At the end of the year, the following information was obtained from the accounting records of Clips Systems, Inc.:

 

Sales (all on credit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .          $4,800,000

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           3,000,000

Average inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               420,000

Average accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               380,000

Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  50,000

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                  80,000

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .                280,000

Average investment in assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           2,600,000

Average stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           1,000,000

 

 

Instructions

a.       From the information given, compute the following:

1.      Inventory turnover.                           4. Gross profit percentage.

2.      Accounts receivable turnover.         5. Return on average stockholders’ equity.

3.      Total operating expenses.                6. Return on average assets.

b.      

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Clips Systems has an opportunity to obtain a long-term loan at an annual interest rate of 8 percent and could use this additional capital at the same rate of profitability as indicated by the given data. Would obtaining the loan be desirable from the viewpoint of the stockholders? Explain.