Page 196 - Calculating Agriculture Cover 20191124 STUDENT - A

21-8 Profitability & Performance Measures CH 21]

Solution algorithm (A):

(a) Working Capital = Current Assets – Current Liabilities
= $908,000 − $ 416,000
= $492,000

Current Assets $ 908,000
————————

$ 416,000
(b) Current Ratio = Current Liabilities = ————— = 2.18:1

Cash + Accounts Receivable + Inventory Investment
(c) Acid-Test Ratio = —————————————————————————
Current Liabilities

$72,000 + $356,000 + $480,000 $908,000
Acid-Test Ratio = ——————————————— = ————— = 2.18 : 1
$ 416,000 $416,000

(d) Owner's equity to creditors' equity ratio

Owners' Equity = —————— = 1.17:1
$1,652,000
———————
Total Liabilities $1,416,000

(e) Fixed assets to Fixed Liabilities ratio.

Fixed Assets $2,160,000
—————–——— = ——————— = 2.16:1
Fixed Liabilities $1,000,000

B. Use the data in Figure 21.2, the 20x1 column of the balance sheet, to find (a) the work-
ing capital, (b) the current ratio, (c) the acid-test ratio, (d) the owner's equity to credi-
tors' equity ratio, and (e) the fixed assets to fixed liabilities ratio. Round to the nearest
0.01%.

Solution algorithm: B

(a) Working Capital = Current Assets – Current Liabilities
= 1,110,000 − $ 526,000
= $584,000
Current Assets $ 1,110,000
(b) Current Ratio = ————————- = —————- = 2.1:1
Current Liabilities $ 526,000

Cash + Accounts Receivable + Inventory Investment

(c) Acid-Test Ratio = —————————————————————————-
Current Liabilities

$88,000 + $422,000 + $600,000 $1,110,000
Acid-Test Ratio = ———————————————- = —————- = 2.1:1
$ 526,000 $526,000

(d) Owner's equity to creditors' equity ratio

Owners' Equity $1,514,000
———————- = —————- = 0.9:1
Total Liabilities $1,646,000

(e) Fixed assets to Fixed Liabilities ratio.

Fixed Assets $2,050,000
——————–-— = ——————- = 1.83:1
Fixed Liabilities $1,120,000
Solvency Ratios and Investment ratios
Solvency ratios measure a firm’s ability to make payments on debts and pay off its long-
term obligations. These are also known as leverage ratios. A firm’s creditworthiness and its
ability to sustain operations over long periods of time are determined by comparing debt
levels with equity, assets, and the firms’ earnings. Solvency ratios focus on the long-term
sustainability instead of its current liability obligations.
The most common solvency ratios include:
 Debt Ratio
 Equity Ratio
 Debt to Equity Ratio

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