Problem 14-4A (Part Level Submission) Financial information for Messersmith Comp

Question

Problem 14-4A (Part Level Submission) Financial information for Messersmith Company is presented below MESSERSMITH COMPANY Balance Sheets December 31 2017 2016 Assets Cash Short-term investments Accounts receivable (net) Inventory Prepaid expenses Land Building and equipment (net) 77,000 $71,500 57,200 44,000 107,800 88,000 137,500 148,500 31,900 25,300 143,000 143,000 198,000 192,500 $752,400 $712,800 Liabilities and Stockholders" Equi Notes payable $110,000 $110,000 Accounts payable Accrued liabilities Bonds payable, 165,000 165,000 due 2020 Common stock, $10 par Retained earnings 52,800 46,200 55,000 44,000 220,000 220,000 149,600 127,600 $752,400 $712,800 MESSERSMITH COMPANY Income Statement For the Years Ended December 31 2017 2016 Net sales $935,000 $869,000 Cost of goods sold Gross profit Operating 205,700 190,300 expenses Net income 682,000 632,500 253,000 236,500 $47,300 $46,200

Explanation / Answer

A. LIQUIDITY

Here, Current Assets = Cash + Short term investments+ Accounts receivable+ Inventory + Prepaid expenses

Here, Current Liabilities = Notes payable + Accounts payable + Accrued liabilities

So, applying above formula Current Ratio

2017 = $ 411,400/ $ 217,800 = 1.9

2016 = $ 377,300/ $ 200,200 = 1.9

Change = Nil

2. Acid-test = Quick Assets/Current Liablities

Here, Current Assets = Cash + Short term investments+ Accounts receivable

Here, Current Liabilities = Notes payable + Accounts payable + Accrued liabilities

So, applying above formula Quick Ratio

2017 = $ 242,000/ $ 217,800 = 1.1

2016 = $ 203,500/ $ 200,200 = 1.0

Change = 0.1

3. Accounts receivable turnover ratio = Net revenue /Average accounts receivable

Here, Average accounts receivable is the average of a company's accounts receivable from its prior period to the current period.

2017 = $ 935,000/ ($ 107,800 + $ 88,000)/2 = 9.6 times

2016 = $ 869,000/ ($ 88,000 + $ 96,800)/2 = 9.4 times

Change = 0.2 times

4. Inventory turnover ratio = Cost of Goods sold /Average inventory

Here, Average accounts receivable in the denominator of the formula is the average of a company's inventory from its prior period to the current period.

2017 = $ 682,000/ ($ 137,500 + $ 148,500)/2 = 4.8 times

2016 = $ 632,500/ ($ 148,500 + $ 129,800)/2 = 4.5 times

Change = 0.3 times

B. PROFITABILITY

So, applying above formula Current Ratio

2017 = $ 47,300/ $ 935,000 = 5.1%

2016 = $ 46,200/ $ 869,000 = 5.3%

Change = 0.2%

2 Asset turnover ratio = Net revenue /Average total assets

Here, Average total assets in the denominator of the formula is the average of a company's assets from its prior period to the current period.

2017 = $ 935,000/ ($ 752,400 + $ 712,800)/2 = 1.3 times

2016 = $ 869,000/ ($ 712,800 + $ 693,000)/2 = 1.2 times

Change = 0.1 times

3. Return on assets ratio = Net income / total assets

2017 = $ 47,300/ $ 752,400   = 6.3%

2016 = $ 46,200/ $ 712,800 = 6.5%

Change = 0.2%

4 Earnings per share = Net income / No of shares

2017 = $ 47,300/ $ 22,000   = 2.15

2016 = $ 46,200/ ($ 22,000 = 2.10

Change = 0.05

    

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