# Case 5-23

Case 5-23

Net income     16000

Short term note         5000

Bonds interest rate   0.08

Cash balance  15000

Profit margin on sales          0.05

Return on assets       0.075

Gross profit margin  0.4

Inventory turnover ratio     6

Receivables turnover ratio  25

Acid test ratio            0.9

Current ratio 2

Return on shareholders equity       0.1

Debt to equity ratio  0.33

Times interest earned          12

Integrating Case 5-23

 Balance Sheet                                                                                 Assets                                                                                                           Cash                                                          \$  15,000       Accounts receivable (net)                                            (e)       Inventory                                                                     (d)       Prepaid expenses and other current assets                  (i)      Current assets                                                               (h)       Property, plant, and equipment (net)                          (j)                                                                                     \$   (b)         Liabilities and Shareholders’ Equity                                            Accounts payable                                                \$     (g)       Short-term notes                                             5,000        Current liabilities                                                          (f)       Bonds payable                                                            (l)       Shareholders’ equity                                                   (k)                                                                                     \$   (b)                            Income Statement      Sales                                                                             (a)      Cost of goods sold                                                       (c)         Gross profit                                                               (c)      Operating expenses                                                      (o)      Interest expense                                                            (m)      Tax expense                                                                 (n)        Net income                                                                                                     \$
##### Case 5-23 (concluded)

Calculations (\$ in 000s):

a.  Profit margin on sales = Net income ÷ Sales = 5%

For example:

Net income = 17000

17000/X = .05

Cross multiply

17000

_____    =.05

X

17000 = .05X

Divide both sides by .05

X = 17000/.05

X = 340,000

b.  Return on assets = Net income ÷ Total assets = 7.5%

For example:

Net income = 17000

17000/X = .075

Cross multiply

17000 = .075X

Divide both sides by .075

X = 17000/.075

X = 226,666

c.  Gross profit margin = Gross profit ÷ Sales = 40%
Cost of goods sold = Sales – Gross profit =

d.  Inventory turnover ratio = Cost of goods sold ÷ Inventory = 6

e.  Receivables turnover ratio = Sales ÷ Accounts receivable = 25

f.   Acid-test ratio = Cash + AR + ST Investments ÷ Current liabilities = .9

g.  Accounts payable = Current liabilities – Short-term notes = \$

h.  Current ratio = Currentassets ÷ Currentliabilities = 2

i.   Prepaid expenses and other current assets =
Current assets – (Cash + AR + Inventory) = \$

j.   Property, plant, and equipment = Total assets – Current assets =

k.  Return on shareholders’ equity = Net income ÷ Shareholders’ equity =10%

l.   Debt to equity ratio = Total liabilities ÷ Shareholders’ equity =
Bonds payable = Total liabilities – Current liabilities =

m. Interest expense = 8% x (Short-term notes + Bonds )
Interest expense =

n   Times interest earned ratio = (Net income + Interest +Taxes) ÷ Interest = 12
Times interest earned ratio =
Times interest earned ratio =
Tax expense = \$

o.      Operating expenses = (Sales – Cost of goods sold – Interest expense – Tax expense) – Net income =

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