Ratio Computations and Effect of Transactions
Problem: Presented below is information related to Carver Inc.
CARVER INC.
BALANCE SHEET
DECEMBER 31, 2014
|
Cash
|
|
$ 45.000
|
Notes payable (short-term)
|
$ 50.000
|
|
Receivables
|
$110,000
|
|
Accounts payable
|
32.000
|
|
Less: Allowance
|
15.000
|
95.000
|
Accrued liabilities
|
5.000
|
|
Inventory
|
|
170,000
|
Common stock (par $5)
|
260.000
|
|
Prepaid insurance
|
|
8.000
|
Retained earnings
|
141.000
|
|
Land
|
|
20.000
|
|
|
|
Equipment (net)
|
|
150,000
|
|
|
|
|
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$488,000
|
|
$488,000
|
CARVER INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2014
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Sales revenue Cost of goods sold
|
|
$1.400,000
|
|
Inventory. Jan. 1. 2014
|
$200,000
|
|
|
Purchases
|
790.000
|
|
|
Cost of goods available for sale
|
990,000
|
|
|
Inventory. Dec. 31. 2014
|
(170.000)
|
|
|
Cost of goods sold
|
|
820.000
|
|
Gross profit on sales
|
|
580.000
|
|
Operating expenses
|
|
170.000
|
|
Net income
|
|
$ 410.000
|
Instructions:
(a) Compute the following ratios or relationships of Carver Inc. Assume that the ending account balances are representative unless the information provided indicates differently.
(1) Current ratio.
(2) Inventory turnover.
(3) Accounts receivable turnover.
(4) Earnings per share.
(5) Profit margin on sales.
(6) Return on assets on December 31, 2014.
(b) Indicate for each of the following transactions whether the transaction would improve, weaken, or have no effect on the current ratio of Carver Inc. at December 31, 2014.
(1) Write off an uncollectible account receivable, $2,200.
(2) Purchase additional capital stock for cash.
(3) Pay $40,000 on notes payable (short-term).
(4) Collect $23,000 on accounts receivable.
(5) Buy equipment on account.
(6) Give an existing creditor a short-term note in settlement of account.