Mastery Problem: Financial Statement Analysis

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
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

the picture has the option to choose for above's table.

Balance Sheetle

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 ea0c04ff6fb8064_1
Accounts receivable (net)	fill in the blank ea0c04ff6fb8064_2
Inventory	fill in the blank ea0c04ff6fb8064_3
Prepaid expenses	fill in the blank ea0c04ff6fb8064_4
Total current assets	$fill in the blank ea0c04ff6fb8064_5
Long-term investments	fill in the blank ea0c04ff6fb8064_6
Property, plant, and equipment (net)	fill in the blank ea0c04ff6fb8064_7
Total assets	$fill in the blank ea0c04ff6fb8064_8
Liabilities
Current liabilities	$fill in the blank ea0c04ff6fb8064_9
Long-term liabilities	fill in the blank ea0c04ff6fb8064_10
Total liabilities	$fill in the blank ea0c04ff6fb8064_11
Stockholders' Equity
Preferred stock, $10 par	$fill in the blank ea0c04ff6fb8064_12
Common stock, $5 par	fill in the blank ea0c04ff6fb8064_13
Retained earnings	fill in the blank ea0c04ff6fb8064_14
Total stockholders' equity	$fill in the blank ea0c04ff6fb8064_15
Total liabilities and stockholders' equity	$fill in the blank ea0c04ff6fb8064_16

Profitability Measures

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

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

Comparative Income Statement For the Years Ended December 31, 20Y6 and 20Y5

Increase/(Decrease)

20Y6

20Y5

Amount

Percentage

Sales

$fill in the blank d79279fd1fa9ff2_1

$7,287,000

$fill in the blank d79279fd1fa9ff2_2

fill in the blank d79279fd1fa9ff2_3

%

Cost of goods sold

fill in the blank d79279fd1fa9ff2_4

(3,444,000)

fill in the blank d79279fd1fa9ff2_5

fill in the blank d79279fd1fa9ff2_6

%

Gross profit

$fill in the blank d79279fd1fa9ff2_7

$3,843,000

$fill in the blank d79279fd1fa9ff2_8

fill in the blank d79279fd1fa9ff2_9

%

Selling expenses

$fill in the blank d79279fd1fa9ff2_10

$(1,457,600)

$fill in the blank d79279fd1fa9ff2_11

fill in the blank d79279fd1fa9ff2_12

%

Administrative expenses

(1,242,000)

(1,106,000)

fill in the blank d79279fd1fa9ff2_13

fill in the blank d79279fd1fa9ff2_14

%

Total operating expenses

$fill in the blank d79279fd1fa9ff2_15

$(2,563,600)

$fill in the blank d79279fd1fa9ff2_16

fill in the blank d79279fd1fa9ff2_17

%

Operating income

$fill in the blank d79279fd1fa9ff2_18

$1,279,400

$fill in the blank d79279fd1fa9ff2_19

fill in the blank d79279fd1fa9ff2_20

%

Other expense (interest)

fill in the blank d79279fd1fa9ff2_21

(120,600)

fill in the blank d79279fd1fa9ff2_22

fill in the blank d79279fd1fa9ff2_23

%

Income before income tax expense

$fill in the blank d79279fd1fa9ff2_24

$1,158,800

$fill in the blank d79279fd1fa9ff2_25

fill in the blank d79279fd1fa9ff2_26

%

Income tax expense

fill in the blank d79279fd1fa9ff2_27

(181,980)

fill in the blank d79279fd1fa9ff2_28

fill in the blank d79279fd1fa9ff2_29

%

Net income

$fill in the blank d79279fd1fa9ff2_30

$976,820

$fill in the blank d79279fd1fa9ff2_31

fill in the blank d79279fd1fa9ff2_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.

has decreased significantly from 20Y5 to 20Y6, even though has increased. However, has also , which slowed the increase in . In addition, has increased at a faster rate. The company appears .

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

$3,095,000 - $900,000 $3,095,000 = $900,000 $1,866,000 - $900,000 $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 $2,590,000 - $4,019,000 ($989,400 + $127,000) $127,000