7. Using your printed financial documents, answer questions 7-15.

Where appropriate, round all answers to two decimal places.

What is the current ratio?

______________

8. What is the inventory turnover ratio?

______________

9. What is the interest coverage (or times interest earned) ratio?

______________

10. What is the gross profit ratio?

_____________%

Work4Me Accounting Simulations 3rd Web-Based Edition Problem Seventeen Financial Statement Analysis Page 1 Work4Me - Problem 17 3rd Web-Based Edition, Copyright 2010 PKL Software, Incorporated. All rights reserved. Last Revised: April 29, 2011 Introduction You will be recording a variety of transactions involving assets, liabilities, and stockholders' equity. After recording all of the business transactions, you will analyze the effect transaction had on one or more financial analysis ratios and calculate financial ratios from your printed income statement and balance sheet. To expedite dealing with the topic of this problem, sales and expenses will be recorded in summary CHART OF ACCOUNTS ASSETS 101 105 106 115 121 127 131 132 141 142 Cash Accounts Receivable Allowance for Doubtful Accounts Merchandise Inventory Prepaid Insurance Office Supplies Office Equipment Accum. Depreciation - Office Equipment Office Building Accum. Depreciation - Office Building LIABILITIES 201 205 208 209 210 230 240 Accounts Payable Dividends Payable Interest Payable Income Taxes Payable Short-Term Notes Payable Long-Term Notes Payable Mortgage Note Payable STOCKHOLDERS' EQUITY 301 302 303 304 Common Stock Common Stock Dividends Declared Preferred Stock Preferred Stock Dividends Declared Page 2 Work4Me - Problem 17 3rd Web-Based Edition, Copyright 2010 PKL Software, Incorporated. All rights reserved. Last Revised: April 29, 2011 REVENUE 401 Sales EXPENSES 501 601 650 701 801 Cost of Goods Sold Selling Expense Administrative Expense Interest Expense Income Tax Expense SUMMARY ACCOUNT 901 Income Summary Log on to Work4Me and from the Problems Menu Bar select Problem 17: Analysis of Financial Statements. Click on Data Entry and record the following transactions: RECORD THE FOLLOWING TRANSACTIONS Note:Identify each journal entry by Transaction Number. The stock transa made in relatively small dollar amounts, for illustrative purposes. In the Date c Data Entry, enter each Transaction as 01, 02, 03, etc. TRANSACTIONS Student Analysis Tran 01: Cash sales Record the cash sales of $10,000 . At the Invoice prompt type CSALE. ****************************************************** Tran 02: Write off of an uncollectible account Record the write off of a $500uncollectible account receivable under the allowance method. At the Invoice prompt type WROFF. Page 3 Work4Me - Problem 17 3rd Web-Based Edition, Copyright 2010 PKL Software, Incorporated. All rights reserved. Last Revised: April 29, 2011 TRANSACTIONS Student Analysis ****************************************************** Tran 03: Purchase of merchandise on credit Record the purchase of $30,000 of merchandise inventory on account. At the Invoice prompt enter MACCP. ****************************************************** Tran 04: Credit sales Record the sales of$120,000 to credit customers. At the Invoice prompt type ASALE. ****************************************************** Tran 05: Borrowing money Record the issuance of a short-term note payable of$10,000 . At the Invoice prompt enter STNTP. ****************************************************** Tran 06: Purchase of a plant asset Record the purchase of a small office building by issuing a mortgage note payable for $140,000 and a check ( 10001 ) for . At the Invoice prompt enter MTPAY. $10,000 ****************************************************** Tran 07: Borrowing money Record the issuance of a long-term note payable of $50,000 . At the Invoice prompt enter LTNTP. ****************************************************** Tran 08: Sale of common stock Record the issuance of 10,000 shares of common stock for $10 a share. At the Invoice prompt enter CMSTK. ****************************************************** Tran 09: Paying accounts payable Record a payment by check ( 10002 ) to a vendor for $32,000 . At the Invoice prompt enter PAYAP. Page 4 Work4Me - Problem 17 3rd Web-Based Edition, Copyright 2010 PKL Software, Incorporated. All rights reserved. Last Revised: April 29, 2011 TRANSACTIONS Student Analysis Tran 10: Record payment on mortgage notes Record a $25,000 payment by check (10003 ) on a mortgage note. At the Invoice prompt entry PYMNP. ****************************************************** Tran 11: Declare a common stock cash dividend Record the declaration of a $20,000 cash dividend on common stock. At the Invoice prompt type DVDEC. ****************************************************** Tran 12: Purchase merchandise inventory with cash Record the purchase of $30,000 of merchandise inventory with check 10004 . At the Invoice prompt type CPINV. ****************************************************** Tran 13: Record cash and credit sales Record the cash sales of $50,000 and credit sales of $40,000. At the Invoice prompt type SALES. ****************************************************** Tran 14: Declare a preferred stock cash dividend Record the declaration of a $1,000 cash dividend on preferred stock. At the Invoice prompt type DVDEC. ****************************************************** Tran 15: Paying dividends declared Record the payment of the common stock dividend of $20,000 and the preferred stock dividend of $1,000. The check number is 10005. At the Invoice prompt enter