Week Five Exercise Assignment
Financial Ratios
1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close
of business on July 10:

Edison
Cash
$4,000
Short-term investments 3,000
Accounts receivable
2,000
Inventory
1,000
Prepaid expenses
800
Accounts payable
200
Notes payable: short-term 3,100
Accrued payables
300
Long-term liabilities
3,800

Stagg
$2,500
2,500
2,500
2,500
800
200
3,100
300
3,800

Thornton
$1,000
2,000
3,000
4,000
800
200
3,100
300
3,800

a. Compute the current and quick ratios for each of the three companies. (Round
calculations to two decimal places.) Which firm is the most liquid? Why?
2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc:

20X5
Net credit sales
$832,000
Cost of goods sold
440,000
Cash, Dec. 31
125,000
Average Accounts receivable 180,000
Average Inventory
70,000
Accounts payable, Dec. 31 115,000

20X4
$760,000
350,000
110,000
140,000
50,000
108,000

a. Compute the accounts receivable and inventory turnover ratios for 20X5. Alaska rounds
all calculations to two decimal places.
3. Profitability ratios, trading on the equity. Digital Relay has both preferred and common stock
outstanding. The company reported the following information for 20X7:

Net sales
Interest expense
Income tax expense
Preferred dividends
Net income
Average assets
Average common stockholders’

$1,500,000
$120,000
$80,000
$25,000
$130,000
$1,100,000
$400,000

equity

a. Compute the profit margin ratio, the return on equity and the return on assets, rounding
calculations to two decimal places.
b. Does the firm have positive or negative financial leverage? Briefly explain.

4. Horizontal analysis. Mary Lynn Corporation has been operating for several years. Selected data from
the 20X1 and 20X2 financial statements follow.

20X2
Current Assets
Property, Plant, and Equipment
(net)
Intangibles
Current Liabilities
Long-Term Liabilities
Stockholders’ Equity
Net Sales
Cost of Goods Sold
Operating Expenses

20X1
$76,000
99,000

$80,000
90,000

25,000
40,800
143,000
16,200
500,000
332,500
93,500

50,000
48,000
160,000
12,000
500,000
350,000
85,000

Prepare a horizontal analysis for 20X1 and 20X2. Briefly comment on the results of your
work.
5. Vertical analysis. Mary Lynn Corporation has been operating for several years. Selected data from
the 20X1 and 20X2 financial statements follow.

20X2
Current Assets
Property, Plant, and Equipment
(net)

20X1
$ 76,000
99,000

$ 80,000
90,000

Intangibles
Current Liabilities
Long-Term Liabilities
Stockholders’ Equity
Net Sales
Cost of Goods Sold
Operating Expenses

25,000
40,800
143,000
16,200
500,000
332,500
93,500

50,000
48,000
160,000
12,000
500,000
350,000
85,000

Prepare a vertical analysis for 20X1 and 20X2. Briefly comment on the results of your work.

6.

Ratio computation. The financial statements of the Lone Pine Company follow.
LONE PINE COMPANY
Comparative Balance Sheets
December 31, 20X2 and 20X1 ($000 Omitted)
20X2
20X1
Assets
Current Assets
Cash and Short-Term Investments
Accounts Receivable (net)
Inventories
Total Current Assets
Property, Plant, and Equipment
Land
Buildings and Equipment (net)
Total Property, Plant, and
Equipment
Total Assets
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable
Notes Payable
Total Current Liabilities
Long-Term Liabilities
Bonds Payable
Total Liabilities
Stockholders’ Equity
Common Stock
Retained Earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’

$ 400
3,000
2,000
$5,400

$ 600
2,400
2,200
$5,200

$1,700
1,500
$3,200

$ 600
1,000
$1,600

$8,600

$6,800

$1,800
1,100
$2,900

$1,700
1,900
$3,600

4,100
$7,000

2,100
$5,700

$ 200
1,400
$1,600
$8,600

$ 200
900
$1,100
$6,800

Equity
LONE PINE COMPANY
Statement of Income and Retained Earnings
For the Year Ending December 31,20X2 ($000 Omitted)
Net Sales*
$36,000
Less: Cost of Goods
$20,000
Sold
Selling Expense
Administrative
Expense
Interest Expense
Income Tax Expense
Net Income
Retained Earnings,

6,000
4,000
400
2,000

32,400
$ 3,600
900

Jan. 1
Cash Dividends
Declared and Paid
Retained Earnings,

$ 4,500
3,100
$ 1,400

Dec. 31
*All sales are on account.
Instructions
Compute the following items for Lone Pine Company for 20X2, rounding all calculations to
two decimal places when necessary:
a. Quick ratio
b. Current ratio
c. Inventory-turnover ratio
d. Accounts-receivable-turnover ratio
e. Return-on-assets ratio
f. Net-profit-margin ratio
g. Return-on-common-stockholders’ equity
h. Debt-to-total assets
i. Number of times that interest is earned

