1) Using a perpetual inventory system, the purchase of inventory is recorded with a
debit to the Purchases account, which is a temporary account closed to cost of goods
sold at the end of the period.
2) The debt to equity ratio measures a companys risk and is calculated as total liabilities
divided by stockholders equity.
3) Northwest Clothing Supply has the following transactions during the year related to
stockholders equity:
January 1Issues 3,000 shares of no-par value common stock for $20 per share.
March 15Issues 800 shares of $20 par value preferred stock for $22 per share.
December 1Declares a cash dividend of $1 per share to all stockholders of record (both
common and preferred) on December 15 .
December 15Date of record.
December 31Pays the cash dividend declared on December 1 .
Record each of these transactions.
4) Highland Park Homes reports net income of $300,000, and yet its net cash flow from
operating activities is a negative $200,000 during the same period. Is this possible?
Explain.
5) A company reports the following amounts at the end of the year:
Sales revenue$300,000 Cost of goods sold 225,000
Net income 50,000
Compute the companys gross profit ratio.
6) The following income statement and balance sheets for Laser World are provided:
Earnings per share for the year-ended December 31, 2015, is $1.90. The closing stock
price on December 31, 2015, is $30.40.
Calculate the following profitability ratios for 2015:
7) 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.
8) United Products began the year with an Accounts Receivable balance of $250,000,
and had a year-end balance of $280,000. Credit sales of $800,000 generated a gross
profit of $150,000. Calculate the receivables turnover ratio for the year.
