(a)
Earnings per share (EPS): The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).
Formula of EPS:
To compute: (a) EPS.
(a)
Explanation of Solution
Compute EPS of Corporation D for 2017, if net income is $70,000, preferred dividends are $0, and weighted common shares outstanding are 33,000 shares.
Compute EPS of Corporation D for 2016, if net income is $60,000, preferred dividends are $0, and weighted common shares outstanding are 30,000 shares.
(b)
Formula of working capital:
To compute: (b) Working capital.
(b)
Explanation of Solution
Compute working capital of Corporation D for 2017.
Compute working capital of Corporation D for 2016.
(c)
Formula of current ratio:
To compute: (c) Current ratio.
(c)
Explanation of Solution
Compute current ratio of Corporation D for 2017.
Compute current ratio of Corporation D for 2016.
(d)
Debt to assets ratio: This financial ratio evaluates the ability of a company to pay off long-term debt obligations owed to creditors. This ratio assesses the solvency of a company.
Formula of debt to assets ratio:
To compute: (d) Debt to assets ratio.
(d)
Explanation of Solution
Compute debt to assets ratio of Corporation D for 2017, if total assets are $760,000, current liabilities are $75,000, and long-term liabilities are $80,000.
Compute debt to assets ratio of Corporation D for 2016, if total assets are $685,000, current liabilities are $70,000, and long-term liabilities are $90,000.
(e)
Formula of free cash flow:
To compute (e) Free cash flow of Corporation D for 2016 and 2017.
(e)
Explanation of Solution
Compute free cash flow of Corporation D for 2017, if net cash provided by operating activities is $82,000, capital expenditures are $45,000, and dividends paid are $20,000.
Compute free cash flow of Corporation D for 2016, if net cash provided by operating activities is $56,000, capital expenditures are $38,000, and dividends paid are $15,000.
(f)
To compute: (f) Discuss the financial position of the company based on the computed ratios.
(f)
Explanation of Solution
Analysis:
- Net income has increased, EPS has increased from 2016 to 2017. So, profitability increased.
- Working capital and current ratio also increased from 2016 to 2017. So, liquidity of the company has increased.
- Debt to assets ratio decreased and free cash flow increased. This is a sign of improvement in solvency.
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Chapter 2 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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