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Mastery Problem: Financial Statement Analysis

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 – $860,000 
Current ratio
$3,095,000 ÷ $860,000 
Quick ratio
$1,866,000 ÷ $860,000 
Accounts receivable turnover
$8,250,000 ÷ [($714,000 + $740,000) ÷ 2] 
Number  of days' sales in receivables
[($714,000 + $740,000) ÷ 2] ÷ ($8,250,000 ÷ 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
$2,550,000 ÷ $4,059,000 
Times interest earned
($970,500 + $127,000) ÷ $127,000 

Feedback

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.

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$


Identify the amounts in the Liquidity and Solvency Measures panel and the Profitability Measures panel that are balance sheet items and enter them accordingly.

Profitability Measures

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

Profitability Measures
Computations
Asset turnover
$8,250,000 ÷ [($5,785,000 + $5,595,000) ÷ 2] 
Return on total assets
($786,300 + $127,000) ÷ [($6,609,000 + $6,419,000) ÷ 2] 
Return on stockholders' equity
$786,300 ÷ [($4,059,000 + $3,856,050) ÷ 2] 
Return on common stockholders' equity
($786,300 – $65,000) ÷ [($3,571,500 + $3,428,640) ÷ 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 


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%.

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Comparative Income Statement
For the Years Ended December 31, 20Y6 and 20Y5



Increase/(Decrease)

20Y620Y5AmountPercentage
Sales
$

$7,257,000 

$

 %
Cost of goods sold


(3,444,000)



 %