Review of Ratios

Exercise 8- 20
The following information is taken from the unadjusted trial balance of Goodwear Glove Co. at
December 31, 2014:
Accounts receivable $ 26,000
Allowance for doubtful accounts 400
Cash 1,500
Cost of goods sold 178,000
Inventory 13,500
Prepaid expenses 650
Sales discounts 3,180
Sales revenue 340,000
Supplies 2,560

Other information:
1. All accounts are their normal balances.
2. Goodwear does not make any cash sales.
3. At December 31, 2013, accounts receivable were $37,500 and the allowance for
doubtful accounts was $3,000.
4. Goodwear has found that approximately 8% of ending accounts receivable become
uncollectible.
5. Goodwear’s credit terms are n/30.

Instructions
a. Prepare the adjusting entry to adjust the allowance for doubtful accounts and record bad
debts expense for 2014.
b. Prepare the current assets section of Goodwear’s December 31, 2014 balance sheet.
c. Calculate accounts receivable turnover and collection period and comment on their
customers’ adherence to Goodwear’s credit terms.

Dec. 31 Bad debt expense 2 600

Allowances for doubtful accounts 2 600
To adjust the allowances for doubtful accounts for 2014

Dec. 31 Bad debt expense 2 080

Accounts receivable 2 080
To record the bad debt expense for 2014, estimated to be 8% of ending
accounts receivable

Part B
Current Assets
 Cash 1 500
Accounts receivable 26 000
Prepaid expenses 650
Inventories 13 500

Total current assets 41 650

Part C
Accounts receivable turnover ratio = Net credit sales / Average accounts receivable

Net credit sales = 340 000

Average accounts receivable = (beginning accounts receivable + ending accounts receivable) /

2
Average accounts receivable = (37 500 + 26 000) / 2
Average accounts receivable = 31 750

Accounts receivable turnover ratio = 340 000 / 31 750

Accounts receivable turnover ratio = 10.708

Exercise 9-33
The following information is available from the audited financial statements of Molson Coors
Brewing Company and Big Rock Breweries Income Trust for their 2014 year ends.
Molson/Coors Big Rock Breweries
(in millions of US dollars) (in thousands of Cdn dollars)

Net revenue $ 5,844 $ 38,701

Profit $ 373 $ 8,380

Total assets, ending $ 11,603 $ 42,170

Total assets, beginning $ 11,799 $ 41,786

Instructions
a. Calculate both companies’ asset turnover and return on assets.
b. Compare the companies’ effectiveness in using their assets to produce revenue and profit.

a)
Asset Turnover=Net Sales ÷ Average Total Assets
Return on Assets(RoA )=Net Income ÷ Total Assets
Average Total Assets = (Total assets, beginning + Total assets, ending) / 2

Molson Coors Brewing Company Big Rock Breweries

Asset Turnover Average Total Assets=(11 603+11 799)÷ 2 Average Total Assets
Average Total Assets=11701 = (42170 + 41786) / 2
= 41978
 Asset Turnover=5 844 ÷ 11 701 Asset Turnover = 38,701 / 41,978
Asset Turnover=0.499 ≃0.5 Asset Turnover = 0.921

Return on Assets RoA=373÷ 11 701 RoA = 8,380 / 41,978

RoA=3.187 % ≃ 3.19 % = 19.9%

b) Big Rock Breweries Asset Turnover ratio measured at 0.92, significantly exceeding Molson Coors’
score of 0.5. This substantial disparity suggests that Big Rock is using its assets to generate revenue far
more effectively than Molson Coors.

The same comment can also be made for the companies’ ability to generate profit with assets, where Big
Rock scored 19.9% on its RoA, compared to Molson Coors’ 3.19%.

Exercise 10-14
Kent Company’s December 31, 2014 trial balance includes the following accounts:
Accounts payable............................................................................. $ 29,400
Accounts receivable......................................................................... 52,000
Interest payable................................................................................ 700
Bank demand loan payable............................................................. 10,000
Cash………….................................................................................. 3,000
Income taxes payable...................................................................... 1,200
Inventory……………........................................................................ 27,000
Mortgage payable............................................................................ 140,000
Note payable…………..................................................................... 5,000
Prepaid expenses............................................................................ 1,200

Other information:
The mortgage payable is due in annual principal installments of $4,000 per year.
The note payable is due in full in 18 months’ time.
 Industry average working capital ratio is 2.5:1

Instructions
a. Prepare the current liabilities section of Kent’s December 31, 2014 balance sheet.
b. Calculate and comment on Kent’s working capital and current ratio.

A.
Balance Sheet
Kent Company
December 31, 2014

Liabilities
Account Payable $ 29,400
Interest Payable 700
Income tax Payable 1,200
Mortgage Payable 4,000
Bank demand loan payable 10,000
Current liabilities $ 45,300

B) Rocco

Total current assets ($52,000 + 3,000 + 27,000 + 1,200): $83,200

Less: Current Liabilities 45,300
Working Capital $37,900

Current ratio= current asset/ Current Liabilities= $83,200/ $45,300= 1.84

The company’s current ratio is 1.84, pretty close to the ideal ratio 2. This shows that the
company has a relatively strong ability to repay the liabilities in a short period.
Exercise 15-27
The following is a summarized balance sheet of Falcon Corporation at December 31, 2013. All
amounts are in $000’s.
Current assets......................................................................................... $ 1,000
Property, plant and equipment................................................................ 15,000
Total assets............................................................................................. 16,000

Current liabilities...................................................................................... $ 650

Long term debt........................................................................................ 9,500
Total liabilities.......................................................................................... 10,150

Shareholders' equity
Common shares...................................................................................... 4,000
Retained earnings................................................................................... 1,850
Total shareholders' equity....................................................................... 5,850
Total liabilities and equity........................................................................ $
16,000

Falcon requires additional financing of $5,000,000 to finance an expansion of its business. The
two choices are:
Alternative 1: Issue a 20-year, $5,000,000 5% bond payable at face value.
Alternative 2: Issue 250,000 common shares at $20 each.

In Falcon’s industry, a safe debt to total assets ratio is considered to be between 50% and 60%.
Falcon’s board of directors is risk averse. Assume that the financing is made at the beginning of
the year.

Instructions
a. Calculate the debt to total assets ratio under the two proposed financing methods.
b. Make a recommendation to Falcon on the better financing alternative and explain your
choice.