1. B
Week Five Exercise Assignment
Financial Ratios
1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close
of business on July 10:
Edison Stagg Thornton
Cash $6,000 $5,000 $4,000
Short-term investments 3,000 2,500 2,000
Accounts receivable 2,000 2,500 3,000
Inventory 1,000 2,500 4,000
Prepaid expenses 800 800 800
Accounts payable 200 200 200
Notes payable: short-term 3,100 3,100 3,100
Accrued payables 300 300 300
Long-term liabilities 3,800 3,800 3,800
a. Compute the current and quick ratios for each of the three companies. (Round calculations to two
decimal places.) Which firm is the most liquid? Why?
Edison Stagg Thornton
Cash 6,000 5,000 4,000
Short-term investments 3,000 2,500 2,000
Accounts receivable 2,000 2,500 3,000
Inventory 1,000 2,500 4,000
Prepaid expenses 800 800 800
Total Current Assets 12,800 13,300 13,800
Edison Stagg Thornton
Accounts payable 200 200 200
Notes payable: short-term 3,100 3,100 3,100
Accrued payables 300 300 300
Total Current Liabilities 3,600 3,600 3,600
I would say that Thornton has the most liquid because they have a larger inventory and Thornton
can move their inventory quickly

2. B
Edison
Current ratio $12,800 / 3,600 3.56
Quick ration ($6,000 + 3,000 + 2,000) / 3,600 3.06
Stagg
Current ratio $13,300 / 3,600 3.69
Quick ration ($5,000 + 2,500 + 2,500) / 3,600 2.78
Thornton
Current ratio $13,800 / 3,600 3.83
Quick ration ($4,000 + 2,000 + 3,000) / 3,600 2.5
2. Computation and evaluation ofactivity ratios. The following data relate to Alaska Products, Inc:
20X5 20X4
Net credit sales $832,000 $760,000
Cost of goods sold 530,000 400,000
Cash, Dec. 31 125,000 110,000
Average Accounts receivable 205,000 156,000
Average Inventory 70,000 50,000
Accounts payable, Dec. 31 115,000 108,000
Instructions
a. Compute the accounts receivable and inventory turnover ratios for
20X5. Alaska rounds all calculations to two decimal places.
2. a. Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
$832,000 / 180,500 = 4.60
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
$530,000 / 60,000 = 8.83
[($ 205,000 + 156,000) / 2 = $180,500]
[($70,000 + 50,000) / 2 = 60,000]
3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock
outstanding. The company reported the following information for 20X7:

3. B
Net sales $1,750,000
Interest expense 120,000
Income tax expense 80,000
Preferred dividends 25,000
Net income 130,000
Average assets 1,200,000
Average common stockholders' equity 500,000
a. Compute the profit margin on sales ratio, the return on equity and the return on assets,rounding
calculations to two decimal places.
Profit margin on Sales = Net Income / Net sales
= 130,000 / 1,750,000
= 7.43%
Rate of Return on Assets = Net Income / Average Assets
= 130,000 / 1,200,000
= 10.83%
Return on Common stockholder’s equity
= Net Income/Average common stockholder’s equity
= 130,000 / 500,000
= 26%
b. Does the firm have positive or negative financial leverage? Briefly explain.
The company has an interest expense of $120,000,which indicates that there is huge debt on the company.
The debt capital ratio is extremely high. It seems that they are using or running on borrowed funds.
4. Horizontal analysis. Mary Lynn Corporation has been operating for severalyears.
Selected data from the 20X1 and 20X2 financial statements follow.
20X2 20X1
Current Assets $86,000 $80,000
Property, Plant, and Equipment (net) 99,000 90,000
Intangibles 25,000 50,000
Current Liabilities 40,800 48,000

4. B
Long-Term Liabilities 153,000 160,000
Stockholders’ Equity 16,200 12,000
Net Sales 500,000 500,000
Cost of Goods Sold 322,500 350,000
Operating Expenses 93,500 85,000
a. Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results
of your work.
Mary Lynn Corporation
20X2 20X1
Increase / Decrease
Amount Percentage
Current Assets 86,000 80,000 6,000 7.50%
Property, Plant, and Equipment (net) 99,000 90,000
9,000 10.00%
Intangibles 25,000 50,000 -25,000 -50.00%
Current Liabilities 40,800 48,000 -7,200 -15.00%
Long-Term Liabilities 153,000 160,000 -7,000 -4.38%
Stockholders’ Equity 16,200 12,000 4,200 35.00%
Net Sales 500,000 500,000 0 0.00%
Cost of Goods Sold 322,500 350,000 -27,500 -7.86%
Operating Expenses 93,500 85,000 8,500 10.00%
Example 86,000 - 80,000 = 6,000 ÷ 80,000 = 0.075 = 7.50%
Comments:
Decrease in current liabilities and increase in current assets.
There is no change in Net Sales, Operating expense has increased.
Decrease in long term liabilities, indicates the repayment of debts.
There is no change in Net Sales; Cost of goods sold has decreased

