Using the financial statements for the Goodyear Calendar Company, calculate
the 13 basic ratios found in the chapter.
GOODYEAR CALENDAR COMPANY
Balance Sheet
December 31, 2008
Assets
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,000
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Accounts receivable (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 370,000
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . (100,000)
Net plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 760,000
GOODYEAR CALENDAR COMPANY
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accrued taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,000
Long-term liabilities:
Bonds payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,000
Stockholders’ equity
Preferred stock, $100 par value . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Common stock, $1 par value . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Capital paid in excess of par . . . . . . . . . . . . . . . . . . . . . . . . . . 230,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . 480,000
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . $ 760,000
GOODYEAR CALENDAR COMPANY
Income Statement
For the Year Ending December 31, 2008
Sales (on credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,000,000
Less: Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
Less: Selling and administrative expenses . . . . . . . . . . . . . . . 400,000*
Operating profit (EBIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
Less: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Earnings before taxes (EBT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280,000
Less: Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112,000
Earnings after taxes (EAT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 168,000
To calculate the 13 basic ratios, we need to use the information provided in the financial statements of the Goodyear Calendar Company. Here are the steps to calculate each ratio:
1. Current Ratio: This ratio measures the company's ability to pay its short-term liabilities with its short-term assets. The formula is:
Current Ratio = Current Assets / Current Liabilities
2. Acid-Test Ratio: This ratio measures the company's ability to pay its short-term liabilities with its most liquid assets. The formula is:
Acid-Test Ratio = (Current Assets - Inventory) / Current Liabilities
3. Receivables Turnover: This ratio measures the number of times the company collects its average accounts receivable balance during a period. The formula is:
Receivables Turnover = Sales / Average Accounts Receivable
4. Inventory Turnover: This ratio measures the number of times the company sells and replaces its inventory during a period. The formula is:
Inventory Turnover = Cost of Goods Sold / Average Inventory
5. Total Asset Turnover: This ratio measures the company's ability to generate sales using its total assets. The formula is:
Total Asset Turnover = Sales / Total Assets
6. Debt Ratio: This ratio measures the proportion of a company's assets financed with debt. The formula is:
Debt Ratio = Total Liabilities / Total Assets
7. Equity Ratio: This ratio measures the proportion of a company's assets financed with equity. The formula is:
Equity Ratio = Total Stockholders' Equity / Total Assets
8. Gross Profit Margin: This ratio measures the percentage of sales that remains after deducting the cost of goods sold. The formula is:
Gross Profit Margin = (Gross Profit / Sales) * 100
9. Operating Profit Margin: This ratio measures the percentage of sales that remains after deducting both the cost of goods sold and operating expenses. The formula is:
Operating Profit Margin = (Operating Profit / Sales) * 100
10. Net Profit Margin: This ratio measures the percentage of sales that remains after deducting all expenses, including taxes. The formula is:
Net Profit Margin = (Earnings After Taxes / Sales) * 100
11. Return on Assets (ROA): This ratio measures the company's ability to generate profit relative to its total assets. The formula is:
ROA = (Earnings After Taxes / Total Assets) * 100
12. Return on Equity (ROE): This ratio measures the company's ability to generate profit relative to its equity. The formula is:
ROE = (Earnings After Taxes / Total Stockholders' Equity) * 100
13. Earnings Per Share (EPS): This ratio measures the company's profitability on a per share basis. The formula is:
EPS = Earnings After Taxes / Number of Common Shares Outstanding
Using the information provided in the financial statements, apply the formulas to calculate each of the 13 ratios.