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Compute the following ratios for Year 1, Year 2, and Year 3 for Company A:
1. Debt ratio
2. Debt-to-equity ratio
1) Preparing a Common-Size Income Statement
Company A reported the following income statement data for the most recent three years:
Year 3
Year 2
Year 1
Sales
$120,000
$90,000
$100,000
Cost of goods sold
(55,000)
(47,000)
(48,000)
Operating expenses:
Marketing expense
(7,000)
(6,000)
R&D expense
(15,000)
(4,000)
(10,000)
Administrative expense
(20,000)
(22,000)
Operating income
$ 23,000
$10,000
$ 16,000
Interest expense
(3,000)
(5,000)
Income before income taxes
$ 20,000
$ 5,000
$ 13,000
Income tax expense
(8,000)
(2,000)
Net income
$ 12,000
$ 3,000
$ 8,000
Prepare a common-size income statement for each year.
2) Preparing a Common-Size Balance Sheet
Company A reported the following balance sheet data for the most recent three years:
Cash
$ 2,000
$ 1,000
Accounts receivable
5,000
11,000
Inventory
10,000
16,000
Current assets
$17,000
$29,000
$16,000
Property, plant, and equipment (net)
50,000
45,000
40,000
Total assets
$67,000
$74,000
$56,000
Accounts payable
$ 9,000
$14,000
$ 7,000
Short-term debt
9,000
Current liabilities
$23,000
$12,000
Long-term debt
20,000
25,000
Total liabilities
$34,000
$48,000
$32,000
Paid-in capital
Retained earnings
28,000
21,000
19,000
Total liabilities and equities
Prepare the Asset section of a common-size balance sheet for each year.
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