Reference no: EM131097268

	2014		2013
Current assets	$45,000		$35,000
Total assets	145,000		110,000
Current liabilities	20,000		10,000
Long-term liabilities	20,000		-
Owner's equity	105,000		100,000
Net sales	262,000		200,000
Net income	16,000		11,000

Total assets and owner's equity at the beginning of 2013 were $90,000 and $80,000, respectively. The owner made no investments in 2013 or 2014.

1. Compute the following measures of liquidity for 2013 and 2014: (a) working capital and (b) current ratio. Round your current ratio values to one decimal place.

	2014		2013
a. Working capital	$		$
b. Current ratio

Comment on the differences between the years.

The input in the box below will not be graded, but may be reviewed and considered by your instructor. Blank Item 5

2. Compute the following measures of profitability for 2013 and 2014: (a) profit margin, (b) asset turnover, (c) return on assets, (d) debt to equity ratio, and (e) return on equity. Round your answers to one decimal place.

	2014		2013
a. Profit margin		%		%
b. Asset turnover		times		times
c. Return on assets		%		%
d. Debt to equity ratio		%		%
e. Return on equity		%		%

Comment on the change in performance from 2013 to 2014.

The input in the box below will not be graded, but may be reviewed and considered by your instructor. blank Item 16

Hide FeedbackShow All FeedbackPartially CorrectCheck My Work Feedback1a.Working capital, which uses two elements of the classified balance sheet, is the amount by which current assets exceed current liabilities. It is an important measure of liquidity because current liabilities must be satisfied within one year or one operating cycle, whichever is longer, and current assets are used to pay the current liabilities. Thus, the working capital is what is on hand to continue business operations.

Working Capital

=

Current Assets

-

Current Liabilities

1b.The current ratio is the ratio of current assets to current liabilities. It is computed as follows:

Current Ratio

=

Current Assets Current Liabilities

Check figure: 2014 current ratio = 2.3 
2a.The profit margin shows the percentage of each sales dollar that results in net income. It is an indication of how well a company is controlling its costs: the lower its costs, the higher its profit margin. It is computed as follows:

Profit Margin

=

Net Income Revenues

2b.The asset turnover ratio measures how efficiently assets are used to produce sales. In other words, how much revenue is generated by each dollar of assets? It is computed as follows:

Asset Turnover

=

Revenues Average Total Assets

2c.The return on assets ratio relates net income to average total assets. It is computed as follows:

Return on Assets

=

Net Income Average Total Assets

2d.The debt to equity ratio shows the proportion of a company's assets financed by creditors and the proportion financed by the owner. It is computed as follows:

Debt to Equity Ratio

=

Total Liabilities Total Equity

2e.Return on equity is the ratio of net income to average owner's equity. It is computed as follows:

Return on Equity

=

Net Income Average Owner's Equity

Check figure: 2014 return on equity = 15.6%Post Submission FeedbackSolution

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 Question 2 of 4 3Problem 5-03

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