Question

1. Basic Financial Ratios
2. 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.
   

3. 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

4. 
   

5. 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

6. Required:
7. 1. Calculate the following financial ratios for 2017 for CCB Enterprises:
8. 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.

9. 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

10. 2. Which of the following statements pertaining to ratio analysis of CCB Enterprises is true?
    
11. The company has low number of days' receivables outstanding indicating strong collection efforts.

• While the company has a strong interest coverage ratio, there is no guarantee that its debt service coverage will also be high.
• While the company has strong liquidity, its inventory has crept up in 2017 which could signal a problem.
• All of these are true.

1. Feedback

1. Loading item

There was an error loading this item. If this continues to occur, please contact Technical Support.

Check My Work

• Previous
• Next

• 100% Correct
• Partially Correct
• Incorrect
• Needs Instructor Grading

Basic Calculatorclose

0

UseEntBSBSpCEHomCEnd

789+

456-

123*

0.=/

Answer 1

1) Please find below the ratio calculation:

S no	Ratio name	Formula	Amount	Ratio
a	Times interest earned ratio =	Income before interest and tax	140,000	7.00
		Interest expense	20,000
b	Return on Total assets =	Income before interest and tax	140,000	26%
		Total Net Assets	540,000
c	Return on common stockholder's equity =	Net income	72,000	28%
		Stockholder's equity	260,000
d	Debt to equity ratio=	Total Liabilities	280,000	1.08
		Stockholder's equity	260,000
e	Current Ratio =	Current Assets	144,000	1.20
		Current Liabilities	120,000
f	Quick ratio =	Liquid Assets	209,000	1.74
		Current Liabilities	120,000
g	Account Receivable turnover ratio=	Net credit sales	800,000	16.33
		Average Accounts receivable	49,000
h	Number of days sales in receivables=	Number of days in a year	360	22.05
		Accounts receivable turnover ratio	16
i	Inventory turnover ratio =	Cost of goods sold	540,000	8.50
		Average inventory	63,500
j	Number of days sales in inventory=	Number of days in a year	360	42.33
		Inventory turnover ratio	9
k	Number of days in cash operating cycle	Number of days sales in receivables+Number of days sales in inventoty	64.38

2 The company has approximately 22 days sales in receivables as per ratio calculated above in point"h". Whether it indicates strong collecting efforts or not depends on the number of days credit is given to the customer. If the credit period given is more than 22 days then yes it indicates strong collecting efforts or vice versa.  

Yes, while the company has a strong interest coverage ratio, there is no guarantee that its debt service coverage will also be high.as debt service coverage would also take into account the principal repayments along with the interest

Yes, while the company has strong liquidity, its inventory has crept up in 2017 which could signal a problem as the number of days sales inventory is quire high approx 42 days (refer j in above table)