Question

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 $3,095,000 - $840,000 Current ratio $3,095,000 = $840,000 Quick ratio $1,866,000 = $840,000 Accounts receivable turnover $8,260,000 = [($714,000 + $740,000) = 2] Number of days' sales in receivables [($714,000 + $ 740,000) : 2] = ($8,260,000 = 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 $2,530,000 = $4,079,000 Times interest earned ($976,800 + $127,000) = $127,000 Feedback Check My Work Look for patterns in the computations and match them to ratios that are related to each other. Identify the amounts in the computations and consider how they are related to amounts in other computations.

Answer 1

			Increase or Decrease
	20Y6	2005	Amount	Percentage
Sales	$      82,60,000
COGS	$      41,00,000
Gross Profit	$      41,60,000
Selling expense	$      18,17,200	14,53,200	$   3,64,000	25.0%
Administrative Expense	$      12,39,000
Total Operating Expenses	$      30,56,200	$     25,56,200	$   5,00,000	19.6%
Operating Income	$      11,03,800	$     12,66,800	$ -1,63,000	-12.9%
Other Expense(interest)	$        1,27,000	$       1,20,600	$         6,400	5.3%
Income before Income tax expense	$        9,76,800	$     11,46,200	$ -1,69,400	-14.8%
Income Tax Expense	$        1,85,460	$       1,79,460	$         6,000	3.3%
Net Income	$        7,91,340	$       9,66,740	$ -1,75,400	-18.1%

Computation:

Selling expense
Income before Income tax expense	$        9,76,800	(From Times interest earned -Image 1)
Add:Interest Expense	$        1,27,000
Operating Income	$      11,03,800
Less: Gross Profit	$    -41,60,000
Total Operating Expenses	$    -30,56,200
Total Operating Expenses	$      30,56,200
Less:Administrative Expense	$    -12,39,000
Selling expense	$      18,17,200

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Income Tax Expense
Income before Income tax expense	$        9,76,800	(From Times interest earned -Image 1)
Less: Net Income	$      -7,91,340	(From return on total assets -Image 3)
Income Tax Expense	$        1,85,460

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