payable

Total Liabilities

Stockholders’ Equity

Common Stock

Retained Earnings

Total Stockholders’ Equity

Total Liabilities and Stockholders’

$ 400

3,000

2,000

$5,400

$ 600

2,400

2,200

$5,200

$1,700

1,500

$3,200

$ 600

1,000

$1,600

$8,600

$6,800

$1,800

1,100

$2,900

$1,700

1,900

$3,600

4,100

$7,000

2,100

$5,700

$ 200

1,400

$1,600

$8,600

$ 200

900

$1,100

$6,800

Equity

LONE PINE COMPANY

Statement of Income and Retained Earnings

For the Year Ending December 31,20X2 ($000 Omitted)

Net Sales*

$36,000

Less: Cost of Goods

$20,000

Sold

Selling Expense

Administrative

Expense

Interest Expense

Income Tax Expense

Net Income

Retained Earnings,

6,000

4,000

400

2,000

32,400

$ 3,600

900

Jan. 1

Cash Dividends

Declared and Paid

Retained Earnings,

$ 4,500

3,100

$ 1,400

Dec. 31

*All sales are on account.

Instructions

Compute the following items for Lone Pine Company for 20X2, rounding all calculations to

two decimal places when necessary:

a. Quick ratio

b. Current ratio

c. Inventory-turnover ratio

d. Accounts-receivable-turnover ratio

e. Return-on-assets ratio

f. Net-profit-margin ratio

g. Return-on-common-stockholders’ equity

h. Debt-to-total assets

i. Number of times that interest is earned

GRADING RUBRIC

Total Possible Score: 8.00

Liquidity Ratios

Total: 1.00

Distinguished – Accurately answers all parts of the problem from the assignment. The submission

includes a detailed explanation of how the problem was completed and all applicable supporting

computations.

Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies

in the calculations. The submission includes an explanation of how the problem was completed

and all applicable supporting computations.

Basic – Answers most parts of the problem from the assignment with several inaccuracies in the

calculations. The submission includes a brief explanation of how the problem was completed and

partial supporting computations.

Below Expectations – Attempts to answer the problem from the assignment; however, the

submission is underdeveloped and has many inaccuracies in the calculations. The submission

does not include an explanation of how the problem was attempted.

Non-Performance – The assignment is either nonexistent or fails to answer the problem from the

assignment.

Computation and Evaluation of Activity Ratios

Total: 1.00

Distinguished – Accurately answers all parts of the problem from the assignment. The submission

includes a detailed explanation of how the problem was completed and all applicable supporting

computations.

Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies

in the calculations. The submission includes an explanation of how the problem was completed

and all applicable supporting computations.

Basic – Answers most parts of the problem from the assignment with several inaccuracies in the

calculations. The submission includes a brief explanation of how the problem was completed and

partial supporting computations.

Below Expectations – Attempts to answer the problem from the assignment; however, the

submission is underdeveloped and has many inaccuracies in the calculations. The submission

does not include an explanation of how the problem was attempted.

Non-Performance – The assignment is either nonexistent or fails to answer the problem from the

assignment.

Profitability Ratios, Trading on the Equity

Total: 1.00

Distinguished – Accurately answers all parts of the problem from the assignment. The submission

includes a detailed explanation of how the problem was completed and all applicable supporting

computations.

Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies

in the calculations. The submission includes an explanation of how the problem was completed

and all applicable supporting computations.

Basic – Answers most parts of the problem from the assignment with several inaccuracies in the

calculations. The submission includes a brief explanation of how the problem was completed and

partial supporting computations.

Below Expectations – Attempts to answer the problem from the assignment; however, the

submission is underdeveloped and has many inaccuracies in the calculations. The submission

does not include an explanation of how the problem was attempted.

Non-Performance – The assignment is either nonexistent or fails to answer the problem from the

assignment.

Horizontal Analysis

Total: 2.00

Distinguished – Accurately answers all parts of the problem from the assignment. The submission

includes a detailed explanation of how the problem was completed and all applicable supporting

computations.

Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies

in the calculations. The submission includes an explanation of how the problem was completed

and all applicable supporting computations.

Basic – Answers most parts of the problem from the assignment with several inaccuracies in the

calculations. The submission includes a brief explanation of how the problem was completed and

partial supporting computations.

Below Expectations – Attempts to answer the problem from the assignment; however, the

submission is underdeveloped and has many inaccuracies in the calculations. The submission

does not include an explanation of how the problem was attempted.

Non-Performance – The assignment is either nonexistent or fails to answer the problem from the

assignment.

Vertical Analysis

Total: 1.00

Distinguished – Accurately answers all parts of the problem from the assignment. The submission

includes a detailed explanation of how the problem was completed and all applicable supporting

computations.

Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies

in the calculations. The submission includes an explanation of how the problem was completed

and all applicable supporting computations.

Basic – Answers most parts of the problem from the assignment with several inaccuracies in the

calculations. The submission includes a brief explanation of how the problem was completed and

partial supporting computations.

Below Expectations – Attempts to answer the problem from the assignment; however, the

submission is underdeveloped and has many inaccuracies in the calculations. The submission

does not include an explanation of how the problem was attempted.

Non-Performance – The assignment is either nonexistent or fails to answer the problem from the

assignment.

Ratio Computation

Total: 2.00

Distinguished – Accurately answers all parts of the problem from the assignment. The submission

includes a detailed explanation of how the problem was completed and all applicable supporting

computations.

Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies

in the calculations. The submission includes an explanation of how the problem was completed

and all applicable supporting computations.

Basic – Answers most parts of the problem from the assignment with several inaccuracies in the

calculations. The submission includes a brief explanation of how the problem was completed and

partial supporting computations.

Below Expectations – Attempts to answer the problem from the assignment; however, the

submission is underdeveloped and has many inaccuracies in the calculations. The submission

does not include an explanation of how the problem was attempted.

Non-Performance – The assignment is either nonexistent or fails to answer the problem from the

assignment.