PAYDV. ****************************************************** Tran 16: Collected accounts receivable Record the receipt of $150,000 from credit customers. At the Invoice prompt enter ARCOL. Page 5 Work4Me - Problem 17 3rd Web-Based Edition, Copyright 2010 PKL Software, Incorporated. All rights reserved. Last Revised: April 29, 2011 TRANSACTIONS Student Analysis Tran 17: Record the cost of goods sold Record the cost of goods sold for all cash and credit sales. The cost of goods sold is $88,000 . Debit Cost of Goods Sold and credit Merchandise Inventory. At the Invoice prompt enter 17CGS . ****************************************************** Tran 18: Record Selling and Administrative Record total selling expense of $40,000 and total administrative expenses of $20,000 that were paid with check 10006. At the Invoice prompt enter TOTEX. ****************************************************** Tran 19: Record accrued interest expense Record the accrued interest expense of $1,200 on all short-term and long-term obligations. At the Invoice prompt enter INTEX. ****************************************************** Tran 20: Record accrued income tax Record the accrued income tax expense of $7,000 . At the Invoice prompt enter INCTX. Note: For this problem, all other end-of-accounting period adjustments are ignored. Page 6 Work4Me - Problem 17 3rd Web-Based Edition, Copyright 2010 PKL Software, Incorporated. All rights reserved. Last Revised: April 29, 2011 Print a Trial Balance and check your account totals against the \"Check It Out\" b \"CHECK IT OUT\" 101 Cash 105 Accounts Receivable 201 Accounts Payable 210 Short-Term Notes Payable 240 Mortgage Note Payable 301 Common Stock 501 Cost of Goods Sold 601 Selling Expense 701 Interest Expense TRIAL BALANCE TOTAL $198,000.00 89,500.00 10,000.00 38,000.00 115,000.00 200,000.00 88,000.00 40,000.00 1,200.00 $719,700.00 If your account balances are in agreement with the \"Check It Out\" box, then continue. If your account balances are not in agreement, then print a copy of your General Journal and compare your entries with the data entry information and make appropriate correcting entries. Print the following documents: 1. Trial Balance 2. The following accounts 101 Cash 105 Accounts Receivable 115 Merchandise Inventory 209 Income Taxes Payable 301 Common Stock 501 Cost of Goods Sold 701 Interest Expense 3. The Income Statement 4. The Balance Sheet Page 7 Work4Me - Problem 17 3rd Web-Based Edition, Copyright 2010 PKL Software, Incorporated. All rights reserved. Last Revised: April 29, 2011 Ratios and Formulas For Problem 17 Working Capital = Current Assets - Current Liabilies Current Ratio = Current Assets/Current Liabilities Inventory Turnover = Cost of Goods Sold/Average Inventoyr Times Interest Earned=Ratio (Income before Interest Expense and Income Taxes)/Interest Expense = (Net Sales - Cost of Goods Sold) /Net Sales Gross Margin Ratio Profit Margin Ratio = Net Income/Net Sales = (Net Income - Preferred Dividends)/Weighted-Average Common Shares Earnings Per Share Outstanding = Return on Assets Net Income (Beginning Total Assets + Ending Total Assets)/2 = Equity Return on Common Stockholders' (Net Income - Preferred Dividends) (Beginning Common Stockholder Equity+ Ending Common Stockholder Equity/2) Price Earnings (PE) Ratio = Market value per common share/Earnings per share = Stockholders' equity applicable to common shares*/Number of Book Value Per Share common shares outstanding *Total Stockholders' Equity - Par Value of Preferred Stock or Call Price - Preferre . Dividends in Arrears Page 8 Work4Me - Problem 17 3rd Web-Based Edition, Copyright 2010 PKL Software, Incorporated. All rights reserved. Last Revised: April 29, 2011 WORK4ME - PROBLEM 17 NAME_______________________________________ FINANCIAL STATEMENT CLASS DAY AND TIME__________DATE________ ANALYSIS 1. An increase in a current asset with an increase in a revenue account ______________ will increase the current ratio. Answer T for True or F for False for questions 1-6. 2. The write-off of an uncollectible account receivable will change the value of Net Accounts Receivable on the Balance Sheet. ______________ 3. An increase in the common stock shares will decrease the book value per common share. ______________ 4. If current assets and current liabilities increase by the same amount, there will be no change in the Working Capital total. ______________ 5. Dividend Yield = Annual Dividend / The Current Price of the Common Stock. ______________ 6. Earning Per Share = Net Income - Preferred Dividends / The Weighted-Average Common Shares Outstanding. ______________ 7. Using your printed financial documents, answer questions 7-15. ______________ Where appropriate, round all answers to two decimal places. What is the current ratio? 8. What is the inventory turnover ratio? ______________ 9. What is the interest coverage (or times interest earned) ratio? ______________ 10. What is the gross profit ratio? _____________% 11. What are the earnings per share, assuming there were 10,000 shares of common stock at the beginning of the accounting period and the additional 10,000 shares were purchased in the last half of the period? $______________ 12. What is the return on assets? _____________% 13. What is the return on common stockholder's equity? _____________% 14. What is the price earnings (P/E) ratio, assuming a market price of $20 per share of common stock? ______________ 15. What is the book value per share? $______________ Page 9 Work4Me - Problem 17 3rd Web-Based Edition, Copyright 2010 PKL Software, Incorporated. All rights reserved. Last Revised: April 29, 2011