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# QUESTION 3. Ratio Analysis The financial statements of Skye Plumbing Inc. appear below: SKYE PLUMBING INC. Comparative Balance Sheet December 31...

QUESTION 3. Ratio Analysis

The financial statements of Skye Plumbing Inc. appear below:

SKYE PLUMBING INC.

Comparative Balance Sheet

December 31

Assets 2014 2013

Cash .............................................................................................. \$ 25,000 \$ 40,000

Accounts receivable ....................................................................... 50,000 30,000

Inventory ........................................................................................ 170,000 120,000

Total Current Assets: ...................................................................... 260,000 250,000

Property, plant, and equipment (net) .............................................. 160,000 200,000

Total assets .............................................................................. \$420,000 \$450,000

Liabilities and shareholders' equity

Accounts payable ........................................................................... \$ 20,000 \$ 30,000

Short-term notes payable ............................................................... 40,000 40,000

Total Current Liabilities 60,000 70,000

Bonds payable ............................................................................... 100,000 160,000

Total Liabilities: 160,000 230,000

Common shares ............................................................................. 170,000 145,000

Retained earnings .......................................................................... 90,000 75,000

Total liabilities and shareholders' equity ................................... \$420,000 \$450,000

Page 3 of 4

SKYE PLUMBING INC.

Income Statement

Year Ended December 31, 2014

Net sales ........................................................................................ \$360,000

Cost of goods sold ......................................................................... 184,000

Gross profit .................................................................................... 176,000

Expenses

Interest expense ...................................................................... \$24,000

Operating expenses ................................................................ 50,000

Total expenses ................................................................... 74,000

Net Income before income taxes .................................................... 102,000

Income tax expense ....................................................................... 30,000

Net Income after taxes ................................................................... \$ 72,000

Required:

A) Using the financial statements , calculate the following ratios for Skye Plumbing Inc. for 2014. Show all calculations, round to nearest two decimal places.

a. Current ratio _________

b. Return on shareholders equity (use Net income after taxes) _________

c. Debt to total assets

e. Age of Receivables _________

f. Times Interest earned (use Net Income before taxes)_________

g. Net Income margin (use Net Income after taxes)_________

h. Inventory turnover _________

i. Return on assets (use Net Income after taxes)_________

B) Select 5 ratios you calculated above, and comment on which ratios performed well and which ratios were not that strong and why, what do they measure? You may want to calculate 2013 ratios to compare to 2014 ratios.

Here is the solution... View the full answer

A)
a. Current ratio
Current ratio = current assets/current liabilities
=260,000/60,000
=4.33 b. Return on shareholders’ equity (use Net income after taxes)
Return on shareholders’ equity = Net...

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