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| Â | 2014 | Â | 2013 |
| Current assets | $45,000 | Â | $35,000 |
| Total assets | 145,000 | Â | 110,000 |
| Current liabilities | 20,000 | Â | 10,000 |
| Long-term liabilities | 20,000 | Â | - |
| Owner’s equity | 105,000 |  | 100,000 |
| Net sales | 262,000 | Â | 200,000 |
| Net income | 16,000 | Â | 11,000 |
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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.
| Â | 2014 | Â | 2013 |
| a. Working capital | $ | Â | $ |
| b. Current ratio | Â | Â | Â |
Comment on the differences between the years.
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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.
| Â | 2014 | 2013 | ||
| a. Profit margin | Â | % | Â | % |
| b. Asset turnover | Â | times | Â | times |
| c. Return on assets | Â | % | Â | % |
| d. Debt to equity ratio | Â | % | Â | % |
| e. Return on equity | Â | % | Â | % |
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.
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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.
| Â | Working Capital | = | Current Assets | - | Current Liabilities |
1b.The current ratio is the ratio of current assets to current liabilities. It is computed as follows:
| Â | Current Ratio | = | Current Assets Current Liabilities |
Check figure: 2014 current ratio = 2.3Â
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:
| Â | 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:
| Â | Asset Turnover | = | Revenues Average Total Assets |
2c.The return on assets ratio relates net income to average total assets. It is computed as follows:
| Â | 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:Â
| Â | 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:Â
| Â | Return on Equity | = | Net Income Average Owner's Equity |
Check figure: 2014 return on equity = 15.6%Post Submission FeedbackSolution
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