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The Balance Sheet and Income Statement

The financial ratios for Chico Electronics in Year 5 are as follows: - The acid-test ratio of 0.99 indicates current liabilities can be adequately covered by the most liquid assets. - The return on assets of 20.4% suggests return on each dollar invested in assets is good. - The return on common equity of 42.7% indicates return on common equity is excellent. - Earnings per share was $1.77, but it is difficult to interpret without other factors. - The gross profit margin of 33.3% is also difficult to assess without other considerations. - Times interest earned was 30 times, showing a high level of safety in covering interest payments.

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1K views3 pages

The Balance Sheet and Income Statement

The financial ratios for Chico Electronics in Year 5 are as follows: - The acid-test ratio of 0.99 indicates current liabilities can be adequately covered by the most liquid assets. - The return on assets of 20.4% suggests return on each dollar invested in assets is good. - The return on common equity of 42.7% indicates return on common equity is excellent. - Earnings per share was $1.77, but it is difficult to interpret without other factors. - The gross profit margin of 33.3% is also difficult to assess without other considerations. - Times interest earned was 30 times, showing a high level of safety in covering interest payments.

Uploaded by

dhanya1995
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The balance sheet and income statement for Chico Electronics

are reproduced below 1 answer below »


The balance sheet and income statement for Chico Electronics are reproduced below (tax rate is 40%).

CHICO ELECTRONICS
Balance Sheet ($ thousands)
As of December 31
Assets
Current assets
Cash $ 683 $325
Accounts receivable 1,490 3,599
Inventories 1,415 2,423
Prepaid expenses 15 13
Total current assets 3,603 $6,360
Property, plant and equipment, net 1,066 $1,541
Other assets 123 157
Total assets $4,792 $8,058
Liabilities and Shareholders" Equity
Current liabilities

Notes payable to bank $— $875


Current portion of long-term debt 38 $116
Accounts payable 485 933
Estimated income tax liability 588 472
Accrued expenses. 576 586
Customer advance payments 34 963

Total current liabilities 1,721 $3,945


Long-term debt 122 179
Other liabilities 81 131
Total liabilities 1,924 4,255
Shareholders" equity

Common stock, $1.00 par value; 1,000,000 shares authorized;


550,000 and 829,000 outstanding, respectively

Preferred stock, Series A 10%; $25 par value; 25,000 authorized 550 829
20,000 and 18,000 outstanding, respectively 500 450

Additional paid-in capital 450 575


Retained earnings 1,368 1,949
Total shareholders" equity 2,868 3,803
Total liabilities and shareholders" equity $4,792 $8,058








CHICO ELECTRONICS
Income Statement ($ thousands)
For Years Ending December 31

Year 4 Year 5
Net sales 7,570 $12,065
Other income, net $261 345
Total revenues. 7,831 12,410
Cost of goods sold 4,850 8048
General, administrative, and 1,531
2025
marketing expense

Interest expense 22 78
Total costs and expenses 6403 10151
Net income before tax 1,428 2,259
Income tax 628 994
Net income $800 $1,265



Required:
Compute and interpret the following financial ratios of the company for Year 5:
a. Acid-test ratio.
b. Return on assets.
c. Return on common equity.
d. Earnings per share.
e. Gross profit margin ratio.
f. Times interest earned.
g. Days to sell inventory.
h. Long-term debt to equity ratio.
i. Total debt to equity.
j. Sales to end-of-year working capital.

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1 Approved Answer

Priyanka G answered on October 16, 2020 5 Ratings,(12 Votes)

a.Acid-test ratio: (Cash Accounts receivable)/ Total current


liabilities ($325 $3,599)* $3,945 = 0.99 Interpretation: Current
Liabilities can be adequately covered by the most liquid assets.
b.Return on assets: [Net income Interest expense (1-tax rate)]/
Average total assets [$1,265 $78 (1 - .40)]/ [($4,792 $8,058)/ 2]
= 20.4% Interpretation: Return on each dollar invested in assets
seems to be good. c.Return on common equity: (Net income -
Preferred dividends)/ Average common equity [$1,265 - $45]/
[($2,868 - $500 $3,803 - $450)/2] = 42.7% Interpretation:
Return on common equity seems to be excellent d.Earnings per
share: (Net income - Preferred dividends)¸ Average common
shares outstanding [$1,265 - $45]¸ [(550 829)¸ 2] = $1.77
Interpretation: It is quite difficult to interpret this EPS value
without consideration of other factors. e.Gross profit margin:
(Net sales - Cost of goods sold)/ Net sales ($12,065 - $8,048)/
$12,065 = 33.3% Interpretation: Without considering other
factors, assessment of this value is difficult. f.Times interest
earned: (Net income before tax Interest expense) / Interest
expense ($2,259 $78)/ $78 = 30 times Interpretation: Time
interest earned is a measure of safety which is a magnitude by
which net income...

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