Question
Liquidity Ratios Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess
Liquidity Ratios
Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.
Kepler Company | ||||
Comparative Balance Sheets | ||||
This Year | Last Year | |||
Assets | ||||
Current assets: | ||||
Cash | $ 50,000 | $100,000 | ||
Accounts receivable, net | 300,000 | 150,000 | ||
Inventory | 600,000 | 400,000 | ||
Prepaid expenses | 25,000 | 30,000 | ||
Total current assets | $ 975,000 | $680,000 | ||
Property and equipment, net | 125,000 | 150,000 | ||
Total assets | $1,100,000 | $830,000 | ||
Liabilities and Stockholders' Equity | ||||
Current liabilities: | ||||
Accounts payable | $ 400,000 | $290,000 | ||
Short-term notes payable | 200,000 | 60,000 | ||
Total current liabilities | $ 600,000 | $350,000 | ||
Long-term bonds payable, 12% | 100,000 | 150,000 | ||
Total liabilities | $ 700,000 | $500,000 | ||
Stockholders' equity: | ||||
Common stock (100,000 shares) | 200,000 | 200,000 | ||
Retained earnings | 200,000 | 130,000 | ||
Total liabilities and stockholders' equity | $1,100,000 | $830,000 |
Kepler Company | ||||
Comparative Income Statements | ||||
This Year | Last Year | |||
Sales | $ 950,000 | $ 900,000 | ||
Less: Cost of goods sold | (500,000) | (490,000) | ||
Gross margin | $ 450,000 | $ 410,000 | ||
Less: Selling and administrative expenses | (275,000) | (260,000) | ||
Operating income | $ 175,000 | $ 150,000 | ||
Less: Interest expense | (12,000) | (18,000) | ||
Income before taxes | $ 163,000 | $ 132,000 | ||
Less: Income taxes | (65,200) | (52,800) | ||
Net income | $ 97,800 | $ 79,200 | ||
Less: Dividends | (27,800) | (19,200) | ||
Net income, retained | $ 70,000 | $ 60,000 |
When required, round your intermediate computations and answers to two decimal places. Assume that the ending balance of last year's accounts receivable and inventory is the average for last year computations. Assume 365 days per year.
Required:
Note: Round all answers to two decimal places.
1. Compute the following ratios for each year:
This Year | Last Year | |
a. Current ratio | ||
b. Quick ratio | ||
c. Receivables turnover | days | days |
d. Inventory turnover | days | days |
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