Mastery Problem: Financial Statement Analysis

Liquidity and Solvency Measures

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.)

• $3,091,000 $860,000
• $3,091,000 $860,000
• $1,866,000 $860,000
• $8,280,000 [($714,000 + $740,000) 2]
• [($714,000 + $740,000) 2] ($8,280,000 365)
• $4,100,000 [($1,072,000 + $1,100,000) 2]
• [($1,072,000 + $1,100,000) 2] ($4,100,000 365)
• $2,690,000 $1,690,000
• $2,550,000 $4,055,000
• ($989,400 + $127,000) $127,000

Liquidity and Solvency Measures		Computations
Working capital
Current ratio
Quick ratio
Accounts receivable turnover
Number of days' sales in receivables
Inventory turnover
Number of days' sales in inventory
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 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	fill in the blank 827e1a067067f8f_1
Accounts receivable (net)	fill in the blank 827e1a067067f8f_2
Inventory	fill in the blank 827e1a067067f8f_3
Prepaid expenses	fill in the blank 827e1a067067f8f_4
Total current assets	$fill in the blank 827e1a067067f8f_5
Long-term investments	fill in the blank 827e1a067067f8f_6
Property, plant, and equipment (net)	fill in the blank 827e1a067067f8f_7
Total assets	$fill in the blank 827e1a067067f8f_8
Liabilities
Current liabilities	$fill in the blank 827e1a067067f8f_9
Long-term liabilities	fill in the blank 827e1a067067f8f_10
Total liabilities	$fill in the blank 827e1a067067f8f_11
Stockholders' Equity
Preferred stock, $10 par	$fill in the blank 827e1a067067f8f_12
Common stock, $5 par	fill in the blank 827e1a067067f8f_13
Retained earnings	fill in the blank 827e1a067067f8f_14
Total stockholders' equity	$fill in the blank 827e1a067067f8f_15
Total liabilities and stockholders' equity	$fill in the blank 827e1a067067f8f_16

Profitability Measures

Match each computation to one of the profitability measures in the table.

• $8,280,000 [($5,781,000 + $5,591,000) 2]
• ($801,420 + $127,000) [($6,605,000 + $6,415,000) 2]
• $801,420 [($4,055,000 + $3,852,250) 2]
• ($801,420 $65,000) [($3,567,500 + $3,424,800) 2]
• ($801,420 $65,000) 250,000 shares
• $35 $3.05
• $175,000 250,000 shares
• $0.70 $35

Profitability Measures		Computations
Asset turnover
Return on total assets
Return on stockholders' equity
Return on common stockholders' equity
Earnings per share on common stock
Price-earnings ratio
Dividends per share
Dividend yield

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 down and 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, 20Y6 and 20Y5

Increase/(Decrease)

20Y6

20Y5

Amount

Percentage

Sales

$fill in the blank d269c4033057022_1

$7,287,000

$fill in the blank d269c4033057022_2

fill in the blank d269c4033057022_3

%

Cost of goods sold

fill in the blank d269c4033057022_4

(3,444,000)

fill in the blank d269c4033057022_5

fill in the blank d269c4033057022_6

%

Gross profit

$fill in the blank d269c4033057022_7

$3,843,000

$fill in the blank d269c4033057022_8

fill in the blank d269c4033057022_9

%

Selling expenses

$fill in the blank d269c4033057022_10

$(1,457,600)

$fill in the blank d269c4033057022_11

fill in the blank d269c4033057022_12

%

Administrative expenses

(1,242,000)

(1,106,000)

fill in the blank d269c4033057022_13

fill in the blank d269c4033057022_14

%

Total operating expenses

$fill in the blank d269c4033057022_15

$(2,563,600)

$fill in the blank d269c4033057022_16

fill in the blank d269c4033057022_17

%

Operating income

$fill in the blank d269c4033057022_18

$1,279,400

$fill in the blank d269c4033057022_19

fill in the blank d269c4033057022_20

%

Other expense (interest)

fill in the blank d269c4033057022_21

(120,600)

fill in the blank d269c4033057022_22

fill in the blank d269c4033057022_23

%

Income before income tax expense

$fill in the blank d269c4033057022_24

$1,158,800

$fill in the blank d269c4033057022_25

fill in the blank d269c4033057022_26

%

Income tax expense

fill in the blank d269c4033057022_27

(181,980)

fill in the blank d269c4033057022_28

fill in the blank d269c4033057022_29

%

Net income

$fill in the blank d269c4033057022_30

$976,820

$fill in the blank d269c4033057022_31

fill in the blank d269c4033057022_32

%

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/sales/cost of goods/other___ has decreased significantly from 20Y5 to 20Y6, even though___netincome/sales/cost of goods/expense___ has increased. However, __net income/sales/cost of goods___ has also __increase/decreased___ , which slowed the increase in__gross profit/net income/sales/expenses__ . In addition, __selling expense/income tax expense/expenses___ has increased at a faster rate. The company appears__struggling/heavy/leveraged/good investment/right steps/growing__ .

Based on these observations, do you recommend that your friend invest in this companys stock? Y/N