Recent financial statements for Madison Company follow:Recent financial statements for Madison Company follow: Madison Company Balance Sheet June 30Assets Current assets: Cash $21,000 Accounts receivable, net 160,000 Merchandise inventory 300,000 Prepaid expenses 9,000 Total current assets 490,000 Plant and equipment, net 810,000 Total assets $1,300,000 Liabilities and Stockholders' EquityLiabilities: Current liabilities $200,000 Bonds payable, 10% 300,000 Total liabilities 500,000 Stockholders’ equity: Common stock, $5 par value $100,000 Retained earnings 700,000 Total stockholders’ equity 800,000 Total liabilities and stockholders' equity $1,300,000 Madison Company Income Statement For the Year Ended June 30Sales $2,100,000 Cost of goods sold 1,260,000 Gross margin 840,000 Selling and administrative expenses 660,000 Net operating income 180,000 Interest expense 30,000 Net income before taxes 150,000 Income taxes 45,000 Net income $105,000 ccount balances at the beginning of the company’s fiscal year were: accounts receivable, $140,000; and inventory, $260,000. All sales were on account. Required:Compute financial ratios as follows:1. Gross margin percentage. 2. Current ratio. (Round your answer to 2 decimal places.)3. Acid-test ratio.4. Average collection period. 5. Average sale period. 6. Debt-to-equity ratio. 7. Times interest earned.8. Book value per share.

1. Gross margin percentage = 40%

2. Current ratio. (Round your answer to 2 decimal places.) = 2.45

3. Acid-test ratio = 0.95

4. Average collection period = 26 days

5. Average sale period = 81 days

6. Debt-to-equity ratio = 0.63

7. Times interest earned = 6 times

8. Book value per share = $40 per share

Explanation:

1. Gross margin percentage.

This can be calculated using the following formula:

Gross margin percentage = (Gross margin / Sales) * 100 (1)

Where;

Sales = $2,100,000

Gross margin = $840,000

We substitute the values into equation (1) and have:

Gross margin percentage = ($840,000 / $2,100,000) * 100 = 0.40 * 100 = 40%

2. Current ratio. (Round your answer to 2 decimal places.)

This can be calculated using the following formula:

Current ratio = Total current assets / Current liabilities (2)

Where;

Total current assets = $490,000

Current liabilities = $200,000

We substitute the values into equation (2) and have:

Current ratio = $490,000 / $200,000 = 2.45

3. Acid-test ratio.

This can be calculated using the following formula:

Acid-test ratio = (Total current assets – Closing Merchandise Inventory) / Current liabilities (3)

Where;

Total current assets = $490,000

Closing Merchandise Inventory = $300,000

Current liabilities = $200,000

We substitute the values into equation (3) and have:

Acid-test ratio = ($490,000 - $300,000) / $200,000 = $190,000 / $200,000 = 0.95

4. Average collection period.

This can be calculated using the following formula:

Average collection period = (Average accounts receivable / Sales) * 365 days …….. (4)

Where;

Average accounts receivable = (Beginning account receivable + Ending account receivable) / 2 = ($140,000 + $160,000) / 2 = $300,000 / 2 = $150,000

Sales = $2,100,000

We substitute the values into equation (4) and have:

Average collection period = ($150,000 / $2,100,000) * 365 = 26 days approximately.

5. Average sale period.

This can be calculated using the following formula:

Average sale period = 365 days / Inventory turnover ……………………….. (5)

Where;

Inventory turnover = Cost of goods sold / Average inventory = Cost of goods sold / [(Opening inventory + Closing inventory) / 2] = 1,260,000 / [($260,000 + $300,000) / 2] = 1,260,000 / [$560,000 / 2] = 1,260,000 / $280,000 = 4.50

We substitute the values into equation (5) and have:

Average sale period = 365 days / 4.50 = 81 days

6. Debt-to-equity ratio.

This can be calculated using the following formula:

Debt-to-equity ratio = Total liabilities / Total stockholders’ equity ……………………. (6)

Where;

Total liabilities = $500,000  

Total stockholders’ equity = $800,000

We substitute the values into equation (6) and have:

Debt-to-equity ratio = $500,000 / $800,000 = 0.63

7. Times interest earned.

This can be calculated using the following formula:

Times interest earned = Income before interest and tax / Interest expense ……………….. (7)

Where;

Income before interest and tax = Net operating income = $180,000

Interest expense = $30,000

We substitute the values into equation (7) and have:

Times interest earned = $180,000 / $30,000 = 6 times

8. Book value per share.

This can be calculated using the following formula:

Book value per share = Total stockholders’ equity / Number of shares outstanding ……….. (8)

Where;

Total stockholders’ equity = $800,000

Number of shares outstanding = $100,000 / $5 = 20,000 shares

We substitute the values into equation (8) and have:

Book value per share = $800,000 / 20,000 = $40 per share