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Calculating Accounting Ratios From a Balance Sheet

Problem 1
Suppose a company has $350,000 in current assets. The company's current ratio is 1.25, and its quick ratio is 0.8. Compute the company's current liabilities and inventories.

Problem 2
Compute the price earnings (P/E) ratio given the following.
Earnings per share: $1.70
Cash flow per share: $2.50
Price/cash flow ratio: 7.0 times

Problem 3
Suppose a company has a profit margin of 2.5% and an equity multiplier of 2.0. Its sales are $50,000. The common equity is $25,000. Compute its return on common equity (ROE).

Problem 4
The balance sheet and income statement for a company are shown below.

Balance Sheet
Cash $45,500 Accounts Payable $98,000
Receivables 256,000 Notes Payable 39,000
Inventories 141,500 Other Current Liabilities 121,000
Total Current Assets $443,000 Total Current Liabilities $258,000
Net Fixed Assets 160,500 Long-term debt 147,500
Total Liabilities $405,500
Common equity 262,000
Total Assets $603,500 Total Liabilities and equity $667,500

Income Statement
Sales $1,404,500
Cost of goods sold 1,240,000
Selling, general, and administrative expenses 91,000
Earnings before interest and taxes (EBIT) $73,500
Interest expense 12,500
Earnings before taxes (EBT) $61,000
Federal and state income taxes (40%) 24,400
Net income $36,600

Compute the following ratios for the company.
a) Current ratio
b) Quick ratio
c) Inventory turnover ratio
d) Days sales outstanding (Assume 365 days in a year)
e) Fixed assets turnover ratio
f) Total assets turnover ratio
g) Debt ratio
h) Times-interest-earned ratio

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Solution Preview

1.
Current ratio = current assets/current liabilities
1.25 = 350000/current liabilities
1.25*current liabilities = 350000
current liabilities = 350000/1.25
current liabilities = $280,000

Quick ratio = (Current assets - inventory)/current liabilities
0.8 = (350000 - inventory)/280000
0.8*280000 = 350000 - inventory
224000 = 350000 - inventory
inventory = 350000 - 224000
inventory = $126,000

2.
P/E ratio = Price ...

Solution Summary

This solution shows how to calculate various accounting ratios from a balance sheet. The ratios calculated include:

a) Current ratio
b) Quick ratio
c) Inventory turnover ratio
d) Days sales outstanding (Assume 365 days in a year)
e) Fixed assets turnover ratio
f) Total assets turnover ratio
g) Debt ratio
h) Times-interest-earned ratio

$2.19