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
Number of days' sales in receivables
Times interest earned
Quick ratio
Inventory turnover
Current ratio
Working capital
Ratio of fixed assets to long-term liabilities
Number of days' sales in inventory
Ratio of liabilities to stockholders' equity
Accounts receivable turnover

Use the following balance sheet form to enter amounts you identify from the computations on the Liquidity and Solvency Measures panel. You will identify other amounts for the balance sheet on the Profitability Measures panel. 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

1	Assets
2	Current assets:
3	Cash	$823,000.00
4	Marketable securities
5	Accounts receivable (net)
6	Inventory
7	Prepaid expenses
8	Total current assets
9	Long-term investments
10	Property, plant, and equipment (net)
11	Total assets
12	Liabilities
13	Current liabilities
14	Long-term liabilities
15	Total liabilities
16	Stockholders Equity
17	Preferred stock, $10 par
18	Common stock, $5 par
19	Retained earnings
20	Total stockholders equity
21	Total liabilities and stockholders equity

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

Profitability Measures	Computations
Asset turnover
Return on total assets
Return on stockholders equity
Return on common stockholders equity
Earnings per share on common stock
Price-earnings ratio
Dividends per share
Dividend yield

Use the following comparative income statement form to enter amounts you identify from the computations on the Liquidity and Solvency Measures panel and on the Profitability Measures panel. 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

1		20Y6	20Y5	Amount Increase (Decrease)	Percentage Increase (Decrease)
2	Sales		$7,287,000.00
3	Cost of goods sold		3,444,000.00
4	Gross profit		$3,843,000.00
5	Selling expenses		$1,457,600.00
6	Administrative expenses	1,242,000.00	1,106,000.00
7	Total operating expenses		$2,563,600.00
8	Income from operations		$1,279,400.00
9	Interest expense		120,600.00
10	Income before income tax		$1,158,800.00
11	Income tax expense		181,980.00
12	Net income		$976,820.00

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?