3 3 4 Exercise 6 5 6 Companies, a home improvement store chain, reported the following summarized figures: 7 8 9 10 11 2024 428 000 12 13 14 DANFIELD, INC. Income Statement Years Ended December 31, 2025 and 2024 2025 Net Sales $ 467 000 $ Cost of Goods Sold 237 000 $ Gross Profit 230 000 Operating Expenses 136 000 Income From Opetations 94 000 Interest Expense 9 000 Income Before Income Tax $ $ 85 000 $ Income Tax Expense $ 24 000 $ Net Income 61 000 15 16 218 000 210 000 134 000 76 000 10 000 66 000 27 000 17 18 19 20 39 000 21 22 23 DANFIELD, INC. Balance Sheet 24 22 23 24 25 26 27 28 2025 225 000 114 000 2024 246 000 97 000 DANFIELD, INC. Balance Sheet December 31, 2025 and 2024 2025 2024 Liabilities 97 000 95 000 Total Current Liabilities Long-term Liabilities 112 000 118 000 Total Liabilities 145 000 163 000 12 000 5 000 Stockholders' Equity 366 000 381 000 Preffered Stock, 3% 211 000 179 000 Common Stockholders' Equity 577 000 560 000 Total Liabilities an Equity 339 000 343 000 Assets Cash Short-term Investments Accounts Receivable, Net Merchandise Inventory Prepaid Expenses Total Current Assets Property, Plant and Equipment, Net Total Assets 29 30 31 32 33 108 000 130 000 577 000 108 000 109 000 560 000 34 35 36 37 DANFIELD has 50,000 common shares outstanding during 2025. 38 39 40 41 42 43 44 Evaluating current ratio Requirements 1. Compute Companies' current ratio at May 31, 2025. 2. Did Companies' current ratio improve, deteriorate, or hold steady during 2025? Computing inventory, gross profit, and receivables ratios A B F H 44 45 46 47 48 49 50 51 52 53 54 Computing inventory, gross profit, and receivables ratios 3. Compute the inventory turnover, days' sales in inventory, and gross profit percentage for Companies for 2025. 4. Compute days' sales in receivables during 2025. Round dollar amounts to three decimal places. Assume all sales were on account. 5. What do these ratios say about Companies' ability to sell inventory and collect receivables? Measuring ability to pay liabilities 6. Compute the debt ratio and the debt to equity ratio at May 31, 2025 for Companies. 7. Is ability to pay its liabilities strong or weak? Explain your reasoning. Measuring profitability 8. Compute the profit margin ratio for Companies for 2025. 9. Compute the rate of return on total assets for 2025. 10. Compute the asset turnover ratio for 2025. 11. Compute the rate of return on common stockholders' equity for 2025. 12. Are these rates of return strong or weak? Explain your reasoning. Computing EPS and P/E ratio 13. Compute earnings per share (EPS) for 2025. Round to the nearest cent. 14. Compute Companies' price/earnings ratio for 2025. The market price per share of stock is $68.50. 15. What do these results mean when evaluating Companies' profitability? 55 56 57 58 59 60 61 62 63 64 65 66 67 68 Test Your Knowledge 69 Exercise 3 70 71 72 73 Solution: Requirement 1 Current ratio = 74 366000 75 76 77 Requirement 2 78 79 80 Requiremets 3 Inventory turnover 81 = II 82 83 84 Days' sales in inventory II days 85 86 87 Il Gross profit percentage = 1 2 3 4 4 5 6 + + A D G H K 86 Gross profit percentage = 87 88 89 90 91 92 93 Requirement 4 Accounts receivable turnover ratio 94 days Days' Sales in Receivables 95 96 97 Requirement 5 98 99 100 101 102 103 104 105 Requirement 6 Debt ratio 1 2 3 4 5 6 A B D G H K 130 Requirement 12 131 132 133 134 135 Requirement 13 Earnings per share 136 /share 137 138 139 140 141 Requirement 14 Price/earnings ratio 142 143 Requirement 15 144 145 146 147 148 B D G H K 106 107 Debt to equity ratio = 108 109 110 Requirement 7 111 112 113 114 Requirement 8 Profit margin ratio 115 116 117 118 119 120 Requirement 9 Rate of return on total assets 121 122 Requirement 10 Asset turnover ratio 123 124 125 126 Requirement 11 1 2 3 4 5 6