Your company is considering the possible acquisition of Growth Inc. Financial statements of Growth Inc. are shown below and on the following page.

GROWTH INC.

Balance Sheet December 31, 2001 and 2000 2001 2000 Assets Current assets:

Cash $ 64,346 $ 11,964 Accounts receivable, less allowance of $750 for doubtful accounts 99,021 83,575 Inventories, FIFO 63,414 74,890 Prepaid expenses 834 1,170 Total current assets 227,615 171,599 Investments and other assets 379 175 Property, plant, and equipment:

Land and land improvements 6,990 6,400 Buildings 63,280 59,259 Machinery and equipment 182,000 156,000 252,270 221,659 Less: Accumulated depreciation 110,000 98,000 Net property, plant, and equipment 142,270 123,659 Total assets $370,264 $295,433 Liabilities and Stockholders’ Equity Current liabilities:

Accounts payable $ 32,730 $ 26,850 Federal income taxes 5,300 4,800 Accrued liabilities 30,200 24,500 Current portion of long-term debt 5,500 5,500 Total current liabilities 73,730 61,650 Long-term debt 76,750 41,900 Other long-term liabilities 5,700 4,300 Deferred federal income taxes 16,000 12,000 Total liabilities 172,180 119,850 Stockholders’ equity:

Capital stock 44,000 43,500 Retained earnings 154,084 132,083 Total stockholders’ equity 198,084 175,583 Total liabilities and stockholders’ equity $ 370,264 $ 295,433 GROWTH INC.

Statement of Income Years Ended December 31, 2001, 2000, and 1999 2001 2000 1999 Revenues $578,530 $523,249 $556,549 Costs and expenses:

Cost of products sold 495,651 457,527 482,358 Selling, general, and administrative 35,433 30,619 29,582 Interest and debt expense 4,308 3,951 2,630 535,392 492,097 514,570 Income before income taxes 43,138 31,152 41,979 Provision for income taxes 20,120 12,680 17,400 Net income $ 23,018 $ 18,472 $ 24,579 Net income per share $ 2.27 $ 1.85 $ 2.43 Partial footnotes: Under the LIFO method, inventories have been reduced by approximately $35,300 and

$41,100 at December 31, 2001 and 2000, respectively, from current cost, which would be reported under the first-in, first-out method.

The effective tax rates were 36.6%, 30.7%, and 31.4%, respectively, for the years ended December 31, 2001, 2000, and 1999.

Required

a. Compute the following for 2001, without considering the LIFO reserve:

Liquidity 1.Days’ sales in inventory 2.Merchandise inventory turnover 3.Inventory turnover in days 4.Operating cycle 5.Working capital 6.Current ratio 7.Acid-test ratio 8.Cash ratio Debt 1.Debt ratio 2.Debt/equity ratio 3.Times interest earned Profitability 1.Net profit margin 2.Total asset turnover 3.Return on assets 4.Return on total equity b.Compute the ratios in part (a), considering the LIFO reserve.

c.Comment on the apparent liquidity, debt, and profitability, considering both sets of ratios.

P 11-6.

Required For each of the following numbered items, you are to select the lettered item(s) that indicate(s) its effect(s) on the corporation’s statements. If more than one effect is applicable to a particular item, be sure to indicate all applicable letters. (Assume that the state statutes do not permit declaration of nonliquidating dividends except from earnings.)

Item Effect 1.Declaration of a cash

a. Reduces working capital dividend due in one month b.Increases working capital on noncumulative preferred c.Reduces current ratio stock.d.Increases current ratio 2.Declaration and payment

e. Reduces the dollar amount of of an ordinary stock total capital stock dividend.f. Increases the dollar amount of 3.Receipt of a cash dividend, total capital stock not previously recorded, g.Reduces total retained on stock of another earnings corporation.h.Increases total retained 4.Passing of a dividend on earnings cumulative preferred i.Reduces equity per share stocks.of common stock 5.Receipt of preferred j. Reduces equity of each shares as a dividend on common stockholder stock held as a temporary investment. This was not a regularly recurring dividend.
6.Payment of dividend mentioned in 1.
7.Issue of new common shares in a 5-for-1 stock split.