Following Is The Balance Sheet Of Adams Company For Year 3ad

Following Is The Balance Sheet Of Adams Company For Year 3adams Compa

Following is the balance sheet of Adams Company for Year 3: ADAMS COMPANY Balance sheet Assets Cash$15,100 Marketable securities 8,260 Accounts receivable 12,620 Inventory 11,150 Property and equipment 168,000 Accumulated depreciation (12,100)Total assets$203,030 Liabilities and Stockholders’ Equity Accounts payable$8,660 Current notes payable 3,120 Mortgage payable 4,250 Bonds payable 21,660 Common stock 113,800 Retained earnings 51,540 Total liabilities and stockholders’ equity$203,030 The average number of common stock shares outstanding during Year 3 was 850 shares. Net income for the year was $15,500. Required Compute each of the following: (Round your answer to 2 decimal places. For percentages, 0.2345 should be entered as 23.45.) a.Current ratio ? b.Earnings per share per share ? c.Quick (acid-test) ratio ? d.Return on investment % ? e.Return on equity % ? f.Debt to equity ratio ?

Paper For Above instruction

Introduction

The analysis of financial ratios provides insights into a company's operational efficiency, liquidity, profitability, and financial stability. This paper calculates and interprets key financial ratios for Adams Company based on its balance sheet data for Year 3. Specifically, the ratios examined include the current ratio, earnings per share, quick ratio, return on investment, return on equity, and debt-to-equity ratio. These ratios collectively offer a comprehensive view of Adams Company's financial health, aiding stakeholders in making informed decisions.

Calculation of Financial Ratios

a. Current Ratio

The current ratio measures the company's ability to meet short-term obligations using its short-term assets. It is calculated as:

Current Ratio = Current Assets / Current Liabilities

Current Assets include cash, marketable securities, accounts receivable, and inventory:

Current Assets = $15,100 + $8,260 + $12,620 + $11,150 = $47,130

Current Liabilities include accounts payable and current notes payable:

Current Liabilities = $8,660 + $3,120 = $11,780

Thus,

Current Ratio = $47,130 / $11,780 ≈ 4.00

A current ratio of approximately 4.00 indicates strong liquidity, with the company possessing four times its current liabilities in short-term assets.

b. Earnings Per Share (EPS)

EPS indicates the portion of net income attributable to each share of common stock:

EPS = Net Income / Average Number of Shares Outstanding

Given:

Net Income = $15,500


Average Shares = 850

Calculating:

EPS = $15,500 / 850 ≈ $18.24

This suggests that each share of stock earned approximately $18.24 during Year 3.

c. Quick (Acid-Test) Ratio

The quick ratio assesses liquidity excluding inventory, which may not be as liquid:

Quick Assets = Cash + Marketable Securities + Accounts Receivable

Calculating:

Quick Assets = $15,100 + $8,260 + $12,620 = $36,980

Current Liabilities remain at $11,780. Therefore:

Quick Ratio = $36,980 / $11,780 ≈ 3.14

A quick ratio above 1 indicates that the company can meet its immediate liabilities without relying on inventory, underscoring strong liquidity.

d. Return on Investment (ROI)

ROI measures the efficiency of investments, often approximated by return on assets (ROA):

ROI = Net Income / Total Assets

Calculating:

ROI = $15,500 / $203,030 ≈ 7.63%

This indicates that the company's investments generated a return of about 7.63% during the year.

e. Return on Equity (ROE)

ROE measures profitability relative to shareholders’ equity:

Shareholders’ Equity = Common Stock + Retained Earnings = $113,800 + $51,540 = $165,340

Calculating:

ROE = $15,500 / $165,340 ≈ 9.37%

A ROE of approximately 9.37% reflects the efficiency of equity capital in generating profits.

f. Debt to Equity Ratio

This ratio evaluates financial leverage:

Total Debt = Current Notes Payable + Mortgage Payable + Bonds Payable = $3,120 + $4,250 + $21,660 = $29,030

Using total equity of $165,340:

Debt to Equity Ratio = Total Debt / Shareholders’ Equity = $29,030 / $165,340 ≈ 0.18

A debt-to-equity ratio of 0.18 suggests conservative leverage, with the company primarily financed through equity.

Conclusion

The ratios calculated reveal that Adams Company exhibits robust liquidity, with high current and quick ratios, indicating strong short-term financial health. The EPS signifies healthy profitability per share, while the ROI and ROE reflect efficient use of assets and equity, respectively. Additionally, the low debt-to-equity ratio suggests conservative financial leverage, reducing financial risk. Collectively, these indicators portray a financially stable and efficient company, positive for investors and creditors alike.

References

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