Question

PLEASE ONLY DO THE LAST PORTION " Final Questions." I already did all the other ones.

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
Times interest earned	($970,500 + $127,000) ÷ $127,000
Working capital	$3,095,000 – $840,000
Number  of days' sales in receivables	[($1,072,000 + $1,100,000) ÷ 2] ÷ ($4,100,000 ÷ 365)
Quick ratio	$1,866,000 ÷ $840,000
Current ratio	$3,095,000 ÷ $840,000
Ratio of liabilities to stockholders' equity	$2,530,000 ÷ $4,079,000
Number of days' sales in inventory	[($714,000 + $740,000) ÷ 2] ÷ ($8,250,000 ÷ 365)
Accounts receivable turnover	$8,250,000 ÷ [($714,000 + $740,000) ÷ 2]
Inventory turnover	$4,100,000 ÷ [($1,072,000 + $1,100,000) ÷ 2]
Ratio of fixed assets to long-term liabilities	$2,690,000 ÷ $1,690,000

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	$8,250,000 ÷ [($6,609,000 + $6,419,000) ÷ 2]
Return on total assets	($786,300 + $127,000) ÷ [($6,609,000 + $6,419,000) ÷ 2]
Return on stockholders’ equity	$786,300 ÷ [($4,079,000 + $3,875,050) ÷ 2]
Return on common stockholders’ equity	($786,300 – $65,000) ÷ [($3,591,500 + $3,447,840) ÷ 2]
Earnings per share on common stock	($786,300 – $65,000) ÷ 250,000 shares
Price-earnings ratio	$35 ÷ $3.05
Dividends per share	$175,000 ÷ 250,000 shares
Dividend yield	$0.70 ÷ $35

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		$7,257,000.00
3	Cost of goods sold		3,444,000.00
4	Gross profit		$3,813,000.00
5	Selling expenses		$1,451,000.00
6	Administrative expenses	1,237,500.00	1,101,500.00
7	Total operating expenses		$2,552,500.00
8	Income from operations		$1,260,500.00
9	Interest expense		120,600.00
10	Income before income tax		$1,139,900.00
11	Income tax expense		178,200.00
12	Net income		$961,700.00

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 company’s stock?

Answer 1

Balance Sheet
December 31, 20Y6
1	Assets
2	Current assets:
3	Cash	823000
4	Marketable securities	329000
5	Accounts receivable (net)	714000
6	Inventory	1072000
7	Prepaid expenses	157000
8	Total current assets	3095000
9	Long-term investments	824000
10	Property, plant, and equipment (net)	2690000
11	Total assets	6609000
12	Liabilities
13	Current liabilities	840000
14	Long-term liabilities	1690000
15	Total liabilities	2530000
16	Stockholders’ Equity
17	Preferred stock, $10 par	487500
18	Common stock, $5 par	1250000
19	Retained earnings	2341500
20	Total stockholders’ equity	4079000
21	Total liabilities and stockholders’ equity	6609000

1	Number  of days' sales in receivables	[($714,000 + $740,000) ÷ 2] ÷ ($8,250,000 ÷ 365)
	Formula	(Closing +Opening receivable)÷ 2 / (annual sales / 365 days)
	Closing account receivable	714000
2	Number of days' sales in inventory	[($1,072,000 + $1,100,000) ÷ 2] ÷ ($4,100,000 ÷ 365)
	Formula	(Closing +opening inventory)÷ 2 / (COGS / 365 days)
	Closing inventory	1072000
3	Quick ratio	$1,866,000 ÷ $840,000
	Formula	(cash and equivalents + marketable securities + accounts receivable) / current liabilities
	marketable securities	=1866000-714000-823000=329000
4	Current ratio	$3,095,000 ÷ $840,000
	Formula	current assets/ current liabilities
	Prepaid expenses	=3095000-2938000=157000
5	Ratio of fixed assets to long-term liabilities	$2,690,000 ÷ $1,690,000
	Fixed assets	2690000
	Loan-term liabilities	1690000
6	Working capital	$3,095,000 – $840,000
7	Ratio of liabilities to stockholders' equity	$2,530,000 ÷ $4,079,000
8	Accounts receivable turnover	$8,250,000 ÷ [($714,000 + $740,000) ÷ 2]
9	Inventory turnover	$4,100,000 ÷ [($1,072,000 + $1,100,000) ÷ 2]
10	Times interest earned	($970,500 + $127,000) ÷ $127,000
	Asset turnover	$8,250,000 ÷ [($6,609,000 + $6,419,000) ÷ 2]
	Return on total assets	($786,300 + $127,000) ÷ [($6,609,000 + $6,419,000) ÷ 2]
	Return on stockholders’ equity	$786,300 ÷ [($4,079,000 + $3,875,050) ÷ 2]
	Return on common stockholders’ equity	($786,300 – $65,000) ÷ [($3,591,500 + $3,447,840) ÷ 2]
	Earnings per share on common stock	($786,300 – $65,000) ÷ 250,000 shares
	Price-earnings ratio	$35 ÷ $3.05
	Dividends per share	$175,000 ÷ 250,000 shares
	Dividend yield	$0.70 ÷ $35