Selected year- end financial statements of Cadet Corporation follow. ( All sales were on credit; selected balance sheet amounts at December 31, 2008 (prior year – you will need this to calculate certain averages), were inventory, $ 56,900; total assets, $ 219,400; common stock, $ 85,000; and retained earnings, $ 52,348.)
CADET CORPORATION
Income Statement
For Year Ended December 31, 2009
Sales . . . . . . . . . . . . . . . . . . . $ 456,600
Cost of goods sold . . . . . . . . 297,450
Gross profit . . . . . . . . . . . . . 159,150
Operating expenses . . . . . . . . 99,400
Interest expense . . . . . . . . . . 3,900
Income before taxes . . . . . . . 55,850
Income taxes . . . . . . . . . . . . . 22,499
Net income . . . . . . . . . . . . . . $ 33,351
CADET CORPORATION
Balance Sheet
December 31, 2009
Assets Liabilities and Equity
Cash . . . . . . . . . . . . . . . . . . . . . . $ 20,000 Accounts payable . . . . . . . . . . . .. . $ 21,500 Short- term investments . . . . . . . . . 8,200 Accrued wages payable . . . . . . . . . . 4,400 Accounts receivable, net . . . . . . . . 29,400 Income taxes payable . . . . . . . . . . . . 3,700 Notes receivable ( trade)* . . . . . . . . 7,000 Long- term note payable …… . 67,400
Inventory . . . . . . . . . . 34,150
Prepaid expenses . . . . . . . . . . . . . . 2,700 Common stock . . . . . . . . . .. . . 85,000 Plant assets, net . . . . . . . . . . . . . . . 147,300 Retained earnings . . . . . . . . . . . . . . 66,750 Total assets . . . . . . . . . . . . . . . . . . 248,750 Total liabilities and equity . . . . . . $ 248,750
On the next page, compute the following: ( 1) current ratio, ( 2) acid- test ratio, ( 3) days’ sales uncollected, ( 4) inventory turnover, ( 5) days’ sales in inventory, ( 6) debt- to- equity ratio, ( 7) times interest earned, ( 8) profit margin ratio, ( 9) total asset turnover,
( 10) return on total assets, and ( 11) return on common stockholders’ equity. (12 points).
prepare the appropriate adjusting entry for the year Rent of $24,000 for a full year was paid on August 31,2011
To compute the requested ratios, we will need to use the information provided in the financial statements.
1) Current ratio: This ratio measures the company's ability to cover its current liabilities with its current assets.
Current assets = Cash + Short-term investments + Accounts receivable, net + Inventory + Prepaid expenses
Current liabilities = Accounts payable + Accrued wages payable + Income taxes payable
Current ratio = Current assets / Current liabilities
2) Acid-test ratio: This ratio is a more stringent measure of a company's short-term liquidity, as it excludes inventory from current assets.
Acid-test ratio = (Cash + Short-term investments + Accounts receivable, net) / Current liabilities
3) Days' sales uncollected: This ratio measures the average number of days it takes for the company to collect payments from its customers.
Days' sales uncollected = (Accounts receivable, net / Sales) * 365
4) Inventory turnover: This ratio measures how efficiently inventory is being managed by the company.
Inventory turnover = Cost of goods sold / Average inventory
Average inventory = (Beginning inventory + Ending inventory) / 2
5) Days' sales in inventory: This ratio measures the average number of days it takes for inventory to be sold.
Days' sales in inventory = (Average inventory / Cost of goods sold) * 365
6) Debt-to-equity ratio: This ratio measures the proportion of a company's financing that comes from debt compared to equity.
Debt-to-equity ratio = Total liabilities / Total equity
7) Times interest earned: This ratio measures how easily a company can cover its interest expenses with its income before taxes and interest.
Times interest earned = Income before taxes and interest / Interest expense
8) Profit margin ratio: This ratio measures the company's overall profitability.
Profit margin ratio = Net income / Sales
9) Total asset turnover: This ratio measures how efficiently a company uses its assets to generate revenue.
Total asset turnover = Sales / Total assets
10) Return on total assets: This ratio measures the profitability of a company's total assets.
Return on total assets = Net income / Total assets
11) Return on common stockholders' equity: This ratio measures the profitability of a company's common stockholders' equity.
Return on common stockholders' equity = Net income / Common stockholders' equity
Now that we know how to compute each ratio, we can use the information provided in the financial statements to calculate them.