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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

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
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$3,095,000 $900,000

Current ratio
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$3,095,000 $900,000

Quick ratio
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$1,866,000 $900,000

Accounts receivable turnover
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$8,270,000 [($714,000 + $740,000) 2]

Number of days' sales in receivables
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000[($714,000 + $740,000) 2] ($8,270,000 365)

Inventory turnover
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$4,100,000 [($1,072,000 + $1,100,000) 2]

Number of days' sales in inventory
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000[($1,072,000 + $1,100,000) 2] ($4,100,000 365)

Ratio of fixed assets to long-term liabilities
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$2,690,000 $1,690,000

Ratio of liabilities to stockholders' equity
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$2,590,000 $4,019,000

Times interest earned
$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000($983,100 + $127,000) $127,000

Feedback

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.

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 ac5dc8f9005e067_1

Accounts receivable (net) fill in the blank ac5dc8f9005e067_2

Inventory fill in the blank ac5dc8f9005e067_3

Prepaid expenses fill in the blank ac5dc8f9005e067_4

Total current assets $fill in the blank ac5dc8f9005e067_5

Long-term investments fill in the blank ac5dc8f9005e067_6

Property, plant, and equipment (net) fill in the blank ac5dc8f9005e067_7

Total assets $fill in the blank ac5dc8f9005e067_8

Liabilities

Current liabilities $fill in the blank ac5dc8f9005e067_9

Long-term liabilities fill in the blank ac5dc8f9005e067_10

Total liabilities $fill in the blank ac5dc8f9005e067_11

Stockholders' Equity

Preferred stock, $10 par $fill in the blank ac5dc8f9005e067_12

Common stock, $5 par fill in the blank ac5dc8f9005e067_13

Retained earnings fill in the blank ac5dc8f9005e067_14

Total stockholders' equity $fill in the blank ac5dc8f9005e067_15

Total liabilities and stockholders' equity $fill in the blank ac5dc8f9005e067_16

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Previous Question Next Question

Liquidity and Solvency Measures		Computations
Working capital		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$3,095,000 $900,000
Current ratio		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$3,095,000 $900,000
Quick ratio		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$1,866,000 $900,000
Accounts receivable turnover		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$8,270,000 [($714,000 + $740,000) 2]
Number of days' sales in receivables		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000[($714,000 + $740,000) 2] ($8,270,000 365)
Inventory turnover		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$4,100,000 [($1,072,000 + $1,100,000) 2]
Number of days' sales in inventory		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000[($1,072,000 + $1,100,000) 2] ($4,100,000 365)
Ratio of fixed assets to long-term liabilities		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$2,690,000 $1,690,000
Ratio of liabilities to stockholders' equity		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000$2,590,000 $4,019,000
Times interest earned		$3,095,000 $900,000$3,095,000 $900,000$1,866,000 $900,000$8,270,000 [($714,000 + $740,000) 2][($714,000 + $740,000) 2] ($8,270,000 365)$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($983,100 + $127,000) $127,000($983,100 + $127,000) $127,000

Balance Sheet December 31, 20Y6
Assets
Current assets:
Cash	$823,000
Marketable securities	fill in the blank ac5dc8f9005e067_1
Accounts receivable (net)	fill in the blank ac5dc8f9005e067_2
Inventory	fill in the blank ac5dc8f9005e067_3
Prepaid expenses	fill in the blank ac5dc8f9005e067_4
Total current assets	$fill in the blank ac5dc8f9005e067_5
Long-term investments	fill in the blank ac5dc8f9005e067_6
Property, plant, and equipment (net)	fill in the blank ac5dc8f9005e067_7
Total assets	$fill in the blank ac5dc8f9005e067_8
Liabilities
Current liabilities	$fill in the blank ac5dc8f9005e067_9
Long-term liabilities	fill in the blank ac5dc8f9005e067_10
Total liabilities	$fill in the blank ac5dc8f9005e067_11
Stockholders' Equity
Preferred stock, $10 par	$fill in the blank ac5dc8f9005e067_12
Common stock, $5 par	fill in the blank ac5dc8f9005e067_13
Retained earnings	fill in the blank ac5dc8f9005e067_14
Total stockholders' equity	$fill in the blank ac5dc8f9005e067_15
Total liabilities and stockholders' equity	$fill in the blank ac5dc8f9005e067_16