Question 1

The recent financial statements for the Royal Caribbean Company are given below:

Balance Sheet for the period ending June 30

Assets 2006 2005

Current assets

Cash $21,000 $24,000

Accounts receivables $160,000 $162,000

Inventories $300,000 $315,000

Prepaid expenses $9,000 $10,000

Total current assets $490,000 $511,000

Property and equipment $810,000 $700,000

Total assets $1,300,000 $1,211,000

Liabilities and shareholders equity

Liabilities

Current liabilities $200,000 $290,000

10% bonds payable $300,000 $275,000

Total liabilities $500,000 $565,000

Shareholders equity

Common stock $5 per share $100,000 $150,000

Retained earnings $700,000 $496,000

Total liabilities and shareholders equity $1,300,000 $1,211,000

Income statement for the year ended June 30

Sales $2,100,000 $1,900,000

Less cost of goods sold $1,260,000 $1,190,000

Gross margin $840,000 $710,000

Less operating expenses $660,000 $510,000

Net operating income $180,000 $200,000

Less interest expense $30,000 $60,000

Net income before taxes $150,000 $140,000

Less income taxes $45,000 $55,000

Net income $105,000 $85,000

Notes: Accounts balance at the beginning of 2005 financial year were: Accounts receivable

$140 000. Inventory $260,000. All sales were credit.

a. Calculate the following ratios for 2006 and 2005.

i. Gross margin percentage

ii. Net income percentage

iii. Current ratio

iv. Acid test ratio

v. Inventory turn over

vi. Debt to equity ratio

vii. Interest cover

b. Briefly comment on the company performance in the area of liquidity and profitability