Question

Basic Financial Ratios The accounting staff of CCB Enterprises has completed the financial statements for the...

  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. 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
  5. Required:
  6. 1. Calculate the following financial ratios for 2017 for CCB Enterprises:
  7. 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.
  8. 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
  9. 2. Which of the following statements pertaining to ratio analysis of CCB Enterprises is true?
  10. 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.
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Homework Answers

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)

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