# 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

#### 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