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 inancial statements. You take the beti 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 - $900,000 Current ratio $3,095,000 + $900,000 Quick ratio $1,366,000+ $900,000 Accounts receivable turnover Number of days' sales in receivables Inventory turnover Number of days' sales in Inventory $8,270,000+1(8714,000+ $740,000) + 2] [($714,000+ $740,000)+2)+($8,270,000 365) $4,100,000+ [(51,022,000 - $1,100,000) + 2] [($1,072,000 $1,100,000) 21 (54,100,000+ 365) $2,690,000 $1,690,000 $2,590,000+ $4,019,000 ($983,100 + $127.000) 5127,000 Ratio of fixed assets to long-term liabilities Ratio of liabilities to stockholders' equity Times Interest earned Balance Sheet Use the following balance sheet form to enter amounts you identity from the computations on the liquidity and Solvency Measures part. You will identify other mounts for the balance sheet 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: Cach $823,000 Marketable securities Accounts receivable (net) Inventory Prepaid expenses Total current assets Long-term investments Property, plant, and equipment (net) otal assets Liabilities urrent liabilities ong-term liabilities Liabilities Current liabies Long-term liabilities Total liabilities Stockholders' Equity Preferred stock, $10 par Common stock, $5 par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity L , Identity the amounts in the Liquidity and Solvency Measures panel and the Profitability Measures panel that are balance sheet items and enter them accordingly Profitability Measures Match each computation to one of the profitability measures in the table. Profitability Measures Computations Profitability Measures Match each computation to one of the profitability measures in the table. Profitability Measures Computations Asset turnover $8,270,000+ [($5,785,000+ $5,595,000) + 2] Return on total assets ($796,330 + $127,000) + [($6,609,000 $6,419,000) 21 Return on stockholders' equity $796,380 + (($4,019,000 $3,818,050) 21 Return on common stockholders' equity ($796, 380 - $65,000) + (($3,531,500 + $3,390,240) 2] Farnings per share on common stock ($796,380 - $65,000). 250,000 shares Price-earnings ratio $35 + $3.05 Dividends per share $175,000 250,000 shares Dividend Vield $0.70+ $15 Check My Work Look for patterns in the computations and match them to ratios that are related to each other identity the amounts in the computations and consider how they are related to amounts in other computations. Note that two of the corputations use shares Comparative Income Statement ERA on the Comparative Income Statement Use the following comparative Income statement form to enter amounts you identify from the computations on the liquidity and Solvency Measures pot 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, 2016 and 2015 Increase/(Decrease) 2016 20YS Amount Percentage $7,277.000 Cost of goods sold (3,444,000) Gross profit $3,833,000 Selling expenses $(1,455,400) (1,104,500) Administrative expenses (1,240,500) Total operating expenses Operating income $(2,559,900) $1,273,100 (120,600) $1,152,500 Other expense (interest) $ Income before Income tax expense (180,720) Income tax expense $971,780 Net Income For meg amounts, review the defines in your ledChange in the horizontal analysis may be increases or decades Final Questions Your 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 your friend? Using only the information from your horizontal analysis of the comparative income statement, complete the following sentences. Net Income has decreased significantly from 2005 to 2016, even though sales has increased. However, cost of goods sold has also increased which slowed the increase in gross profit In addition, selling expenses 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 Checy w What are the biggest changes between 2015 and 2016? Partially correct