The comparative statements of Simpson Company are shown below. SIMPSON COMPANY
Income Statements
For the Years Ended December 31
2020 2019
Net sales $780,000 $624,000
Cost of goods sold 440,000 405,600
Gross profit 340,000 218,400
Selling and administrative
expenses 176,880 149,760
Income from operations 163,120 68,640
Other expenses and losses
Interest expense 9,920 7,200
Income before income taxes 153,200 61,440
Income tax expense 34,000 14,000
Net income $119,200 $47,440
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable $138,200 $132,000
Income taxes payable 25,300 24,000
Total current liabilities 163,500 156,000
Bonds payable 132,000 120,000
Total liabilities 295,500 276,000
Stockholders’ equity
Common stock ($10 par) 150,000 130,000
Retained earnings 330,300 246,000
Total stockholders’ equity 480,300 376,000
Total liabilities and stockholders’
equity $775,800 $652,000
All sales were on account. Net cash provided by operating activities was $108,000. Capital expenditures were $47,000, and cash dividends were $30,900.
Instructions:
Compute the following ratios for 2019:
A) Earnings per share.
B) Return on common stockholders’ equity.
C) Return on assets. .
D) Current ratio.
E) Accounts receivable turnover.
F) Average collection period.
G) Inventory turnover.
H) Days in inventory
I) Times interest earned
J) Asset turnover
K) Debt to asset ratio
L) Current cash debt coverage
M) Cash debt coverage
N) Free cash flow

Answer and Explanation:

The calculations is shown below:-

a) Earnings per share

= Net income ÷ Common stock

= $119,200 ÷ (($13,000 + $15,000) ÷ 2)

= $119,200 ÷ $14,000

= $8.51

b) Return on common stockholders’ equity

= Return on common stock holders equity = Net income ÷ Average Common stock holders equity

= $119,200 ÷ (($376,000 + $480,300) ÷ 2)

= $119,200 ÷ $428,150

= 27.8%

C) Return on assets

= Net income ÷ Average total Assets

= $119,200 ÷ ((652,000 + $775,800) ÷ 2)

= $119,200 ÷ $713,900

= 16.7%

D) Current ratio

= Current assets ÷ Current Liabilities

= $290,500 ÷ $163,500

= 1.78:1

E) Accounts receivable turnover

= Net credit sales ÷ Average accounts Receivable

= $780,000 ÷ (($83,800 + $106,200) ÷ 2

= $780,000 ÷ $95,000

= 8.2 times

F) Average collection period

= 365 ÷ Accounts Receivable turnover ratio

= 365 ÷ 8.2 times

= 44.5 days

G) Inventory turnover

= Cost of goods sold ÷ Average inventory

= $440,000 ÷ (($740,000 + $116,400) ÷ 2

= $440,000 ÷ $95,200

= 4.6 times

H) For days in inventory

Number of days sales in inventory = 365 days ÷ inventory turnover

= 365 days ÷ 4.6

= 79.3 days

I) For Time interest earned

Times Interest Earned = Income before interest and taxes ÷ Interest Expenses  

= ($119,200 + $9,920 + $34,000) ÷ ($9,920)

= 16.4 times

J) For Asset turnover

Asset turnover = Net Sales ÷ Average total Assets

= ($780,000) ÷ ($775,800 + $652,000) ÷ 2)

= 1.09 times

K) For debt to asset ratio

Debt to assets = Total Liabilities ÷ Total Assets

= $295,500 ÷ $775,800

= 38%

L) For Current cash debt coverage

= Net cash provided by operating activities  ÷ Average of current liabilities

= $108,000 ÷ ( $156,000 + $163,500) ÷ 2

= 0.68 times

M) For cash debt coverage

= Net cash provided by operating activities  ÷ Average of total liabilities

= $108,000 ÷ ($295,500 + $276,000) ÷ 2

= 0.38 times

N) For free cash flow

Free Cash flow = Operating Cash flow - Capital Expenditure - Dividends

= $108,000 - $47,000 - $30,900

= $30,100

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