In its closing financial statements for its first year in business, ABC Enterpri
ID: 2774528 • Letter: I
Question
In its closing financial statements for its first year in business, ABC Enterprises, had cash of $242, accounts receivable of $850, inventory of $820, net fixed assets of $3,408, accounts payable of $700, short-term notes payable of $740, long-term liabilities of $1,100, common stock of $1,160, retained earnings of $1,620, net sales of $2,768, cost of goods sold of $1,210, depreciation of $360, interest expense of $160, taxes of $312, addition to retained earnings of $508, and dividends paid of $218.
Sales to asset ratio
Current Ratio
Total-debt-total-asset ratio
Debt-to-equity ratio
Equity multiplier
Interest coverage ratio
Explanation / Answer
1. Sales to Asset Ratio
Net Sales of ABC Enterprises = $2768
Fixed Asset = $3408
Sales to Asset Ratio = 2768/3408 = 0.81 times
2. Current Ratio
Current assets of the firm are Cash in Hand, Account Receivable and Inventory. Adding all these components we get -
Total current assets = 242+850+820 = $1912
Current liabilities of the firm are accounts payables and short term notes payable. Adding all these components we get -
Total Current Liabilities = 700+740 = $1440
Current Ratio = Total Current Assets / Total Current Liabilities = 1912/1440 = 1.33
3. Total Debt to Total Asset Ratio
Total Debt of the firm = Long term debts + Short Term Debts,
In our case short term debts are accounts payables and short term notes payable. Putting values we get,
Total Debt = 1100+700+740= $2540
Total Assets = Current Assets + Fixed Assets
Putting values from above we get,
Total Assets = 1912+3408 = $5320
Hence Total Debt total Asset ratio = 2540/5320 = 0.48
4. Equity Multiplier
Shareholders Equity = Common Stock + Retained Earning = 1160 + 508 = $1668
Equity Multiplier = Total Assets / Shareholders Equity
= $5320/1668 = 3.19
5. Interest Coverage Ratio
Interest Coverage Ratio = Earnings Before Interest, Depreciation and taxes (EBIDT) / Interest Expense
For ABC Enterprises, EBIDT = PAT + Interest + Depreciation + Taxes
= Retained Earning + Dividends+ Interest + Depreciation + Taxes
= 508+218+160+360+312 = $1558
Putting values, we get
Interest Coverage Ratio = 1558/160 = 9.74