GRADING RUBRIC

Total Possible Score: 8.00

Liquidity Ratios
Total: 1.00
Distinguished – Accurately answers all parts of the problem from the assignment. The submission
includes a detailed explanation of how the problem was completed and all applicable supporting
computations.
Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies
in the calculations. The submission includes an explanation of how the problem was completed
and all applicable supporting computations.
Basic – Answers most parts of the problem from the assignment with several inaccuracies in the
calculations. The submission includes a brief explanation of how the problem was completed and
partial supporting computations.
Below Expectations – Attempts to answer the problem from the assignment; however, the
submission is underdeveloped and has many inaccuracies in the calculations. The submission
does not include an explanation of how the problem was attempted.
Non-Performance – The assignment is either nonexistent or fails to answer the problem from the
assignment.

Computation and Evaluation of Activity Ratios
Total: 1.00
Distinguished – Accurately answers all parts of the problem from the assignment. The submission
includes a detailed explanation of how the problem was completed and all applicable supporting
computations.
Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies
in the calculations. The submission includes an explanation of how the problem was completed
and all applicable supporting computations.
Basic – Answers most parts of the problem from the assignment with several inaccuracies in the
calculations. The submission includes a brief explanation of how the problem was completed and
partial supporting computations.
Below Expectations – Attempts to answer the problem from the assignment; however, the
submission is underdeveloped and has many inaccuracies in the calculations. The submission
does not include an explanation of how the problem was attempted.
Non-Performance – The assignment is either nonexistent or fails to answer the problem from the
assignment.

Profitability Ratios, Trading on the Equity
Total: 1.00
Distinguished – Accurately answers all parts of the problem from the assignment. The submission
includes a detailed explanation of how the problem was completed and all applicable supporting
computations.
Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies
in the calculations. The submission includes an explanation of how the problem was completed
and all applicable supporting computations.

Basic – Answers most parts of the problem from the assignment with several inaccuracies in the
calculations. The submission includes a brief explanation of how the problem was completed and
partial supporting computations.
Below Expectations – Attempts to answer the problem from the assignment; however, the
submission is underdeveloped and has many inaccuracies in the calculations. The submission
does not include an explanation of how the problem was attempted.
Non-Performance – The assignment is either nonexistent or fails to answer the problem from the
assignment.

Horizontal Analysis
Total: 2.00
Distinguished – Accurately answers all parts of the problem from the assignment. The submission
includes a detailed explanation of how the problem was completed and all applicable supporting
computations.
Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies
in the calculations. The submission includes an explanation of how the problem was completed
and all applicable supporting computations.
Basic – Answers most parts of the problem from the assignment with several inaccuracies in the
calculations. The submission includes a brief explanation of how the problem was completed and
partial supporting computations.
Below Expectations – Attempts to answer the problem from the assignment; however, the
submission is underdeveloped and has many inaccuracies in the calculations. The submission
does not include an explanation of how the problem was attempted.
Non-Performance – The assignment is either nonexistent or fails to answer the problem from the
assignment.

Vertical Analysis
Total: 1.00
Distinguished – Accurately answers all parts of the problem from the assignment. The submission
includes a detailed explanation of how the problem was completed and all applicable supporting
computations.
Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies
in the calculations. The submission includes an explanation of how the problem was completed
and all applicable supporting computations.
Basic – Answers most parts of the problem from the assignment with several inaccuracies in the
calculations. The submission includes a brief explanation of how the problem was completed and
partial supporting computations.
Below Expectations – Attempts to answer the problem from the assignment; however, the
submission is underdeveloped and has many inaccuracies in the calculations. The submission
does not include an explanation of how the problem was attempted.
Non-Performance – The assignment is either nonexistent or fails to answer the problem from the
assignment.

Ratio Computation

Total: 2.00
Distinguished – Accurately answers all parts of the problem from the assignment. The submission
includes a detailed explanation of how the problem was completed and all applicable supporting
computations.
Proficient – Answers all parts of the problem from the assignment with some minor inaccuracies
in the calculations. The submission includes an explanation of how the problem was completed
and all applicable supporting computations.
Basic – Answers most parts of the problem from the assignment with several inaccuracies in the
calculations. The submission includes a brief explanation of how the problem was completed and
partial supporting computations.
Below Expectations – Attempts to answer the problem from the assignment; however, the
submission is underdeveloped and has many inaccuracies in the calculations. The submission
does not include an explanation of how the problem was attempted.
Non-Performance – The assignment is either nonexistent or fails to answer the problem from the
assignment.