From the balance sheet and income statement information below calculate the following ratios:
a. return on sales

b. current ratio

c. inventory turnover - if they are no beginning inventory or ending inventory figures then use the merchandise inventory figure

abc inc.
income statement
year ended december 31, 2018
 
net sales revenue
 
$20,941
 
cost of goods sold
 
7,055
 
gross profit
 
13,886
 
operating expenses
 
7,065
 
operating income
 
6,821
 
interest expense
 
210
 
income before taxes
 
6,611
 
income tax expense
 
2,563
 
net income
 
$4,048
 
 
 
 
abc inc.
balance sheet
december 31, 2018
 
assets
 
current assets:
 
 
      cash
 
$2,450
      accounts receivable
 
1,813
      merchandise inventory
 
1,324
      prepaid expenses
 
1,709
      total current assets
 
7,296
long-term assets
 
18,500
total assets
 
$25,796
 
liabilities
current liabilities
 
$7,320
long-term liabilities
 
4,798
total liabilities
 
12,028
 
stockholders’ equity
common stock
 
6,568
retained earnings
 
7,200
total stockholders’ equity
 
13,768
total liabilities & stockholders’ equity
 
$25,796

notes: 1.round up
2. your responses should be in the following formats
a. xx%
b. x. xx
c. x. xx

a) Return on sales = 33%

b) Current ratio = 1.00

c) Inventory Turnover = 5.33 times

Explanation:

Requirement A)

Return on sales - When a ratio measures the firm's efficiency to use its resources to transform the sales into operating profit, then the firm uses return on sales. It can be calculated by dividing the operating income (earnings before interest and tax) by net sales.

Given,

Net sales revenue = $20,941

Operating income = $6,821

Therefore, return on sales = $(6,821/20,941)*100 = 33% (Rounded up).

Requirement B)

Current Ratio = When a ratio measures the liquidity of the company, it is coined as the current ratio. Moreover, the ability of a company to pay its short-term debts with short-term assets. The ratio is calculated by dividing the current assets to its current liabilities. Current assets are cash, Accounts Receivable, Merchandise Inventory, Prepaid Expenses.

Given,

Total current assets = $7,296, Total current liabilities = $7,320

Therefore,

Current ratio = $(7,296/7,320) = 0.996 (since the responses should be up to 2 decimal places, the result will be 1.00)

Requirement C)

Inventory Turnover = Cost of Goods Sold/Average Inventory

When a ratio measures the firms ability to use the inventory efficiently with the help of its cost of goods sold, it is termed as inventory turnover ratio. It is calculated by dividing the cost of goods sold by the average inventory.

Given,

Cost of goods sold = $7,055

Merchandise Inventory (Average Inventory) = $1,324.

Since there are only ending merchandise inventory, it is assumed as average inventory.

Therefore,

Inventory Turnover ratio = $(7,055/1,324) = 5.33 times

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