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Q: Financial Accounting Balance Sheet and Ratios ( No Answer,   0 Comments )
Question  
Subject: Financial Accounting Balance Sheet and Ratios
Category: Business and Money > Accounting
Asked by: urbs44-ga
List Price: $25.00
Posted: 10 May 2006 06:34 PDT
Expires: 11 May 2006 20:18 PDT
Question ID: 727258
Hello everyone.  I am trying to solve a financial accounting problem
realating to a practice test.  If any of you could help me, I would
truly appreciate it.  Here it is:

14-4 Comparing Loan Requests from Two Companies Using Several Ratios

The 2004 financial statements for Rand and Tand companies are summarized here:

Balance Sheet			Rand			Tand
Cash				$25,000			$45,000
Accounts receivable(net)	55,000			5,000
Inventory			110,000			25,000
Operational assets(net)		550,000			160,000
Other assets			140,000			57,000

Total assets			$880,000		$292,000

Current liabilities		$120,000		$15,000
Long-term debt (12%)		190,000			$55,000
Capital stock (par $20)		480,000			210,000
Contributed capital in 
   excess of par		 50,000			4,000
Retained earnings		 40,000			8,000

Total liabilities and 
  stockholders? equity 	         $880,000		$292,000

Income Statement
Sales revenue (on credit)    ()$800,000	   (1/4)$280,000
Cost of goods sold		(480,000)		(150,000)
Expenses(include interest 
    and income tax)	        (240,000)		(95,000)

Net income			 $80,000		 35,000

Selected Data from the 2003 Statements

Accounts receivable, net			$47,000			$11,000
Long-term debt (12%)				190,000			55,000
Inventory					95,000			38,000

Other Data
Per share price at the end of 2004		$ 14.00			$ 11.00
Average income tax rate			        %30		        %30
Dividends declared and paid in 2004		$ 20,000	        $ 9,000

These two companies are in the same line of business and in the same
state but in different cities. Each company has been in operation for
about 10 years. Rand Company is audited by one of the national
accounting firms; Tand Company is audited by a local accounting firm.
Both companies received an unqualified opinion (i.e., the independent
auditors found nothing wrong) on the financial statements. Rand
Company wants to borrow $75,000 cash, and Tand Company needs $30,000.
The loans will be for a two-year period and are needed for ?working
capital purposes.?
Required:

1. Complete a schedule that reflects a ratio analysis of each company.
Compute the ratios below.
2. Assume that you work in the loan department for a local bank. You
have been asked to analyze the situation and recommend which loan is
preferable. Based on the data given, your analysis prepared in
requirement 1, and other information, give your choice and supported
explanation.

Formulas:
Tests on Profitability

1. Return on equity (ROE)	
Income/ Average Owners? Equity

2. Return on assets (ROA)	
(Income + Interest Expense(net of tax)/ Average Total Assets

3. Financial leverage percentage 
Return on Equity ? Return on Assets

4. Earnings per share (EPS)	
Income/ Average Number of Shares of Common Stock Outstanding

5. Quality of income
Cash Flows from Operating Activities/ Net Income

6. Profit margin
Income(before extraordinary items)/ Net Sales Revenue

7. Fixed asset turnover
Net Sales Revenue/ Average Net Fixed Assets

Tests on Liquidity

8. Cash ratio
(Cash + Cash Equivalents)/ Current Liabilities

9. Current ratio
Current Assets/ Current Liabilities

10. Quick ratio 
Quick Assets/ Current Liabilities

11. Receivable turnover
Net Credit Sales/ Average Net Receivables
12. Inventory turnover
Cost of Goods Sold/ Average Inventory

Tests of Solvency
13. Times interest earned
(Net Income + Interest + Income Tax Expense)/ Interest Expense

14. Cash coverage
Cash Flows from Operating Activities/ Interest Paid 
(before interest and tax expense)

15. Debt-to-equity
Total Liabilities/ Owners? Equity

Market Tests
16. Price/earnings ratio
Current Market Price per Share/ Earnings per Share

17. Dividend yield
Dividends per Share/ Market Price per Share
Answer  
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