PROBLEM 14-13. Common-Size Financial Statements [LO 1,2] The financial statements for the Bao Corporation are given below. a. Present the balance sheet with each account balance as a percent of total assets. b. Present the income statement with each balance as a percent of sales.

Required a. Compute the following amounts and ratios at the beginning of the year: 1. Current ratio. 2. Acid-test ratio (quick ratio). b. Indicate the effect of each transaction listed above on the current ratio and the acid-test ratio (quick ratio). Give the effect in terms of increase, decrease, or none. Part a is done as an example below to show the format used. Effect on Current Ratio increase Acid-Test Ratio (Quick Ratio) increase Paid a cash dividend previously declared PROBLEM 14-13. Common-Size Financial Statements [LO 1,2] the Bao Corporation are given below. The financial statements for Bao Corporation Comparative Balance Sheets December 31, 2012 and 2011 2012 Assets Current assets: Cash Accounts receivable net Inventory Prepaid expenses Total current assets Property and equipment: Land Buildings and equipment, net Total property and equipment Total assets $ 1,900 9,100 11,300 560 22,860 2011 $ 1,300 7,300 9,100 250 17,950 86,000 48,600 134,600 $157,460 86,000 52,000 138,000 $155,950 $ 17,600 1,620 540 19,760 $ 21,000 4,430 220 25,650 5,300 34,400 59,460 5,300 35,000 __ 5,950 11,000 19,000 30,000 68,000 98,000 $157,460 11,000 _ 19,000 30,000 _ 60,000 __90,000 $155,950 Liabilities and Stockholder's Equity Current liabilities: Accounts payable Accrued expenses Notes payable, short term Total current liabilities Long-term liabilities: Bonds payable Notes payable Total liabilities Stockholder's equity: Common stock Additional paid-in capital Total paid-in capital Retained earnings Total stockholder's equity Total liabilities and stockholder's equity 553 Bao Corporation Comparative Income Statement For the Year Ended December 31,2012 and 2011 2012 Sales Cost of goods sold Gross margin Operating expenses: Selling expenses Administrative expenses Total operating expenses Income from operations Interest expense Income before taxes Less income taxes Net income 2011 $130,000 _67,00Q _.@,QPO $111,000 __ 6LOOO -.iQ,OQQ 24,500 20,000 _lLL60Q 34,600 15,400 ___ 4,700 10,700 __1)O $ 6,:42 Q ~,5Q9 _~~LOOO 21,000 __ 5,600 15,400 _ 6L 16Q $_9,-2~g n Required a. Present the balance sheet with each account balance as a percent of total assets. b. Present the income statement with each balance as a percent of sales. c. Comment on the results of any significant findings. d. What types of issues does the company seem to be facing? e. What suggestions do you have for the Bao Corporation? PROBLEM 14-14. Horizontal Analysis [LO 1,2) Refer to the financial data for Bao Corporation in Problem 14-13. Using these financial statements, complete the following steps. Required a. b. c. d. Prepare a horizontal analysis for the balance sheet. Prepare a horizontal analysis for the income statement. Comment on the results of any significant findings. What types of issues does the company seem to be facing? e. What suggestions do you have for the Bao Corporation? PROBLEM 14-15. Comprehensive Ratio Analysis [LO 5,6,7] Refer to the financial data for the Bao Corporation in Problem 14-13.You have just been hired as a loan officer at the Sussex Bank.Your supervisor has given you a file containing a request from Bao Corporation for a $30,000 five-year loan. Use the financial statements for the Bao Corporation to answer the questions that follow. Lui Chun, who just a year ago was appointed president of Bao Corporation, informs you that although the company has had some problems in the past, it is turning things around, as evidenced by the 17 percent increase in sales and the improved earnings results between last year and this year. Ms. Chun feels that, with her leadership and the improved technology (which will come from the equipment that the $30,000 will allow the company to purchase), profits will be even stronger in the future. Wanting to succeed in your first assignment, you decide to gather all the necessary information for a complete analysis. You determine that the following ratios are typical for the industry in which Bao Corporation operates; 554 Current ratio Acid-test (quick) ratio Accounts receivable turnover Inventory turnover Return on assets Debt-to-equity ratio Times interest earned 2.6 to 1 1.2 to 1 8.5 times 6.2 times 12.1% 0.68 to 1 6.8 Required a. Compute each of the above ratios for Bao Corporation. b. Summarize the results of these ratios. c. Based on this analysis, would you recommend that the loan be approved? PROBLEM 14-16. Interpretation of Financial Ratios (LO 6, 7] Jordan li is interested in purchasing the stock of Mendella, a company that sells concrete mixtures to the construction industry. Before purchasing the stock,Jordan would like to learn as much as possible about the company. However, all she has to go on is the current year's (Year 3) annual report, which contains no comparative data other than the summary of the ratios given below. Year 3 Current ratio Acid test (quick ratio) Accounts receivable turnover Inventory turnover Return on total assets Return on common stockholder's equity Price-earnings ratio Earnings per share Year 2 Year 1 2.6:1 0.9:1 9.2 times 6.2 times 14.5% 17.2% 14.5 $1.52 2.4:1 1.0:1 10.3 times 7.8 times 13.1% 15.1% 17.2 $1 .51 2.2:1 1.1 :1 11.5 times 8.1 times 11.3% 12.90/0 17.8 $1.54 Jordan would like answers to a number of questions about the trend of events for Mendella over the past three years. She has the following questions: 1. 2. 3. 4. 5. Is it becoming easier for the company to pay its bills as they come due? Are customers paying their accounts as well as they were in Year 1? Is the level of inventory increasing, decreasing, or remaining constant? Is the market price of the company's stock going up or down? Is the company employing financial leverage to the advantage of the common stockholders? Required Answer each of Jordan's questions using the data given above. In each case, explain how you arrived at your answer. PROBLEM 14-17. Effects ofTransactions on Financial Ratios (LO 5,6,7] listed in the righthand column below are certain financial ratios. To the left of each ratio is a business transaction or event relating to the operating activit ies of Candice, Inc., an exporter of ceramic tile. Business Transaction or Event Ratio 1. The company declared a cash dividend. 2. The company sold inventory on account. 3. The company's net income decreased by 5 percent between last year and this year. Long-term debt remained unchanged. 4. A previously declared cash dividend was paid. s. Obsolete inventory totaling $60,000 was written off at a loss. 6. The company sold inventory for cash at a profit. 7. The company issued common stock for cash. 8. The company paid $7,000 on accounts payable. 9. The company purchased inventory on credit terms. 10. The market price of the company's common stock increased from $24.50 to $37.20. Earnings per share remained unchanged. Current ratio Acid-test ratio (quick ratio) Times interest earned Current ratio Inventory turnover ratio Debt-to-equity ratio Earnings per share Current ratio Acid test (quick ratio) Price-earnings ratio Required Indicate the impact of the transaction on the corresponding ratio (increase, decrease,or no effect). 555