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

Points:

1 / 10

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.

Balance Sheet

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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.

Score: 42/64

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

Points:

10.5 / 16

Profitability Measures

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

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

Points:

4 / 8

Feedback

Check My Work

Two of the computations use shares.

Comparative Income Statement

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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%.

Score: 53/128

Comparative Income Statement

For the Years Ended December 31, 20Y6 and 20Y5

1		20Y6	20Y5	Amount Increase (Decrease)	Percentage Increase (Decrease)
2	Sales		$7,277,000.00		?
3	Cost of goods sold	?	3,444,000.00	?
4	Gross profit		$3,833,000.00		?
5	Selling expenses		$1,455,400.00
6	Administrative expenses	1,240,500.00	1,104,500.00	?	?
7	Total operating expenses		$2,559,900.00
8	Income from operations		$1,273,100.00
9	Interest expense	?	120,600.00	?	?
10	Income before income tax		$1,152,500.00
11	Income tax expense		180,720.00
12	Net income		$971,780.00

Points:

13.25 / 32

Final Questions

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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 income has decreased significantly from 20Y5 to 20Y6, even though cost of goods sold has increased. However, cost of goods sold has also not changed , which slowed the increase in interest expense . In addition, interest expense has increased at a faster rate. The company appears to be taking the right steps .

Points:

2 / 7

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

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