Question

Basic Financial Ratios

The accounting staff of CCB Enterprises has completed the financial statements for the 2017 calendar year. The statement of income for the current year and the comparative statements of financial position for 2017 and 2016 follow.

CCB Enterprises
Statement of Income
For the Year Ended December 31, 2017
(thousands omitted)
Revenue:
Net sales	$800,000
Other	60,000
Total revenue	$860,000
Expenses:
Cost of goods sold	$540,000
Research and development	25,000
Selling and administrative	155,000
Interest	20,000
Total expenses	$740,000
Income before income taxes	$120,000
Income taxes	48,000
Net income	$72,000

CCB Enterprises
Comparative Statements of Financial Position
December 31, 2017 and 2016
(thousands omitted)
	2017	2016
Assets
Current assets:
Cash and short-term investments	$26,000	$21,000
Receivables, less allowance for doubtful accounts
($1,100 in 2017 and $1,400 in 2016)	48,000	50,000
Inventories, at lower of FIFO cost or market	65,000	62,000
Prepaid items and other current assets	5,000	3,000
Total current assets	$144,000	$136,000
Other assets:
Investments, at cost	$106,000	$106,000
Deposits	10,000	8,000
Total other assets	$116,000	$114,000
Property, plant, and equipment:
Land	$12,000	$12,000
Buildings and equipment, less accumulated depreciation
($126,000 in 2017 and $122,000 in 2016)	268,000	248,000
Total property, plant, and equipment	$280,000	$260,000
Total assets	$540,000	$510,000
Liabilities and Owners’ Equity
Current liabilities:
Short-term loans	$22,000	$24,000
Accounts payable	72,000	71,000
Salaries, wages, and other	26,000	27,000
Total current liabilities	$120,000	$122,000
Long-term debt	$160,000	$171,000
Total liabilities	$280,000	$293,000
Owners’ equity:
Common stock, at par	$44,000	$42,000
Paid-in capital in excess of par	64,000	61,000
Total paid-in capital	$108,000	$103,000
Retained earnings	152,000	114,000
Total owners’ equity	$260,000	$217,000
Total liabilities and owners’ equity	$540,000	$510,000

Required:

1. Calculate the following financial ratios for 2017 for CCB Enterprises:

Round items a, b, h, j, and k to the nearest whole number. Round all other amounts to two decimal places. Assume a 360-day year.

a.  Times interest earned	to 1
b.  Return on total assets	%
c.  Return on common stockholders' equity	%
d.  Debt-to-equity ratio (at December 31, 2017)	to 1
e.  Current ratio (at December 31, 2017)	to 1
f.  Quick (acid-test) ratio (at December 31, 2017)	to 1
g.  Accounts receivable turnover ratio (Assume that all sales are on credit.)	times
h.  Number of days' sales in receivables	days
i.  Inventory turnover ratio (Assume that all purchases are on credit.)	times
j.  Number of days' sales in inventory	days
k.  Number of days in cash operating cycle	days

Answer 1

a. Time interest earned ratio = EBIT / interest expense

= $140000 / $20000

= 7 times.

b. Return on total assets = Net income / average total assets

= $72000 / ($540000 + $510000) /2

= $72000 / $525000

= 13.71%.

c. Return on common stockholder's equity = Net income / average common stockholder's equity

= $72000 / ($108000 + $103000)/2

= $72000 / $105500

= 68.25%.

d. Debt to equity ratio = long term debt / shareholders equity

= $160000 / $260000

= 0.61

e. Current ratio = current assets / current liabilities

= $144000 / $120000

= 1.2 times.

f. Acid test ratio = $144000 - $65000 - $5000 / $120000

= 0.62 times.