Lecture Handouts #1-Problems

Ratio Analysis:

Problem 1(Liquidity Ratio)

CCH Corporation
Statement of Financial Position
For the comparative years ended Y1 and Y2

Year 2 Year 1
Cash 140 130
AR 160 140
Inventory 170 150
Prepaid Expense 90 90
Total Current Assets 560 510

Current Liabilities
Accounts Payable 150 150
Accrued Liabilities 60 60
Notes Payable 60 60
Total Current Liabilities 270 270

FORMULA:

CURRENT RATIO = TOTAL CURRENT ASSETS / TOTAL CURRENT LIABILITY

QUICK RATIO = (CASH + A.R + MARKETTABLE SECURITIES) / TOTAL CURRENT

LIABILITIES

1. What is CCH’s Current Ratio?

YEAR 2: YEAR 1:

560/270 = 2.07 510/270 = 1.88

2. What is CCH’s Quick Ratio?

YEAR 2: YEAR 1:

(140 + 160) / 270 = 1.11 (130 + 140) / 270 = 1

Problem 2

You are given an excerpt from the Financial Statement of Do-Turtle Corp. for the year
ended 2020. As the Accounting manager of the company, you are tasked by the CEO to
determine the following:
 1. What is Do-Turtle’s Current Ratio?
2. What is Do-Turtle’s Quick
Ratio? The following information are
as follows:

Cash……………………….XXXX Accounts Payable......350,000

AR…………………………..XXXX Notes Payable..........50,000
Marketable Sec……….XXXX Total Current Liabilities…400,000
Inventory.........1,200,000
Total Current Assets.....XXXXX
Problem 3
Winarak Corporation
Statement of Comprehensive Income
For the Year Ended December 31,
2020

Sales 500,000.00

Cost of Goods Sold (LESS) (200,000.00)

Gross Margin 300,000.00
Selling & Administrative
Expenses (LESS) (50,000.00)
Net Operating Income/EBIT 250,000

Interest Expense (LESS) (12,000.00)

Net Income Before Taxes 238,000 – “TAXABLE INCOME”
Income Tax (30%) (238,000 x 30%) (71,400)
Net Income After Taxes 166,600

1. What is Winarak Corporation’s Gross Margin? 300,000

2. What is Winarak Corporation’s Sales Rate? 100%
3. What is Winarak Corporation’s COGS Rate? 40%
4. What is Winarak Corporation’s Gross Profit Rate? 60%
5. How much is Winarak Corp’s Income Tax? 71,400
6. How much is Winarak Corp’s Earnings Before Interest and Taxes (EBIT)? 250,000
7. How much is Winarak Corp’s Net Income Before Tax? 238,000
8. How much is Winarak Corp’s Net Income After Tax? 166,600
9. How much is Winarak Corp’s Profit Margin?
PROFIT MARGIN = NET INCOME / SALES
= 166,600 / 500,000
 = 33.28%

10.How much is Winarak Corp’s Time Interest Earned Ratio?

TIME INTEREST EARNED RATIO = EBIT / INTEREST EXPENSE
= 250,000 / 12,000
= 20.83%
Problem 4(Asset Turnover)
Digs Drama Series Inc.(DDS Inc.) has the following information lifted from its
Statement of Comprehensive Income for the year 2020.
Sales 350,000.00
Sales Discounts 20,000.00
Sales Returns 30,000.00
It also has reported total Assets of 800,000 pesos for the year 2020 (ENDING
BALANCE) while its assets in 2019 was 680,000 pesos (BEGINNING BALANCE). As the
consultant of DDS Inc., what is the Asset Turnover?

ASSET TURNOVER = NET SALES / AVERAGE ASSETS

=350,000 / [(680,000 + 800,000) / 2]
= 350,000 / (1,480,000 / 2)
= 350,000 / 740,000
= 47.3 / 40.54

Problem 5(Return on Assets 1)

Bong Gotohan Corp.’s net income last year is P65,000 and its interest income expense
was P15,000. Total assets the beginning of the year were P620,000 and total assets at
the end of the yeat was P650,000. Bong Gotohan’s income tax rate was 40%. The
company’s return on total assets or the year is?
RETURN OF ASSETS = NET INCOME (ADJUSTED INCOME) / AVERAGE TOTAL ASSETS
= (65,000 + 9,000) / [(620,000 + 650,000) / 2]
= 74,000 / 635,000
= 11.65%
INTEREST x (1 – TAX RATE)
15,000 x (1 – 40%)
15,000 x 60%
9000

Problem 6(Return on Assets 2)

MokaPeyk News Company’s most recent income statement appears below:

Sales (all on account) 610,000.00

Cost of Goods Sold (350,000.00)
Gross Margin 260,000
Selling and administrative expenses (110,000.00)
Net operating Income 150,000
Interest Expense (30,000.00)
Net Income before Taxes 120,000
Income Tax (30%) (36,000) -
Net Income After Taxes 84,000 -

The beginning balance of total assets was P650,000 and the ending balance was
P580,000. As the consultant of MokaPeyk News, what is the return on total assets
(RoA)?

RETURN ON TOTAL ASSETS = 84,000 / [(650,000 + 580,000) /2)

= 84,000 / 615,000
= 13.65% / 13.66%