97
99
100
205) The income statements for The Sports Warehouse for the years ending December 31, 2022,
and 2021, are provided.
Required:
1. Complete the “Amount” and “%” columns to be used in a horizontal analysis of The Sports
Warehouse’s income statement.
2. Discuss the major fluctuations in income statement items during the year.
102
206) The following income statement and balance sheets for The Sports Shack are provided.
The Sports Shack
Income Statement
For the year ended December 31, 2021
Sales revenue
$6,600,000
Cost of goods sold
4,700,000
Gross profit
1,900,000
Expenses:
Operating expenses
1,400,000
Depreciation expense
100,000
Interest expense
50,000
Income tax expense
80,000
Total expenses
1,630,000
Net income
$270,000
The Sports Shack
Balance Sheets
December 31
Assets
2021
2020
Current assets:
Cash
$218,000
$196,000
Accounts receivable
680,000
880,000
Inventory
1,250,000
1,100,000
Supplies
90,000
65,000
Long-term assets:
Equipment
1,200,000
900,000
Less: Accumulated depreciation
(350,000)
(250,000)
Total assets
$3,088,000
$2,891,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$65,000
$55,000
Interest payable
4,000
6,000
Income tax payable
40,000
30,000
Long-term liabilities:
Notes payable
400,000
300,000
Stockholders’ equity:
Common stock
900,000
900,000
Retained earnings
1,679,000
1,600,000
Total liabilities and equity
$3,088,000
$2,891,000
103
Required:
Assuming that all sales were on account, calculate the following risk ratios for 2021 (round to one
decimal place).
1. Receivables turnover ratio
2. Average collection period
3. Inventory turnover ratio
4. Average days in inventory
5. Current ratio
6. Acid-test ratio
7. Debt to equity ratio
8. Times interest earned ratio
105
207) Income statement and balance sheet data for The Sports Shack are provided below.
The Sports Shack
Income Statements
For the years ended December 31
2022
2021
Sales revenue
$8,200,000
$6,600,000
Cost of goods sold
6,100,000
4,700,000
Gross profit
2,100,000
1,900,000
Expenses:
Operating expenses
1,450,000
1,400,000
Depreciation expense
90,000
100,000
Interest expense
25,000
50,000
Income tax expense
95,000
80,000
Total expenses
1,660,000
1,630,000
Net income
$440,000
$270,000
The Sports Shack
Balance Sheets
December 31
Assets
2022
2021
2020
Current assets:
Cash
$290,000
$218,000
$196,000
Accounts receivable
1,050,000
680,000
880,000
Inventory
919,000
1,250,000
1,100,000
Supplies
80,000
90,000
65,000
Long-term assets:
Equipment
1,100,000
1,200,000
(250,000)
Less: Accumulated depreciation
(440,000)
(350,000)
(250,000)
Total assets
$2,999,000
$3,088,000
$2,891,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$50,000
$65,000
$55,000
Interest payable
2,000
4,000
6,000
Income tax payable
38,000
40,000
30,000
Long-term liabilities:
Notes payable
200,000
400,000
300,000
Stockholders’ equity:
Common stock
900,000
900,000
900,000
Retained earnings
1,809,000
1,679,000
1,600,000
Total liabilities and equity
$2,999,000
$3,088,000
$2,891,000
106
Required:
1. Calculate the following risk ratios for 2021 and 2022 (round to one decimal place).
Receivables turnover ratio
Inventory turnover ratio
Current ratio
Debt to equity ratio
2. Calculate the following profitability ratios for 2021 and 2022 (round to one decimal place).
Gross profit ratio
Return on assets
Profit margin
Asset turnover
3. Based on the ratios calculated, determine whether overall risk and profitability improved from
2021 to 2022.
109
208) A company has the following data for the year.
Sales revenue
$7,200,000
Cost of goods sold
$5,800,000
Net income
$1,600,000
Average total assets
$9,100,000
Average total equity
$6,300,000
Average shares of common stock
4,000,000
Closing stock price
$5.40
Required:
Calculate the following profitability ratios (round to one decimal place).
1. Gross profit ratio
2. Return on assets
3. Profit margin
4. Asset turnover
5. Return on equity
6. Price-earnings ratio
111
209) Explain the difference between vertical and horizontal analysis.
210) Explain why ratios that compare an income statement account with a balance sheet account
should express the balance sheet account as an average of the beginning and ending balances.
211) Sideline Sports Products reports a return on assets of 6%, and a return on equity of 10%. Why
do these two ratios differ?
112
212) Define earnings persistence. How does earnings persistence relate to the reporting of
discontinued operations?
213) Explain the difference between conservative and aggressive accounting practices. Provide an
example of a conservative accounting practice and explain why this practice is conservative.
Provide an example of an aggressive accounting practice and explain why this practice is
aggressive.