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		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($983,100 + $127,000) $127,000$3,093,000 $840,000
Current ratio		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($983,100 + $127,000) $127,000$3,093,000 $840,000
Quick ratio		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($983,100 + $127,000) $127,000$1,866,000 $840,000
Accounts receivable turnover		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($983,100 + $127,000) $127,000$8,270,000 [($714,000 + $740,000) 2]
Number of days' sales in receivables		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($983,100 + $127,000) $127,000[($714,000 + $740,000) 2] ($8,270,000 365)
Inventory turnover		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($983,100 + $127,000) $127,000$4,100,000 [($1,072,000 + $1,100,000) 2]
Number of days' sales in inventory		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($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		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($983,100 + $127,000) $127,000$2,690,000 $1,690,000
Ratio of liabilities to stockholders' equity		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($983,100 + $127,000) $127,000$2,530,000 $4,077,000
Times interest earned		$3,093,000 $840,000 $3,093,000 $840,000 $1,866,000 $840,000 $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$2,530,000 $4,077,000 ($983,100 + $127,000) $127,000($983,100 + $127,000) $127,000

Question Content Area

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
Accounts receivable (net)
Inventory
Prepaid expenses
Total current assets
Long-term investments
Property, plant, and equipment (net)
Total assets
Liabilities
Current liabilities
Long-term liabilities
Total liabilities
Stockholders' Equity
Preferred stock, $10 par
Common stock, $5 par
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity

Question Content Area

Profitability Measures

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

Profitability Measures		Computations
Asset turnover		$8,270,000 [($5,783,000 + $5,593,000) 2]($796,380 + $127,000) [($6,607,000 + $6,417,000) 2]$796,380 [($4,077,000 + $3,873,150) 2]($796,380 $65,000) [($3,589,500 + $3,445,920) 2]($796,380 $65,000) 250,000 shares$35 $3.05$175,000 250,000 shares$0.70 $35
Return on total assets		$8,270,000 [($5,783,000 + $5,593,000) 2]($796,380 + $127,000) [($6,607,000 + $6,417,000) 2]$796,380 [($4,077,000 + $3,873,150) 2]($796,380 $65,000) [($3,589,500 + $3,445,920) 2]($796,380 $65,000) 250,000 shares$35 $3.05$175,000 250,000 shares$0.70 $35
Return on stockholders' equity		$8,270,000 [($5,783,000 + $5,593,000) 2]($796,380 + $127,000) [($6,607,000 + $6,417,000) 2]$796,380 [($4,077,000 + $3,873,150) 2]($796,380 $65,000) [($3,589,500 + $3,445,920) 2]($796,380 $65,000) 250,000 shares$35 $3.05$175,000 250,000 shares$0.70 $35
Return on common stockholders' equity		$8,270,000 [($5,783,000 + $5,593,000) 2]($796,380 + $127,000) [($6,607,000 + $6,417,000) 2]$796,380 [($4,077,000 + $3,873,150) 2]($796,380 $65,000) [($3,589,500 + $3,445,920) 2]($796,380 $65,000) 250,000 shares$35 $3.05$175,000 250,000 shares$0.70 $35
Earnings per share on common stock		$8,270,000 [($5,783,000 + $5,593,000) 2]($796,380 + $127,000) [($6,607,000 + $6,417,000) 2]$796,380 [($4,077,000 + $3,873,150) 2]($796,380 $65,000) [($3,589,500 + $3,445,920) 2]($796,380 $65,000) 250,000 shares$35 $3.05$175,000 250,000 shares$0.70 $35
Price-earnings ratio		$8,270,000 [($5,783,000 + $5,593,000) 2]($796,380 + $127,000) [($6,607,000 + $6,417,000) 2]$796,380 [($4,077,000 + $3,873,150) 2]($796,380 $65,000) [($3,589,500 + $3,445,920) 2]($796,380 $65,000) 250,000 shares$35 $3.05$175,000 250,000 shares$0.70 $35
Dividends per share		$8,270,000 [($5,783,000 + $5,593,000) 2]($796,380 + $127,000) [($6,607,000 + $6,417,000) 2]$796,380 [($4,077,000 + $3,873,150) 2]($796,380 $65,000) [($3,589,500 + $3,445,920) 2]($796,380 $65,000) 250,000 shares$35 $3.05$175,000 250,000 shares$0.70 $35
Dividend yield		$8,270,000 [($5,783,000 + $5,593,000) 2]($796,380 + $127,000) [($6,607,000 + $6,417,000) 2]$796,380 [($4,077,000 + $3,873,150) 2]($796,380 $65,000) [($3,589,500 + $3,445,920) 2]($796,380 $65,000) 250,000 shares$35 $3.05$175,000 250,000 shares$0.70 $35

Question Content Area

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					$7,277,000							%
Cost of goods sold					(3,444,000)							%
Gross profit					$3,833,000							%
Selling expenses					$(1,455,400)							%
Administrative expenses		(1,240,500)			(1,104,500)							%
Total operating expenses					$(2,559,900)							%
Operating income					$1,273,100							%
Other expense (interest)					(120,600)							%
Income before income tax expense					$1,152,500							%
Income tax expense					(180,720)							%
Net income					$971,780							%

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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.

Net incomeSalesCost of goods soldOther expense (interest)

has decreased significantly from 20Y5 to 20Y6, even though

net incomesalescost of goods soldselling expenses

has increased. However,

net incomesalescost of goods sold

has also

increaseddecreasednot changed

, which slowed the increase in

gross profitnet incomesalestotal operating expenses

. In addition,

selling expensesincome tax expenseother expense (interest)

has increased at a faster rate. The company appears

to be strugglingto be too heavilyleveragedto be a good investmentto be taking the right stepsto be growing

.

Based on these observations, do you recommend that your friend invest in this companys stock?

YesNo