Question

The financial statements of Sun Corporation appear below:

Sun Corporation

Comparative Balance Sheets

December 31, 2017 - 18

——————————————————————————————————

Assets                                                                         2018                 2017                                                                                                 

Cash                                                                       $ 75,000          $ 150,000

Short-term investments                                            75,000             225,000

Accounts receivable (net)                                      150,000             112,500

Inventory                                                                225,000             262,500

Property, plant and equipment (net)                      975,000          1,125,000

            Total assets                                              $1,500,000      $1,875,000

Liabilities and stockholders' equity

Accounts payable                                                  $ 75,000          $ 112,500

Short-term notes payable                                       150,000             337,500

Bonds payable                                                                    300,000             600,000

Common stock                                                        562,500             562,500

Retained earnings                                                  412,500             262,500

Total liabilities and stockholders' equity           $1,500,000      $1,875,000

Sun Corporation

Income Statement

For the Year Ended December 31, 2018

Net sales                                                                  $1,500,000

Cost of goods sold                                                       937,500

Gross profit                                                                 562,500

Expenses

            Operating expenses              $157,500

            Interest expense                      67,500

                        Total expenses                                                225,000

Income before income taxes                                       337,500

Income tax expense                                                    101,250

Net income                                                              $ 236,250

Required:

(a) Using the financial statements, compute the following ratios for Sun Corporation for 2018. Show all computations.                                                                                

1. Current ratio.                                                         

2. Acid-test ratio.

3. Accounts receivable turnover.                              

4. Inventory turnover.

5. Profit margin.                                                        

6. Return on assets.

7. Assets turnover.                                                     

8. Times interest earned.

9. Working capital.

10. Debt to assets ratio.

(b) Prepare a vertical analysis of the 2018 income statement data for Sun Corporation.

                                                                                                                                          

(c) Based on the ratios calculated in (a), and the vertical analysis in (b), discuss briefly the improvement or lack thereof in financial position and operating results from 2017 to 2018 of Sun Corporation.                                                                                      

Answer 1

(1) current ratio = current assets/current liabilities

Current assets = cash + short term investment + accounts receivable + inventory

= $75000 + $75000 + $150000 + $225000 = $525000

Current liabilities = accounts payable + short term notes payable

= $75000 + $150000 = $225000

Therefore,

Current ratio = $525000/$$225000

= 2.33 times

(2) acid-test ratio = (cash + short term investment + accounts receivable)/current liabilities

= ($75000 + $75000 + $150000)/$225000

= $300000/$225000

= 1.33 times

(3) accounts receivable turnover = credit sales/average accounts receivable

NOTE: Assumed all sales are credit sales.

Average accounts receivable = (beginning accounts receivable + ending accounts receivable)/2

= ($112500 + $150000)/2

= $131250

Therefore,

Accounts receivable turnover = $1500000/$131250

= 11.43 times

(4) inventory turnover ratio = cost of goods sold/average inventory

Average inventory = (beginning inventory + ending inventory)/2

= ($262500 + $225000)/2

= $243750

Therefore,

Inventory turnover ratio = $937500/$243750

= 3.85 times