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 - $860,000 Current ratio $3,095,000 - $860,000 Quick ratio $1,866,000 = $860,000 > Accounts receivable turnover Number of days' sales in receivables $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) Inventory turnover Number of days' sales in inventory Ratio of fixed assets to long-term liabilities $2,690,000 - $1,690,000 Ratio of liabilities to stockholders' equity $2,550,000 = $4,059,000 Times interest earned ($989,400 + $127,000) = $127,000 Feedback Check My Work 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. Assignment 3-Homework E Print Item 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: Cash $823,000 Marketable securities 329,000 Accounts receivable (net) 714,000 Inventory 1,072,000 Prepaid expenses 157,000 Total current assets 3,095,000 Long-term investments 824,000 Property, plant, and equipment (net) 2,690,000 Total assets 6,609,000 Liabilities Current liabilities Long-term liabilities 1,690,000 Total liabilities Stockholders' Equity Preferred stock, $10 par 487,500 Common stock, $5 par 1,250,000 Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 6,609,000
