Using the financial statements for the Goodyear Calendar Company, calculate
the 13 basic ratios found in the chapter.
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 for the Goodyear Calendar Company, we will use the information provided in the financial statements.
1. Current Ratio:
Current Ratio = Current Assets / Current Liabilities
Current Assets = $370,000
Current Liabilities = $110,000
Current Ratio = $370,000 / $110,000
2. Quick Ratio:
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Inventory = $180,000
Quick Ratio = ($370,000 - $180,000) / $110,000
3. Cash Ratio:
Cash Ratio = Cash / Current Liabilities
Cash = $40,000
Cash Ratio = $40,000 / $110,000
4. Inventory Turnover:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Cost of Goods Sold = $1,300,000
Average Inventory = ($180,000 + $0) / 2
5. Days Sales of Inventory:
Days Sales of Inventory = 365 days / Inventory Turnover
6. Receivables Turnover:
Receivables Turnover = Net Sales / Average Accounts Receivable
Net Sales = $2,000,000
Average Accounts Receivable = ($120,000 + $0) / 2
7. Days Sales Outstanding:
Days Sales Outstanding = 365 days / Receivables Turnover
8. Payables Turnover:
Payables Turnover = Total Purchases / Average Accounts Payable
9. Days Payable Outstanding:
Days Payable Outstanding = 365 days / Payables Turnover
10. Debt-to-Equity Ratio:
Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity
11. Times Interest Earned:
Times Interest Earned = Earnings Before Interest and Taxes (EBIT) / Interest Expense
12. Gross Profit Margin:
Gross Profit Margin = Gross Profit / Net Sales
13. Net Profit Margin:
Net Profit Margin = Net Income / Net Sales
To calculate these ratios, you will need additional information for total purchases and average accounts payable. If those values are not provided in the financial statements, you will not be able to calculate the corresponding ratios.
To calculate the 13 basic ratios, we will need to use the information provided in the financial statements for Goodyear Calendar Company.
1. Current Ratio:
Current Ratio = Current Assets / Current Liabilities
Current Assets = $370,000
Current Liabilities = $110,000
Current Ratio = $370,000 / $110,000 = 3.36
2. Quick Ratio:
Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Current Assets = $370,000
Inventory = $180,000
Current Liabilities = $110,000
Quick Ratio = ($370,000 - $180,000) / $110,000 = 1.73
3. Cash Ratio:
Cash Ratio = Cash / Current Liabilities
Cash = $40,000
Current Liabilities = $110,000
Cash Ratio = $40,000 / $110,000 = 0.36
4. Net Working Capital Ratio:
Net Working Capital Ratio = (Current Assets - Current Liabilities) / Total Assets
Current Assets = $370,000
Current Liabilities = $110,000
Total Assets = $760,000
Net Working Capital Ratio = ($370,000 - $110,000) / $760,000 = 0.39
5. Debt-to-Equity Ratio:
Debt-to-Equity Ratio = Total Liabilities / Total Stockholders' Equity
Total Liabilities = $280,000
Total Stockholders' Equity = $480,000
Debt-to-Equity Ratio = $280,000 / $480,000 = 0.58
6. Equity Multiplier:
Equity Multiplier = Total Assets / Total Stockholders' Equity
Total Assets = $760,000
Total Stockholders' Equity = $480,000
Equity Multiplier = $760,000 / $480,000 = 1.58
7. Gross Profit Margin:
Gross Profit Margin = Gross Profit / Sales
Gross Profit = $700,000
Sales = $2,000,000
Gross Profit Margin = $700,000 / $2,000,000 = 0.35
8. Operating Profit Margin:
Operating Profit Margin = Operating Profit / Sales
Operating Profit = $300,000
Sales = $2,000,000
Operating Profit Margin = $300,000 / $2,000,000 = 0.15
9. Net Profit Margin:
Net Profit Margin = Earnings after taxes / Sales
Earnings after taxes = $168,000
Sales = $2,000,000
Net Profit Margin = $168,000 / $2,000,000 = 0.084 or 8.4%
10. Return on Assets (ROA):
Return on Assets = Earnings after taxes / Total Assets
Earnings after taxes = $168,000
Total Assets = $760,000
Return on Assets = $168,000 / $760,000 = 0.22 or 22%
11. Return on Equity (ROE):
Return on Equity = Earnings after taxes / Total Stockholders' Equity
Earnings after taxes = $168,000
Total Stockholders' Equity = $480,000
Return on Equity = $168,000 / $480,000 = 0.35 or 35%
12. Earnings per Share (EPS):
Earnings per Share = Earnings after taxes / Number of Common Shares Outstanding
Earnings after taxes = $168,000
Number of Common Shares Outstanding = (Common stock, $1 par value) / (par value) = $60,000 / $1 = 60,000 shares
Earnings per Share = $168,000 / 60,000 shares = $2.80 per share
13. Price-Earnings Ratio (P/E Ratio):
Price-Earnings Ratio = Market Price per Share / Earnings per Share
Since the market price per share is not provided, we cannot calculate the P/E ratio with the given information.