Answer:
(a) Ratios:
1. Current ratio
= Current Assets/Current Liabilities
= $113,666/
$ 32,676
= 3.48
2. Receivables turnover
= Net Sales/Average Accounts Receivable
= $462,500/3,250
= 142.31
3. Inventory turnover
= Cost of goods sold/Average Inventory
= $231,250/17,897
= 12.92
4. Debt to total assets Ratio
= Total Debts/Total Assets * 100
= $38,676/$155,466 * 100
= 25%
5. Times interest earned
= EBIT/Interest Expense
= $98,863/413
= 239.38
6. Gross profit rate
= Gross profit/Sales * 100
= $231,250/462,500 * 100
= 0.5
= 50%
7. Profit margin
= Net Income/Sales * 100
= $78760/462,500 * 100
= 0.17
= 17%
8. Asset turnover
= Sales/Average Assets
= $462,500/155,466
= 2.97
9. Return on assets
= Net Income/Assets * 100
= $78,760/155,466 * 100
= 50.66%
10. Return on common stockholders' equity
= Net Income/Stockholders' Equity * 100
= $78,760/116,790 * 100
= 67.44%
(b) Comment on your findings from part (a).
1. Current ratio
: This ratio shows CCC INC.'s ability to settle its current liabilities or financial obligations from its current assets. The company can comfortably settle its current financial obligations 3.48 times without borrowing. It only needs to manage its working capital well so that it does not run out of cash.
2. Receivables turnover
: This ratio shows CCC INC.'s ability to collect its accounts receivable. It does not take long for CCC INC. to receive cash from credit customers. When the receivables turnover of 142.31 is divided into 365 days, we find that it takes only 2.6 days to collect from customers. This is very good.
3. Inventory turnover
: This ratio shows how many times the company turns over its inventories. Its inventory is turned 12.92 times in a year.
4. Debt to total assets Ratio: This ratio shows the company's debts are only 25% of the total assets. The remaining 75% of the assets are contributed by equity. The company can still take on more debts when necessary.
5. Times interest earned
: The interest expense is covered 239 times by the EBIT. This shows the company can settle its interest expense from current earnings.
6. Gross profit rate
: This ratio shows the ability of the management to manage the cost of goods sold relative to the net sales. The gross profit represents 50% of the sales.
7. Profit margin
: The profit ratio or margin ratio shows the ability of the managers to ensure that operating expenses do not consume the sales revenue. They could only preserve 17% of the sales revenue for the owners after expenses and income taxes.
8. Asset turnover
: The company generated 2.97 times of the assets it used for operations. This looks good and sound.
9. Return on assets
: What is the return made from the assets? This ratio shows that CCC INC. generates 50.66% net income on each of the assets it has deployed in operations.
10. Return on common stockholders' equity
: The company generates 67.44% returns for the stockholders.
(c) The company does not need to borrow $20,000 from any bank with so much in cash.
(d) Alternatives to bank financing:
The company can self-finance equipment worth $20,000 and even invest its idle cash into some marketable securities.
Explanation:
a) Data:
Balance Sheet October 31, 2017
Assets
Current assets
Cash $86,219
Accounts receivable 3,250
Inventory 17,897
Prepaid expenses 6,300 $113,666
Property, plant, and equipment
Furniture and fixtures $12,500
Accumulated depreciation—
Furniture and fixtures (1,250) 11,250
Computer equipment 4,200
Accumulated depreciation—
computer equipment (600) 3,600
Kitchen equipment 29,000
Accumulated depreciation—
kitchen equipment (2,050) 26,950 41,800
Total assets $155,466
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $ 5,848
Income tax payable 19,690
Dividends payable 700
Salaries and wages payable 2,250
Interest payable 188
Note payable—current portion 4,000 $ 32,676
Long-term liabilities Note payable—
long-term portion 6,000
Total liabilities $38,676
Stockholders’ equity
:
Paid-in capital
Preferred stock, 2,800 shares issued and
outstanding $ 14,000
Common stock, 25,930 shares issued,
25,180 outstanding 25,930 $39,930
Retained earnings 77,360
Total paid-in capital and retained earnings 117,290
Less: Treasury stock (750 common shares) (500)
Total stockholders’ equity 116,790
Total liabilities and stockholders’ equity $155,466
Income Statement
Year Ended October 31, 2017
Sales revenue $462,500
Cost of goods sold 231,250
Gross profit 231,250
Operating expenses
Salaries and wages expense $92,500
Depreciation expense 3,900
Other operating expenses 35,987 $132,387
Income from operations 98,863
Other expenses Interest expense 413
Income before income tax 98,450
Income tax expense 19,690
Net income $ 78,760
Dividends for preferred stock 1,250
Dividends for common stock 150
Retained earnings $ 77,360
