Mastery Problem: Financial Statement AnalysisLiquidity and Solvency MeasuresYour friend, another accountant, has bet you that with your knowledge of accounting and just the computations for common analytical measures, you can figure out many aspects of a company'sfinancial statements. You take the bet!Match each computation to one of the liquidity and solvency measures in the table. (Hint: Begin by looking for simple computations and identifying the amounts in those computations. Look forother measures that use those amounts.)Liquidity and Solvency MeasuresComputationsWorking capital$3,095,000 –- $860,000- vCurrent ratio$3,095,000 ÷ $860,000 -Quick ratio$1,866,000 + $860,000 VAccounts receivable turnover$8,260,000 + [($714,000 + $740,000) ÷ 2]°Number of days' sales in receivables[(S714,000 + $740,000) ÷ 21 ÷ ($8,260,000 ÷ 365) ▪Inventory turnover$4,100,000 ÷ [($1,072,000 + $1,100,000) ÷ 21 -Number of days' sales in inventory[($1,072,000 + $1,100,000) ÷ 21 ÷ ($4,100,000 ÷ 365) ►Ratio of fixed assets to long-term liabilities $2,690,000 + $1,690,000 - VRatio of liabilities to stockholders' equity$2,550,000 ÷ $4,059,000 VTimes interest earned($976,800 + $127,000) ÷ $127,000 -FeedbackBalance SheetUse the following balance sheet form to enter amounts you identify from the computations on the Liquidity and Solvency Measures part. You will identify other amounts for the balance sheet onthe Profitability Measures part. If you have a choice of two amounts, assume the first amount in the ratio is for the end of the year. Compute any missing amounts.Balance SheetDecember 31, 20Y6AssetsCurrent assets:Cash$823,000Marketable securitiesAccounts receivable (net)InventoryPrepaid expensesTotal current assetsLong-term investmentsProperty, plant, and equipment (net)Total assetsLiabilitiesCurrent liabilities$4Long-term liabilitiesTotal liabilitiesStockholders' EquityPreferred stock, $10 parCommon stock, $5 parRetained earningsTotal stockholders' equityTotal liabilities and stockholders' equity Profitability MeasuresMatch each computation to one of the profitability measures in the table.Profitability MeasuresComputationsAsset turnover$8,260,000 ÷[($5,785,000 + $5,595,000) ÷ 21 ►Return on total assets($791,340 + $127,000) ÷ [($6,609,000 + $6,419,000) ÷ 2] ►Return on stockholders' equity$791,340 + [($4,059,000 + $3,856,050) ÷ 21- VReturn on common stockholders' equity ($791,340 - $65,000) ÷ [($3,571,500 + $3,428,640) ÷ 21 ▼Earnings per share on common stock($791,340 - $65,000) ÷ 250,000 shares VPrice-earnings ratio$35 + $3.05 -Dividends per share$175,000 ÷ 250,000 sharesDividend yield$0.70 + $35FeedbackComparative Income StatementUse the following comparative income statement form to enter amounts you identify from the computations on the Liquidity and Solvency Measures part and on the Profitability Measures part.Compute any missing amounts and complete the horizontal analysis columns. Enter percentages as decimal amounts, rounded to one decimal place. When rounding, look only at the figure to theright of one decimal place. If < 5, round down and if 2 5, round up. For example, for 32.048% enter 32.0%. For 32.058% enter 32.1%.Comparative Income StatementFor the Years Ended December 31, 20Y6 and 20Y5Increase/(Decrease)20Y620Y5AmountPercentageSales$7,267,000%Cost of goods sold(3,444,000)%Gross profit$3,823,000$%Selling expenses$(1,453,200)$%Administrative expenses(1,239,000)(1,103,000)%Total operating expenses$(2,556,200)Operating income$1,266,800%Other expense (interest)(120,600)%Income before income tax expense$1,146,200%Income tax expense(179,460)%Net income$966,740%FeedbackFinal QuestionsYour accountant friend reveals that the company whose information you have been working on is actually a company he is thinking of investing in. What advice and insight do you have for yourfriend?Using only the information from your horizontal analysis of the comparative income statement, complete the following sentences.Net income v has decreased significantly from 20Y5 to 20Y6, even though sales has increased. However, cost of goods sold V has also increased V, which slowed theincrease in gross profit - . In addition, selling expenses - v has increased at a faster rate. The company appears to be struggling .Based on these observations, do you recommend that your friend invest in this company's stock? Yes V

An income statement is a financial report that indicates the revenue and expenses of a business. It…

Mastery Problem: Financial Statement Analysis Liquidity and Solvency Measures Your friend, another accountant, has bet you that with your knowledge of accounting and just the computations for common analytical measures, you can figure out many aspects of a company's financial statements. You take the bet! Match each computation to one of the liquidity and solvency measures in the table. (Hint: Begin by looking for simple computations and identifying the amounts in those computations. Look for other measures that use those amounts.) Liquidity and Solvency Measures Computations Working capital $3,095,000 - $860,000 ► Current ratio $3.095.000 + $860,000 - v Quick ratio $1,866,000 + $860,000 - V Accounts receivable turnover $8,260,000 + [($714,000 + $740,000) + 21- Number of days' sales in receivables [($714,000 + $740,000) + 21 + ($8,260,000 + 365) - Inventory turnover $4,100,000 + [($1,072.000 + $1,100,000) + 21 - Number of days' sales in inventory [($1.072.000 + $1,100,000) ÷ 21 + ($4,100,000 + 365) v Ratio of fixed assets to long-term liabilities $2.690,000 + $1,690,000 Ratio of liabilities to stockholders' equity $2,550,000 + $4,059,000 - v ($976,800 + $127,000) + $127,000 • - v Times interest earned Feedback Balance Sheet Use the following balance sheet form to enter amounts you identify from the computations on the Liquidity and Solvency Measures part. You will identify other amounts for the balance sheet on the Profitability Measures part. If you have a choice of two amounts, assume the first amount in the ratio is for the end of the year. Compute any missing amounts. Balance Sheet December 31, 20Y6 Assets Current assets: Cash $823,000 Marketable securities Accounts receivable (net) Inventory Prepaid expenses Total current assets Long-term investments Property, plant, and equipment (net) Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders' Equity Preferred stock, $10 par

10th Edition

ISBN:9781133935940

Author:Ulric J. Gelinas

Publisher:Ulric J. Gelinas

Chapter16: The General Ledger And Business Reporting (gl/br) Process

Section: Chapter Questions

Problem 5P