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 - $840,000 Current ratio $3,095,000 = $840,000 Quick ratio $1,866,000 = $840,000 Accounts receivable turnover $8,260,000 = [($714,000 + $740,000) = 2] Number of days' sales in receivables [($714,000 + $ 740,000) : 2] = ($8,260,000 = 365) Inventory turnover $4,100,000 = [($1,072,000 + $1,100,000) = 2] Number of days' sales in inventory [($1,072,000 + $1,100,000) = 2] = ($4,100,000 = 365) Ratio of fixed assets to long-term liabilities $2,690,000 = $1,690,000 Ratio of liabilities to stockholders' equity $2,530,000 = $4,079,000 Times interest earned ($976,800 + $127,000) = $127,000 Feedback Check My Work Look for patterns in the computations and match them to ratios that are related to each other. Identify the amounts in the computations and consider how they are related to amounts in other computations. 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, 2016 Assets Current assets: Cash Marketable securities $823,000 329,000 714,000 Accounts receivable (net) Inventory 1,072,000 Prepaid expenses 157,000 Total current assets 3,095,000 Long-term investments Property, plant, and equipment (net) 824,000 2,690,000 6,609,000 Total assets $ Liabilities Current liabilities 840,000 Long-term liabilities 1,690,000 Total liabilities $ 2,530,000 Stockholders' Equity Preferred stock, $10 par Common stock, $5 par 487,500 1,250,000 2,341,500 4,079,000 Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 6,609,000 Profitability Measures Match each computation to one of the profitability measures in the table. Profitability Measures Computations $8,260,000 = [($5,785,000 + $5,595,000) = 2] Asset turnover Return on total assets $791,340 + $127,000) = [($6,609,000 + $6,419,000) = 2] Return on stockholders' equity $791,340 = [($4,079,000 + $3,875,050) = 2] ($791,340 - $65,000) = [($3,591,500 + $3,447,840) + 2] Return on common stockholders' equity Earnings per share on common stock $791,340 - $65,000) = 250,000 shares Price-earnings ratio $35 = $3.05 Dividends per share $175,000 = 250,000 shares Dividend yield $0.70 = $35 Feedback Check My Work Look for patterns in the computations and match them to ratios that are related to each other. Identify the amounts in the computations and consider how they are related to amounts in other computations. Note that two of the computations use shares. Comparative Income Statement Use 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 the right of one decimal place. If 5, round up. For example, for 32.048% enter 32.0%. For 32.058% enter 32.1%. Comparative Income Statement For the Years Ended December 31, 2046 and 2045 Increase/(Decrease) 2016 2015 Amount Percentage Sales $ 8,260,000 $7,267,000 $ 993,000 13.7 Cost of goods sold 4,100,000 (3,444,000) 656,000 19.0 % Gross profit $ 4,160,000 $3,823,000 $ 337,000 8.8 Comparative Income Statement For the Years Ended December 31, 2016 and 2045 Increase/(Decrease) Amount Percentage 2016 2045 Sales $7,267,000 13.7 % 8,260,000 993,000 Cost of goods sold 4,100,000 (3,444,000) 656,000 19.0 % Gross profit $3,823,000 8.8 % 4,160,000 337,000 Selling expenses $(1,453,200) 25.0 % 1,816,500 (1,239,000) 363,300 136,000 Administrative expenses (1,103,000) 12.3 % Total operating expenses $(2,556,200) 19.6 % 3,055,500 499,300 Operating income $1,266,800 -12.9 % 162,300 1,104,500 127,000 Other expense interest) (120,600) 6,400 5.3 % Income before income tax expense $1,146,200 -14.8 % 977,500 168,700 X Income tax expense 185,382 (179,460) 5,922 X 3.3 % Net income $966,740 -18.1 % 792,118 174,622