Question

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	23,000
Accounts receivable, net		170,000
Merchandise inventory		350,000
Prepaid expenses		12,000
Total current assets		555,000
Property and equipment, net		850,000
Total assets	$	1,405,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	250,000
Bonds payable, 10%		390,000
Total liabilities		640,000
Stockholders’ equity:
Common stock, $5 per value	$	180,000
Retained earnings		585,000
Total stockholders’ equity		765,000
Total liabilities and stockholders’ equity	$	1,405,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	3,315,000
Cost of goods sold		1,408,000
Gross margin		1,907,000
Selling and administrative expenses		630,000
Net operating income		1,277,000
Interest expense		39,000
Net income before taxes		1,238,000
Income taxes (30%)		371,400
Net income	$	866,600

Account balances at the beginning of the year were: accounts receivable, $220,000; and inventory, $290,000. All sales were on account.

Required:

Compute the following financial data and ratios:

1. Working capital.

2. Current ratio. (Round your answer to 1 decimal place.)

3. Acid-test ratio. (Round your answer to 2 decimal places.)

4. Debt-to-equity ratio. (Round your answer to 2 decimal places.)

5. Times interest earned ratio. (Round your answer to 2 decimal places.)

6. Average collection period. (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)

7. Average sale period. (Use 365 days in a year. Round your intermediate calculations and final answer to 1 decimal place.)

8. Operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

Answer 1

Castile Products Inc.

Sl no		Formula	Calculations ($)
1	Working capital	current assets - current liabilities	555,000 - 250,000	$ 305,000
2	Current ratio	current assets/ current liabilities	555,000/250,000	2.2 : 1
3	Acid test ratio	(cash + accounts receivable)/ current liabilities	(23,000+170,000)/250,000	0.77 : 1
4	Debt to Equity	total liabilities/ total equity	640,000/765,000	83.66 %
5	Time interest earned ratio	operating income/ interest	12,77,000/39,000	32.74 times
6	Average collection period	365/sales × average accounts receivable	365/33,15,000 × (170,000+220,000)/2	21.5 days
7	Average sale period	365/cost sales of × average inventory	365/14,08,000 × (350,000+290,000)/2	83 days
8	Operating cycle	average sales period + average collection period	83 days + 21.5 days	104.5 days