Question

(Ratio Computations and Effect ofTransactions)

Presented below is information related to Carver Inc.

CARVER INC.

Balance Sheet
December 31, 2007

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
Inventories 170,000 Capital stock (par $5) 260,000
Prepaid insurance 8,000 Retained earnings 141,000
Land 20,000
Equipment (net)
150,000

$488,000

$488,000

CARVER INC.

Income Statement
For the year ended December31, 2007

Sales $1,400,000
Cost of goods sold
Inventory, Jan. 1, 2007 $200,000
Purchases
790,000

Cost of goods available forsale 990,000
Inventory, Dec. 31,2007
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 orrelationships of Carver Inc. Assume that the ending accountbalances are representative unless the information providedindicates differently. (Round answers to 2 decimalplaces.)

Current ratio. times
Inventory turnover. times
Receivables turnover. times
Earnings per share. $
Profit margin on sales. %
Rate of return on assets on December 31, 2007. %
(b) Indicate for each of the followingtransactions whether the transaction would improve, weaken, or haveno effect on the current ratio of Carver Inc. at December 31,2007.

Write off an uncollectible account receivable, $2,200.
Purchase additional capital stock for cash.
Pay $40,000 on notes payable (short-term).
Collect $23,000 on accounts receivable.
Buy equipment on account.
Give an existing creditor a short-term note in settlement ofaccount.

Answer 1

Answer:

Carver Inc.

a. Ratio Analysis:

Current ratio = Current assets/Current liabilities

= $318,000/87,000

= 3.66 times

Inventory turnover = cost of goods sold/average inventory

= $820,000/$185,000

= 4.43 times

Receivable turnover = Sales/Receivables

= $1,400,000/$95,000

= 14.74 times

Earnings per share = Net income/No. of shares

= $410,000/52,000

= $7.88 per share

Profit margin on sales = Net Income/Sales * 100

= $410,000/$1,400,000 * 100

= 29.29%

Rate of return on assets = Net income/Total assets * 100

= $410,000/$488,000 * 100

= 84.02%

b) Indication of whether the transaction would improve, weaken, or have no effect on the current ratio of Carver Inc. at December 31,2007:

1. weaken

2. weaken

3. no effect

4. no effect

5. weaken

6. no effect

Explanation:

a) Data and Calculations:

CARVER INC.

Balance Sheet

December 31, 2007

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

Inventories                      170,000       Capital stock (par $5)         260,000

Prepaid insurance              8,000       Retained earnings               141,000

Land                                 20,000

Equipment (net)              150,000

                                   $488,000                                                  $488,000

CARVER INC.

Income Statement

For the year ended December 31, 2007

Sales                                             $1,400,000

Cost of goods sold

Inventory, Jan. 1, 2007 $200,000

Purchases                        790,000

Cost of goods

available for sale          990,000

Inventory, Dec. 31,2007  170,000

Cost of goods sold                         820,000

Gross profit on sales                     580,000

Operating expenses                       170,000

Net income                                   $410,000