Mastery Problem: 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!

Question

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


Current ratio


Quick ratio


Accounts receivable turnover


Number of days' sales in receivables


Inventory turnover


Number of days' sales in inventory


Ratio of fixed assets to long-term liabilities


Ratio of liabilities to stockholders' equity


Times interest earned

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	fill in the blank 531982030ff806c_1
Accounts receivable (net)	fill in the blank 531982030ff806c_2
Inventory	fill in the blank 531982030ff806c_3
Prepaid expenses	fill in the blank 531982030ff806c_4
Total current assets	$fill in the blank 531982030ff806c_5
Long-term investments	fill in the blank 531982030ff806c_6
Property, plant, and equipment (net)	fill in the blank 531982030ff806c_7
Total assets	$fill in the blank 531982030ff806c_8
Liabilities
Current liabilities	$fill in the blank 531982030ff806c_9
Long-term liabilities	fill in the blank 531982030ff806c_10
Total liabilities	$fill in the blank 531982030ff806c_11
Stockholders' Equity
Preferred stock, $10 par	$fill in the blank 531982030ff806c_12
Common stock, $5 par	fill in the blank 531982030ff806c_13
Retained earnings	fill in the blank 531982030ff806c_14
Total stockholders' equity	$fill in the blank 531982030ff806c_15
Total liabilities and stockholders' equity	$fill in the blank 531982030ff806c_16

Feedback

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


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

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. Note that two of the computations use shares.

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

$

%

Feedback

For missing amounts, review their definitions in your text. Changes in the horizontal analysis may be increases or decreases.

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.

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?

business accounting

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Mastery Problem: 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!

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Mastery Problem: Financial Statement Analysis Liquidity and Solvency Measures Your friend, another accountant, has bet you...

Liquidity and Solvency Measures Your friend, another accountant, has bet you that with your knowledge of...

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

Mastery Problem: 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!

Homework Answers

Request Answer!

Add Answer to: Mastery Problem: 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!

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Mastery Problem: 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!