The Financial Statements Of ABC Co Appear Below
The Financial Statements Of Abc Co Appear Belowabc Cocomparative Ba
Using the financial statements and additional information provided for ABC Co. for 2014, the task is to compute ten key financial ratios. These ratios include liquidity ratios, profitability ratios, asset efficiency ratios, and leverage ratios, which are vital for assessing the company’s financial health and operational performance. The calculations will be broken down step-by-step, with detailed explanations and formulas applied to the provided data.
Paper For Above instruction
Financial ratios are essential tools in financial analysis, providing insights into a company’s liquidity, profitability, efficiency, and leverage. Based on the provided financial statements for ABC Co. for the fiscal year ending December 31, 2014, and supplementary data, the calculations for each ratio are as follows.
1. Current Ratio
The current ratio measures the company's ability to cover its short-term obligations with its short-term assets. It is calculated as:
Current Ratio = Current Assets / Current Liabilities
From the balance sheet, current assets are:
- Cash: $25,000
- Marketable Securities: $20,000
- Accounts Receivable (net): $40,000
- Inventory: $150,000
Total current assets = $25,000 + $20,000 + $40,000 + $150,000 = $235,000
Current liabilities include:
- Accounts Payable: $25,000 (2014)
- Short Term Notes Payable: $40,000
Total current liabilities = $25,000 + $40,000 = $65,000
Thus,
Current Ratio = $235,000 / $65,000 ≈ 3.62
2. Return on Common Stockholders’ Equity (ROE)
ROE indicates how effectively equity capital is being utilized to generate profit. It is calculated as:
ROE = Net Income / Average Shareholders' Equity
Shareholders’ equity at December 31, 2014, is:
- Common Stock: $175,000
- Retained Earnings: $90,000
Total equity = $175,000 + $90,000 = $265,000
Assuming no prior year's data, the average equity is approximated as this year’s total, since only one year's data is given:
ROE = $75,000 / $265,000 ≈ 0.283 or 28.3%
3. Price Earnings Ratio (P/E)
The P/E ratio measures the company's current share price relative to its earnings per share (EPS). It is computed as:
P/E Ratio = Market Price per Share / Earnings per Share
Market price per share = $15
EPS = Net Income / Number of Shares Outstanding = $75,000 / 62,000 ≈ $1.21
Therefore,
P/E Ratio = $15 / $1.21 ≈ 12.40
4. Inventory Turnover Ratio
This ratio indicates how many times inventory is sold and replaced during the period. It is calculated as:
Inventory Turnover = Cost of Goods Sold / Average Inventory
Cost of Goods Sold = $184,000
Beginning inventory is not provided; hence, we assume the ending inventory reflects the period's average. Therefore:
Average Inventory ≈ $150,000
Thus,
Inventory Turnover ≈ $184,000 / $150,000 ≈ 1.23 times
5. Accounts Receivable Turnover
This ratio measures how efficiently a company collects its receivables. It is calculated as:
Receivables Turnover = Net Sales / Average Accounts Receivable
Net Sales = $360,000
Accounts Receivable (end of period) = $40,000
Assuming no opening receivables data, average receivables = $40,000
Receivables Turnover ≈ $360,000 / $40,000 = 9 times
6. Times Interest Earned
This ratio indicates the company's ability to meet interest obligations and is calculated as:
Times Interest Earned = Income Before Income Taxes / Interest Expense
Income before taxes = $105,000
Interest Expense = $21,000
Therefore,
Times Interest Earned = $105,000 / $21,000 ≈ 5 times
7. Profit Margin Ratio
This ratio shows the percentage of profit from sales, calculated as:
Profit Margin = Net Income / Net Sales
Net Income = $75,000
Net Sales = $360,000
Thus,
Profit Margin ≈ $75,000 / $360,000 ≈ 0.208 or 20.8%
8. Average Days in Inventory
This measures the average number of days inventory is held before sale, computed as:
Days in Inventory = 365 / Inventory Turnover
Inventory Turnover ≈ 1.23
Therefore,
Days in Inventory ≈ 365 / 1.23 ≈ 297 days
9. Payout Ratio
This ratio indicates the proportion of earnings paid out as dividends, calculated as:
Payout Ratio = Dividends Declared / Net Income
Dividends declared and paid = $50,000
Net Income = $75,000
Thus,
Payout Ratio ≈ $50,000 / $75,000 ≈ 0.6667 or 66.67%
10. Return on Assets (ROA)
ROA indicates how efficiently the company utilizes its assets to generate profit, calculated as:
ROA = Net Income / Average Total Assets
Total assets at year-end = $405,000
Assuming no prior data, average total assets ≈ $405,000
Therefore,
ROA ≈ $75,000 / $405,000 ≈ 0.185 or 18.5%
Conclusion
These financial ratios collectively paint a comprehensive picture of ABC Co.'s financial health in 2014. The company maintains a strong liquidity position with a current ratio over 3.6, indicating good coverage of short-term liabilities. Its profitability measures—ROE, profit margin, and ROA—are robust, demonstrating effective management and operational efficiency. The turnover ratios suggest moderate efficiency in inventory and receivables management, while the interest coverage ratio shows adequate capacity to meet interest obligations. The payout ratio indicates a substantial proportion of earnings are paid out as dividends to shareholders, which, along with the P/E ratio, reflects investor confidence and valuation levels. These ratios serve as valuable benchmarks for investors, creditors, and management in assessing financial stability and strategic planning.
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