Mondok Corporation has provided the following financial data:Balance SheetDecember 31, Year 2 and Year 1AssetsYear 2Year 1Current assets: Cash$139,000 $140,000 Accounts receivable, net 222,000 230,000 Inventory 109,000 120,000 Prepaid expenses 68,000 70,000 Total current assets 538,000 560,000 Plant and equipment, net 857,000 800,000 Total assets$1,395,000 $1,360,000 Liabilities and Stockholders' Equity Current liabilities: Accounts payable$186,000 $180,000 Accrued liabilities 34,000 30,000 Notes payable, short term 64,000 60,000 Total current liabilities 284,000 270,000 Bonds payable 130,000 130,000 Total liabilities 414,000 400,000 Stockholders' equity: Common stock, $2 par

Question

value 100,000  100,000 Additional paid-in capital 90,000  90,000 Retained earnings 791,000  770,000 Total stockholders' equity 981,000  960,000 Total liabilities & stockholders' equity$1,395,000 $1,360,000 Income StatementFor the Year Ended December 31, Year 2Sales (all on account)$1,280,000 Cost of goods sold 840,000 Gross margin 440,000 Operating expenses 387,231 Net operating income 52,769 Interest expense 12,000 Net income before taxes 40,769 Income taxes (35%) 14,269 Net income$26,500 Required:a. What is the company's working capital at the end of Year 2?b. What is the company's current ratio at the end of Year 2?c. What is the company's acid-test (quick) ratio at the end of Year 2?d. What is the company's accounts receivable turnover for Year 2?e. What is the company's average collection period for Year 2?f. What is the company's inventory turnover for Year 2?g. What is the company's average sale period for Year 2?h. What is the company's operating cycle for Year 2?i. What is the company's total asset turnover for Year 2?j. What is the company's times interest earned ratio for Year 2?k. What is the company's debt-to-equity ratio at the end of Year 2?l. What is the company's equity multiplier at the end of Year 2?

What will be an ideal response?

Answer 1

a.

Working capital = Current assets - Current liabilities

= $538,000 - $284,000 = $254,000

 

b.

Current ratio = Current assets ÷ Current liabilities

= $538,000 ÷ $284,000 = 1.89 (rounded)

 

c.

Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $361,000 ÷ $284,000 = 1.27 (rounded)

*Quick assets = Cash + Marketable securities + Current receivables

= $139,000 + $0 + $222,000 = $361,000

 

d.

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,280,000 ÷ $226,000 = 5.66 (rounded)

*Average accounts receivable =  ($222,000 + $230,000) ÷ 2 = $226,000

 

e.

Average collection period = 365 days ÷ Accounts receivable turnover

= 365 days ÷ 5.66 = 64.5 days (rounded)

 

f.

Inventory turnover = Cost of goods sold ÷ Average inventory*

= $840,000 ÷ $114,500 = 7.34 (rounded)

*Average inventory = ($109,000 + $120,000) ÷ 2 = $114,500

 

g.

Average sale period = 365 days ÷ Inventory turnover

= 365 days ÷ 7.34 = 49.7 days (rounded)

 

h.

Operating cycle = Average sale period + Average collection period

= 49.7 days + 64.5 days = 114.2 days

 

i.

Total asset turnover = Sales ÷ Average total assets*

= $1,280,000 ÷ $1,377,500 = 0.93 (rounded)

*Average total assets = ($1,395,000 + $1,360,000) ÷ 2 = $1,377,500

 

j.

Times interest earned ratio = Earnings before interest expense and income taxes ÷ Interest expense

= $52,769 ÷ $12,000 = 4.40 (rounded)

 

k.

Debt-to-equity ratio = Total liabilities ÷ Stockholders' equity

= $414,000 ÷ $981,000 = 0.42 (rounded)

 

l.

Equity multiplier = Average total assets* ÷ Average stockholders' equity*

= $1,377,500 ÷ $970,500 = 1.42 (rounded)

*Average total assets = ($1,395,000 + $1,360,000) ÷ 2 = $1,377,500

**Average stockholders' equity = ($981,000 + $960,000) ÷ 2 = $970,500