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# Analyzing the ability to pay liabilities

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Large Land Photo Shop has asked you to determine whether the company's ability to pay current liabilities and total liabilities improved or deteriorated during 2012. To answer this question, you gather the following data:

(See Attatchment)

Compute the following ratios for 2012 and 2011:

a. Current ratio
b. Acid-test ratio
c. Debt ratio
d. Debt to equity ratio

© BrainMass Inc. brainmass.com October 25, 2018, 6:56 am ad1c9bdddf

#### Solution Preview

1. Current ratio = current assets/current liabilities

***2012
585,000/255,000 = 2.29

***2011
535,000/222,000 = 2.41

2. Acid test ratio = (cash + accounts receivable + term investments)/current ...

#### Solution Summary

1. Current ratio = current assets/current liabilities

\$2.19

## Eagle Company financial data: compute ROA, current ratio, acid-test, profit margin, inventory turnover, debt-equity ratio

Using the following financial statements for Eagle Company, compute the required ratios:

EAGLE COMPANY BALANCE SHEET AS OF December 31 (IN MILLIONS)
2007 2008 2009
Assets
Cash \$2.6 \$1.8 \$1.6
Government securities 0.4 0.2 0.0
Accounts and notes receivable 8.0 8.5 8.5
Inventories 2.8 3.2 2.8
Prepaid assets 0.7 0.6 0.6
Total current assets \$14.5 \$14.3 \$13.5
Property, plant, and equipment (net) 4.3 5.4 5.9
Total assets \$18.8 \$19.7 \$19.4
Liabilities and shareholders' Equity
Notes payable \$3.2 \$3.7 \$4.2
Accounts payable 0.9 1.1 1.0
Total current liabilities \$6.9 \$8.5 \$9.3
Long-term debt, 6% interest 3.0 2.0 1.0
Total liabilities \$9.9 \$10.5 \$10.3
Shareholders' equity 8.9 9.2 9.1
Total liabilities and shareholders' equity \$18.8 \$19.7 \$19.4
Income Statement for the Year Ended December 31 (in millions)
Net sales \$24.2 \$24.5 \$24.9
Cost of goods sold (16.9) (17.2) (18.0)
Gross margin \$7.3 \$7.3 \$6.9
Selling and administrative expenses (6.6) (6.8) (7.3)
Earnings (loss)before taxes \$0.7 \$0.5 \$(0.4)
Income taxes (0.3) (0.2) 0.2
Net income \$0.4 \$0.3 \$(0.2)

Required
A. What is the rate of return on total assets for 2009?
B. What is the current ratio for 2009?
C. What is the quick (acid-test) ratio for 2009?
D. What is the profit margin for 2008?
E. What is the profit margin for 2009?
F. What is the inventory turnover for 2008?
G. What is the inventory turnover for 2009?
H. What is the rate of return on stockholders' equity for 2008?
I. What is the rate of return on stockholders' equity for 2009?
J. What is the debt-equity ratio for 2009?

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