P317 Calculating Financial Ratios LO2 Just Dew It Corporatio

P3-17 Calculating Financial Ratios [LO2] Just Dew It Corporation reports the following balance sheet information for 2008 and 2009. JUST DEW IT CORPORATION 2008 and 2009 Balance Sheets Assets Liabilities and Owners\' Equity 2008 2009 2008 2009 Current assets Current liabilities Cash $ 10,250 $ 10,750 Accounts payable $ 72,250 $ 58,000 Accounts receivable 28,850 28,800 Notes payable 46,500 45,500 Inventory 64,600 64,900 Total $ 118,750 $ 103,500 Total $ 103,700 $ 104,450 Long-term debt $ 57,900 $ 64,300 Owners\' equity Common stock and paid-in surplus $ 80,000 $ 80,000 Fixed assets Retained earnings 177,050 206,650 Net plant and equipment $ 330,000 $ 350,000 Total $ 257,050 $ 286,650 Total assets $ 433,700 $ 454,450 Total liabilities and owners\' equity $ 433,700 $ 454,450 Requirement 1: Based on the balance sheets given for Just Dew It, calculate the following financial ratios for the year 2008. (a) Current ratio (b) Quick ratio (c) Cash ratio (d) NWC to total assets ratio (e) Debt-equity ratio and equity multiplier (f) Total debt ratio and Long-term debt ratio Requirement 2: Based on the balance sheets given for Just Dew It, calculate the following financial ratios for the year 2009. (a) Current ratio (b) Quick ratio (c) Cash ratio (d) NWC to total assets ratio (e) Debt-equity ratio and equity multiplier (f) Total debt ratio and Long-term debt ratio

Solution

Answer to Requirement 1:

Answer a.

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $118,750 / $103,700
Current Ratio = 1.15 times

Answer b.

Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Quick Ratio = ($118,750 - $64,600) / $103,700
Quick Ratio = 0.52 times

Answer c.

Cash Ratio = Cash / Current Liabilities
Cash Ratio = $10,250 / $103,700
Cash Ratio = 0.10 times

Answer d.

Net Working Capital = Current Assets - Current Liabilities
Net Working Capital = $118,750 - $103,700
Net Working Capital = $15,050

NWC to Total Assets Ratio = Net Working Capital / Total Assets
NWC to Total Assets Ratio = $15,050 / $433,700
NWC to Total Assets Ratio = 0.034

Answer e.

Debt-equity Ratio = (Current Liabilities + Long-term Debt) / Total Owner’s Equity
Debt-equity Ratio = ($103,700 + $57,900) / $257,050
Debt-equity Ratio = 0.63

Equity Multiplier = Total Assets / Total Owner’s Equity
Equity Multiplier = $433,700 / $257,050
Equity Multiplier = 1.69

Answer f.

Total Debt Ratio = (Current Liabilities + Long-term Debt) / Total Assets
Total Debt Ratio = ($103,700 + $57,900) / $433,700
Total Debt Ratio = 0.37

Long-term Debt Ratio = Long-term Debt / Total Assets
Long-term Debt Ratio = $57,900 / $433,700
Long-term Debt Ratio = 0.13

Answer to Requirement 2:

Answer a.

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $103,500 / $104,450
Current Ratio = 0.99 times

Answer b.

Quick Ratio = (Current Assets - Inventory) / Current Liabilities
Quick Ratio = ($103,500 - $64,900) / $104,450
Quick Ratio = 0.37 times

Answer c.

Cash Ratio = Cash / Current Liabilities
Cash Ratio = $10,750 / $104,450
Cash Ratio = 0.10 times

Answer d.

Net Working Capital = Current Assets - Current Liabilities
Net Working Capital = $103,500 - $104,450
Net Working Capital = -$950

NWC to Total Assets Ratio = Net Working Capital / Total Assets
NWC to Total Assets Ratio = -$950 / $454,450
NWC to Total Assets Ratio = -0.002

Answer e.

Debt-equity Ratio = (Current Liabilities + Long-term Debt) / Total Owner’s Equity
Debt-equity Ratio = ($104,450 + $64,300) / $286,650
Debt-equity Ratio = 0.59

Equity Multiplier = Total Assets / Total Owner’s Equity
Equity Multiplier = $454,450 / $286,650
Equity Multiplier = 1.59

Answer f.

Total Debt Ratio = (Current Liabilities + Long-term Debt) / Total Assets
Total Debt Ratio = ($104,450 + $64,300) / $454,450
Total Debt Ratio = 0.37

Long-term Debt Ratio = Long-term Debt / Total Assets
Long-term Debt Ratio = $64,300 / $454,450
Long-term Debt Ratio = 0.14