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 aspect 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.) i Liquidity and Solvency Measures Working capital Current ratio Computations $3,093,000 $900,000 - $3,093,000 $900,000 $1,866,000 $900,000 Quick ratio Accounts receivable turnover Number of days' sales in receivables Inventory turnover Number of days' sales in inventory $8,250,000 (5/14,000 +$740,000) 21 (5/14,000 $740,000) 21 ($8,250,000 365) $4,100,000 ($1,072,000 +$1,100,000) 21 (($1,072,000 +$1,100,000) 21 ($4,100,000 365) Ratio of fixed assets to long-term liabilities $2,690,000 $1,690,000 - Ratio of liabilities to stockholders' equity Times interest earned $2,590,000 $4,017,000 ($970,500 $127,000) $127,000 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. Current assets: Cash Balance Sheet December 31, 20Y6 Assets Marketable securities Accounts receivable (net) Inventory Prepaid expenses Total current assets Long term investments Property, plant, and equipment (net) Total assets Liabilities Current liabilities Long-term liabilities $823,000 x Accounts receivable (net) Inventory Prepaid expenses Total current assets Long-term investments Property, plant, and equipment (net) Total assets Liabilities Current liabilities 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 Profitability Measures Match each computation to one of the profitability measures in the table. Profitability Measures Asset turnover Computations Return on total assets Return on stockholders' equity $8,250,000 ($5,783,000 $5,593,000) 21 ($786,300 $127,000) ($6,607,000 $6,417,000) 21 $786,300+ ($4,017,000 +$3,816,150) 21 Return on common stockholders' equity (5786,300 $65,000) (($3,529,500 $3,388,320) 21 Earnings per share on common stock ($786,300 $65,000) 250,000 shares - Price earnings ratio i Dividends per share Dividend yield Feedback $35 $3.05 $175,000 250,000 shares $0.70 $35 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 2 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 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 2 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 2015 Increase/(Decrease) 2016 20Y5 Amount Percentage Sales $7,257,000 Cost of goods sold (3,444,000) Gross profit $3,613,000 Selling expenses $(1,451,000) Administrative expenses (1,237,500) (1,101,500) Total operating expenses $(2,552,500) Operating income. Other expense (interest) $1,260,500 (120,600) Income before income tax expense $1,139,900 Income tax expense (178,200) $961,700 Net income % 9