Question

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

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash	$	24,000
Accounts receivable, net		210,000
Merchandise inventory		310,000
Prepaid expenses		8,000
Total current assets		552,000
Property and equipment, net		910,000
Total assets	$	1,462,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	210,000
Bonds payable, 12%		300,000
Total liabilities		510,000
Stockholders’ equity:
Common stock, $10 par value	$	170,000
Retained earnings		782,000
Total stockholders’ equity		952,000
Total liabilities and stockholders’ equity	$	1,462,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,775,000
Cost of goods sold		1,300,000
Gross margin		1,475,000
Selling and administrative expenses		610,000
Net operating income		865,000
Interest expense		36,000
Net income before taxes		829,000
Income taxes (30%)		248,700
Net income	$	580,300

Account balances at the beginning of the year were: accounts receivable, $160,000; and inventory, $340,000. 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

1). Working capital = Current Assets - Current Liabilities
= 552000- 210000 = 342000

2). Current Ratio = Current Assets/Current Laibilites
= 552000/210000= 2.6

3). Acid Test Ratio = Quick Assets/Current liabilities
= (24000+210000)/210000 = 1.11

4). Debt to Equity Ratio = Debt/Equity
=300000/952000 = 0.32

5). Times Interest earned ratio = Net Operating Income before Interest / Interest Expenses
= 865000/36000 = 24.03

6). Average Collection Period = 365 days/ Account Receivable Turnover Ratio
Account Receivable turnover ratio = Net Sales / Average Account Receivable
= 2775000/((160000+210000)/2) = 2775000/185000= 15
Average collectio period = 365/15 = 24.3