1. 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		$3,091,000 $900,000
   Current ratio		$3,091,000 $900,000
   Quick ratio		$1,866,000 $900,000
   Accounts receivable turnover		$8,270,000 [($714,000 + $740,000) 2]
   Number of days' sales in receivables		[($714,000 + $740,000) 2] ($8,270,000 365)
   Inventory turnover		$4,100,000 [($1,072,000 + $1,100,000) 2]
   Number of days' sales in inventory		[($1,072,000 + $1,100,000) 2] ($4,100,000 365)
   Ratio of fixed assets to long-term liabilities		$2,690,000 $1,690,000
   Ratio of liabilities to stockholders' equity		$2,590,000 $4,015,000
   Times interest earned		($983,100 + $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.

   Balance Sheet December 31, 20Y6
   Assets
   Current assets:
   Cash	$823,000
   Marketable securities	fill in the blank c91b40049fedff0_1
   Accounts receivable (net)	fill in the blank c91b40049fedff0_2
   Inventory	fill in the blank c91b40049fedff0_3
   Prepaid expenses	fill in the blank c91b40049fedff0_4
   Total current assets	$fill in the blank c91b40049fedff0_5
   Long-term investments	fill in the blank c91b40049fedff0_6
   Property, plant, and equipment (net)	fill in the blank c91b40049fedff0_7
   Total assets	$fill in the blank c91b40049fedff0_8
   Liabilities
   Current liabilities	$fill in the blank c91b40049fedff0_9
   Long-term liabilities	fill in the blank c91b40049fedff0_10
   Total liabilities	$fill in the blank c91b40049fedff0_11
   Stockholders' Equity
   Preferred stock, $10 par	$fill in the blank c91b40049fedff0_12
   Common stock, $5 par	fill in the blank c91b40049fedff0_13
   Retained earnings	fill in the blank c91b40049fedff0_14
   Total stockholders' equity	$fill in the blank c91b40049fedff0_15
   Total liabilities and stockholders' equity	$fill in the blank c91b40049fedff0_16

   Profitability Measures

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

   Profitability Measures		Computations
   Asset turnover		$8,270,000 [($5,781,000 + $5,591,000) 2]
   Return on total assets		($796,380 + $127,000) [($6,605,000 + $6,415,000) 2]
   Return on stockholders' equity		$796,380 [($4,015,000 + $3,814,250) 2]
   Return on common stockholders' equity		($796,380 $65,000) [($3,527,500 + $3,386,400) 2]
   Earnings per share on common stock		($796,380 $65,000) 250,000 shares
   Price-earnings ratio		$35 $3.05
   Dividends per share		$175,000 250,000 shares
   Dividend yield		$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 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 83ab67025030ffc_1

   $7,277,000

   $fill in the blank 83ab67025030ffc_2

   fill in the blank 83ab67025030ffc_3

   %

   Cost of goods sold

   fill in the blank 83ab67025030ffc_4

   (3,444,000)

   fill in the blank 83ab67025030ffc_5

   fill in the blank 83ab67025030ffc_6

   %

   Gross profit

   $fill in the blank 83ab67025030ffc_7

   $3,833,000

   $fill in the blank 83ab67025030ffc_8

   fill in the blank 83ab67025030ffc_9

   %

   Selling expenses

   $fill in the blank 83ab67025030ffc_10

   $(1,455,400)

   $fill in the blank 83ab67025030ffc_11

   fill in the blank 83ab67025030ffc_12

   %

   Administrative expenses

   (1,240,500)

   (1,104,500)

   fill in the blank 83ab67025030ffc_13

   fill in the blank 83ab67025030ffc_14

   %

   Total operating expenses

   $fill in the blank 83ab67025030ffc_15

   $(2,559,900)

   $fill in the blank 83ab67025030ffc_16

   fill in the blank 83ab67025030ffc_17

   %

   Operating income

   $fill in the blank 83ab67025030ffc_18

   $1,273,100

   $fill in the blank 83ab67025030ffc_19

   fill in the blank 83ab67025030ffc_20

   %

   Other expense (interest)

   fill in the blank 83ab67025030ffc_21

   (120,600)

   fill in the blank 83ab67025030ffc_22

   fill in the blank 83ab67025030ffc_23

   %

   Income before income tax expense

   $fill in the blank 83ab67025030ffc_24

   $1,152,500

   $fill in the blank 83ab67025030ffc_25

   fill in the blank 83ab67025030ffc_26

   %

   Income tax expense

   fill in the blank 83ab67025030ffc_27

   (180,720)

   fill in the blank 83ab67025030ffc_28

   fill in the blank 83ab67025030ffc_29

   %

   Net income

   $fill in the blank 83ab67025030ffc_30

   $971,780

   $fill in the blank 83ab67025030ffc_31

   fill in the blank 83ab67025030ffc_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?______