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The condensed financial statements of Murawski Company for the years 2019 and 2020 are presented follows
The condensed financial statements of Murawski Company for the years 2019 and 2020 are presented follows. (Amounts in thousands.)
|
MURAWSKI COMPANY |
||||||
|
2020 |
2019 |
|||||
| Current assets | ||||||
| Cash and cash equivalents | $ 352 | $ 368 | ||||
| Accounts receivable (net) | 414 | 486 | ||||
| Inventory | 410 | 432 | ||||
| Prepaid expenses | 142 | 110 | ||||
| Total current assets | 1,318 | 1,396 | ||||
| Investments | 14 | 10 | ||||
| Property, plant, and equipment | 390 | 422 | ||||
| Intangibles and other assets | 508 | 540 | ||||
| Total assets | $2,230 | $2,368 | ||||
| Current liabilities | $ 778 | $ 894 | ||||
| Long-term liabilities | 364 | 410 | ||||
| Stockholders’ equity—common | 1,088 | 1,064 | ||||
| Total liabilities and stockholders’ equity | $2,230 | $2,368 | ||||
|
MURAWSKI COMPANY |
||||||
|
2020 |
2019 |
|||||
| Sales revenue | $3,900 | $3,810 | ||||
| Costs and expenses | ||||||
| Cost of goods sold | 896 | 978 | ||||
| Selling & administrative expenses | 2,345 | 2,400 | ||||
| Interest expense | 22 | 19 | ||||
| Total costs and expenses | 3,263 | 3,397 | ||||
| Income before income taxes | 637 | 413 | ||||
| Income tax expense | 188 | 87 | ||||
| Net income | $ 449 | $ 326 | ||||
Compute the following ratios for 2020 and 2019. (Round current ratio and invertory turnover ratio to 2 decimal places, e.g. 1.62 or 1.62% and all other answers to 1 decimal place, e.g. 1.6 or 1.6%.)
| (a) | Current ratio. | |
| (b) | Inventory turnover. (Inventory on 12/31/18 was $340.) | |
| (c) | Profit margin ratio. | |
| (d) | Return on assets. (Assets on 12/31/18 were $1,908.) | |
| (e) | Return on common stockholders’ equity. (Stockholders' equity on 12/31/18 was $890.) | |
| (f) | Debt to assets ratio. | |
| (g) | Times interest earned. |
Expert Solution
ANSWER:
(1)
Current ratio = current assets/current liabilities
For 2020:
Current ratio = $1318/778
= 1.69 times
For 2019:
Current ratio = $1396/$894
= 1.56 times
(2)
Inventory turnover ratio = cost of goods sold/average inventory
For 2020:
Average inventory = ($432 + $410)/2 = $421
Inventory turnover ratio = $896/$421
= 2.13 times
For 2019:
Average inventory = ($340 + $432)/2 = $386
Inventory turnover ratio = $978/$386
= 2.53%
(3)
Profit margin ratio = net income/net sales
= For 2020:
Profit margin ratio = $449/$3900
= 11.5%
For 2019:
Profit margin ratio = $326/$3810
= 8.6%
(4)
Return on assets = net income/average total assets
For 2020:
Average total assets = ($2368 + $2230)/2 = $2299
Return on assets = $449/$2299
= 19.5%
For 2019:
Average total assets = ($1908 + $2368)/2 = $2138
Return on assets = $326/$2138
= 15.2%
(5)
When there is no preferred stock then the formula is,
Return on common stockholders equity = net income/average common stockholders equity
For 2020:
Average common stockholders equity = ($1064 + $1088)/2 = $1076
Return on common stockholders equity = $449/$1076
= 41.7%
For 2019:
Average common stockholders equity = ($890 + $1064)/2 = $977
Return on common stockholders equity = $326/$977
= 33.4%
(6)
Debt to asset ratio = total liabilities/total assets
For 2020:
Debt to asset ratio = ($778 + $364)/$2230
= 51.2%
For 2019:
Debt to asset ratio = ($894 + $410)/$2368
= 55.1%
(7)
Times interest earned = Earning before interest and taxes/interest expenses
Earning before interest and taxes(EBIT) = net income + income tax expenses + interest expenses
For 2020:
EBIT = $449 + $188 + $22 = $659
Times interest earned = $659/$22
= 30.0 times (or 29.95 times)
For 2019:
EBIT = $326 + $87 + $19 = $432
Times interest earned = $432/$19
= 22.7 times
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