1 answer

The financial statements for Delta Industries for the year ended December 31st, 2018 are as follows:...

Question:

The financial statements for Delta Industries for the year ended December 31st, 2018 are as follows:

Delta Industries

Statement of Income

For the years ended December 31, 2018 and 2017

2018

2017

Sales revenue

$351,500

$310,000

Cost of goods sold

201,000

155,000

Gross margin

150,500

155,000

Operating expenses:

65,000

71,000

Operating income

85,500

84,000

Interest expense

26,000

20,000

Income before income tax

59,500

64,000

Income tax expense

19,000

22,500

Operating income

$40,500

$41,500

Delta Industries

Statement of Financial Position

December 31st, 2018 and 2017

2018

2017

Current assets

Cash

$21,000

$25,000

Accounts receivable(net)

116,000

80,500

Inventory

149,000

137,000

Prepaid expenses

6,000

9,000

Total current assets

292,000

251,500

Property, plan t and equipment (net)

154,500

143,500

Total assets

$446,500

$395,000

Current liabilities

$141,000

$138,500

Long-term liabilities

114,500

121,000

Total liabilities

255,500

259,500

Shareholders’ equity

Preferred shares ($1.50)

30,000

30,000

Common shares

75,000

60,000

Retained earnings

86,000

45,500

Total shareholders’ equity

191,000

135,500

Total liabilities and shareholders’ equity

$446,500

$395,000

Additional information:

  1. The market price of Delta Industries’ common shares was $19.00 on December 31st,2018 and $300 on December 31st, 2017.
  2. The weighted average of common shares outstanding was 15,000 during 2018 and 12,000 during 2017.
  3. There are 2,000 preferred shares outstanding
  4. All sales are on credit

Required:

  1. Compute the following ratios for 2018 and 2017:
    • Current ratio
    • Inventory turnover
    • Accounts receivable turnover
    • Time-interest earned ratio
    • Return on assets
    • Return on common shareholders’ equity
    • Earnings per common share
    • Price-earnings ratio
  2. Determine whenter Delta Industries ability to pay its debts and to sell inventory improved or deteriorated during 2018.
  3. Would you be interested in purchasing common shares in Delta Industries? Explain


Answers

Particular 2018 2017
Current Ratio ( Current Assets / Current Liabilities ) $ 292,000 / $ 141,000 = 2.07 : 1 $ 251,500 / $ 138,500 = 1.82 : 1
Inventory Turnover ( Cost of Goods Sold / Inventory) $ 201,000 / $ 149,000 = 1.35 $ 155,000 / $ 137,000 = 1.13
Accounts Receivable Turnover ( Sales / Accounts Receivable) $ 351,500/ $ 116,000 = 3.03 $ 310,000 / $ 80,500 = 3.85
Time-interest Earned Ratio ( EBIT / Interest Expenses) $ 85,500 / $ 26,000 = 3.29 times $ 84,000 / $ 20,000 = 4.2 times
.

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