5. B
5.Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from the
20X1 and 20X2 financial statements follow.
20X2 20X1
Current Assets $86,000 $80,000
Property, Plant, and Equipment (net) 99,000 80,000
Intangibles 25,000 50,000
Current Liabilities 40,800 48,000
Long-Term Liabilities 153,000 150,000
Stockholders’ Equity 16,200 12,000
Net Sales 500,000 500,000
Cost of Goods Sold 322,500 350,000
Operating Expenses 93,500 85,000
a. Prepare a verticalanalysis for 20X1 and 20X2. Briefly comment on the results of your work.
Mary Lynn Corporation
20X2 20X1
Current Assets 86,000 40.95% 80,000 36.36%
Property, Plant, and Equipment (net) 99,000 47.14% 90,000 40.91%
Intangibles 25,000 11.90% 50,000 22.73%
Total Assets 210,000 100.00% 220,000 100.00%
Current Liabilities 40,800 19.43% 48,000 21.82%
Long-Term Liabilities 153,000 72.86% 160,000 72.73%
Stockholders’ Equity 16,200 7.71% 12,000 5.45%
Total Liabilities & Shareholder’s Equity 210,000 100.00% 220,000 100.00%
Net Sales 500,000 100.00% 500,000 100.00%
Cost of Goods Sold 322,500 64.50% 350,000 70.00%
Operating Expenses 93,500 18.70% 85,000 17.00%
Example 86,000 ÷ 210,000 = 0.4095 = 40.95%
Current assets / Total assets
Comments:
There is a decrease in cost of goods sold, which will increase the net income.
Current Assets and Property Plant and equipment have increased in 20x2.
There is a decrease in current liabilities; however, long term liability is at the same level.
New investments have been made from increase in stockholder’s Equity.

6. B
6. Ratio computation. The financial statements of the Lone Pine Company follow.
LONE PINE COMPANY
Comparative Balance Sheets
December 31, 20X2 and 20X1 ($000 Omitted)
20X2 20X1
Assets
Current Assets
Cash and Short-Term Investments $400 $600
Accounts Receivable (net) 3,000 2,400
Inventories 3,000 2,300
Total Current Assets $6,400 $5,300
Property, Plant, and Equipment
Land $1,700 $500
Buildings and Equipment (net) 1,500 1,000
Total Property, Plant, and Equipment $3,200 $1,500
Total Assets $9,600 $6,800
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable $2,800 $1,700
Notes Payable 1,100 1,900
Total Current Liabilities $3,900 $3,600
Long-Term Liabilities
Bonds Payable 4,100 2,100
Total Liabilities $8,000 $5,700
Stockholders’Equity
Common Stock $200 $200
Retained Earnings 1,400 900
Total Stockholders’ Equity $1,600 $1,100
Total Liabilities and Stockholders’ Equity $9,600 $6,800
LONE PINE COMPANY
Statement of Income and Retained Earnings
For the Year Ending December 31,20X2 ($000 Omitted)
Net Sales* $36,000
Less: Cost of Goods Sold $20,000
Selling Expense 6,000
Administrative Expense 4,000
Interest Expense 400
Income Tax Expense 2,000 32,400

7. B
Net Income $3,600
Retained Earnings, Jan. 1 900
Ending Retained Earnings $4,500
Cash Dividends Declared and Paid 3,100
Retained Earnings, Dec. 31 $1,400
*All sales are on account.
Instructions
Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two
decimal places when necessary:
a. Quick ratio
= Quick Assets ÷ Current Liabilities
= 3,400 ÷ 3,900
= 0.87:1
b. Current ratio
= Current Assets ÷ Current Liabilities
= 6,400 ÷ 3,900
= 1.64:1
c. Inventory-turnover ratio
= Cost ofgoods sold ÷ Average Inventory
= 20,000 ÷ (3,000 + 2,300) / 2
= 7.55
d. Accounts-receivable-turnover ratio
= Net Credit Sales ÷ Average Net Accounts receivable
= 36,000 ÷ (3,000 + 2,400) / 2
= 13.33
e. Return-on-assets ratio
= Net Income ÷ Average Total Assets
= 3,600 ÷ (9,600 + 6,800) / 2
= 43.90%
f. Net-profit-margin ratio
= Net Income ÷ Net Sales
= 3,600 ÷ 36,000
= 10%

8. B
g. Return-on-common-stockholders’equity
= Net Income ÷ Average common-stockholders’ equity
= 3,600 ÷ (1,600 + 1,100) / 2
= 266.67%
h. Debt-to-total assets
= Total Liabilities ÷ Total Assets
= 8,000 ÷ 9,600
= 0.83:1
i. Number of times that interestis earned
= Net Income before Income tax and interest expense ÷ Interest
expense
= (3,600 + 2,000 + 400) ÷ 400
= 15 Times