Question

Long-term debt ratio 0.3
Times interest earned 10.0
Current ratio 1.2
Quick ratio 1.0
Cash ratio 0.4
Inventory turnover 3.0
Average collection period 73 days
Use the above information from the tables to work out the following missing entries, and then calculate the company’s return on equity. Note: Turnover and the average collection period are calculated using start-of-year, not average, values. (Enter your answers in millions. Round intermediate calculations and final answers to 2 decimal places.)

INCOME STATEMENT
(Figures in $ millions)
Net sales $
Cost of goods sold
Selling, general, and administrative expenses 20.00
Depreciation 30.00
Earnings before interest and taxes (EBIT) $
Interest expense
Income before tax $
Tax (35% of income before tax)
Net income $
BALANCE SHEET
(Figures in $ millions)
This Year Last Year
Assets
Cash and marketable securities $ $ 30
Accounts receivable 44
Inventories 36
Total current assets $ $ 110
Net property, plant, and equipment 35
Total assets $ $145
Liabilities and shareholders’ equity
Accounts payable $35.00 $ 30
Notes payable 40.00 45
Total current liabilities 75
Long-term debt 26
Shareholders’ equity 44
Total liabilities and shareholders’ equity $195.00 $145
Please show all workings so i can see how you arrive at your answers.

Answer 1

Answer:

Explanation:

Since the cash ratio = Cash & Marketable Securities / Current liabilities

We can find the value of Cash & Marketable Securities for the current year using the cash ratio and amount of liabilities provided to us

0.4 = Cash & Marketable securities / 75

Cash & Marketable Securities = 75 x 0.4 = 30 million

Quick ratio = (Cash & Marketable Securities + Accounts Receivable) / Current liabilities

1 = (30+X) / 75, where Accounts receivable are X that is to be determined

75 = 30 + X

X = 75 - 30 = 45 million

Current ratio = Current assets / Current liabilities

1.2 = Current assets / 75

Current assets = 75 x 1.2 = 90 million

Now current assets = Cash & Marketable Securities + Accounts receivable + Inventory

90 = 30 + 45 + X, where X is the amount of inventory

X = 90 - 75 = 15 million

Since the total liabilities and equity are equal to 195 million,  the amount of total assets should also be 195 million.

If the total assets are 195 and Current assets are 90, the value of the fixed assets (Net propertyu, plant and equipment should be

195-90 = 105 million

The long term debt ratio = Long term debt / Total assets

0.3 = Long term debt / 105

Long term debt = 105 x 0.3 =  31.5 million

Current liabilities + Long term debt + Equity = Total liabilities and equity

75 +31.5 + X = 195, here X is the unknown amount of equity

X = 195 - 75 -31.5 = 88.5 million

This completes our Balance Sheet!

Average collection period is 73 days

Average collection period = 365/Receivable turnover

Receivable turnover = 365/73 = 5

Receivable turnover = Sales/Average Receivables

Average Receivables = (Receivables last + Receivables current year)/2

Average Receivables = (44+45)/2 = 89/2 = 44.5

Plugging in the values in the receivable turnover ratio formula we can find the amount for Sales

5 = Sales/44.5

Sales = 44.5 x 5 = 222.5 million

Inventory turnover = Cost of good sold/ Average inventory

Average inventory = (Inventory last year + Inventory this year)/2

Average inventory = (36+15)/2 = 51/2 = 25.5

Using the inventory turnover formula, we can find the amount for Cost of goods sold as under

3 = Cost of goods sold / 25.5

Cost of goods sold = 25.5 x 3 = 76.5 million

The gross profit = Sales - Cost of goods sold

Gross profit = 222.5 - 76.5 = 146 million

Earning before interest and taxes = Gross profit - Selling, General and Administrative expense - Depreciation

EBIT = 146 -20 -30 = 96

Times interest earned = EBIT/Interest expense

10 = 96/Interest expense

Interest expense= 96/10 = 9.6 million

Income before tax = EBIT - Interest expense

Income before tax = 96 - 9.6 =  86.4 million

Tax is 35 percent of income before tax and should be

86.4 x 0.35 = 30.24 million

Subtracting taxes from income before tax provides us the amount of net income

Net income = 86.4 - 30.24 = 56.16 million

And this completes the income statement

Also see the excel file attached here