Current Liabilities:
Accounts Payable $ 50 $ 30 $ 20
Wages Payable 20 10 5
Taxes Payable 10 5 15
Current Long–Term Debt 10 15 5
Total Current Liabilities $ 90 $ 60 $ 45
Long–Term Liabilities:
Long–Term Debt 35 45 40
Total Liabilities $125 $105 $ 85
Stockholders’ Equity:
Common Stock $5 par $ 50 $ 50 $ 50
Retained Earnings 75 60 40
Total Stockholders’ Equity $125 $110 $ 90
Total Liab. & Stk. Equity $250 $215 $175
December 31 market price $ 50 $ 47 $ 45 per share
12.3-12) Referring to Table 12–5, what is the gross profit rate for Amazon Pools and Spas in 2X10? Has the
gross profit rate improved or not improved since 2X09?
A) 23.3%, improved
B) 34.4%, improved
C) 34.4%, not improved
D) 52.4%, improved
E) 52.4%, not improved
12.3-13) Referring to Table 12–5, what is the asset turnover for Amazon Pools and Spas in 2X10? Has the
asset turnover improved or not improved since 2X09?
A) 1.2, improved
B) 1.2, not improved
C) 3.2, improved
D) 3.4, improved
E) 3.4, not improved
12.3-14) Referring to Table 12–5, what is the working capital for Amazon Pools and Spas in 2X10? Has the
working capital improved or not improved since 2X09?
A) $125, improved
B) $100, improved
C) $100, not improved
D) $60, improved
E) $125, not improved
12.3-15) Referring to Table 12–5, what is the current ratio for Amazon Pools and Spas in 2X10? Has the
current ratio improved or not improved since 2X09?
A) 2.11, improved
B) 0.76, improved
C) 0.76, not improved
D) 0.36, improved
E) 2.11, not improved
12.3-16) Referring to Table 12–5, what is the quick ratio for Amazon Pools and Spas in 2X10? Has the
quick ratio improved or not improved since 2X09?
A) 2.11, not improved
B) 55, not improved
C) 1.39, improved
D) 1.39, not improved
E) 55, improved
12.3-17) Referring to Table 12–5, what is the average collection period in days for Amazon Pools and Spas
in 2X10? Has the average collection period in days improved or not improved since 2X09?
A) 41.1, improved
B) 36.5, improved
C) 36.5, not improved
D) 8.9, improved
E) 41.1, not improved
12.3-18) Referring to Table 12–5, what is the return on sales for Amazon Pools and Spas in 2X10? Has the
return on sales improved or not improved since 2X09?
A) 8.0%, improved
B) 8.0%, not improved
C) 14.4%, improved
D) 34.4%, improved
E) 34.4%, not improved
12.3-19) Referring to Table 12–5, what is the inventory turnover for Amazon Pools and Spas in 2X10? Has
the inventory turnover improved or not improved since 2X09?
A) 8.10, improved
B) 8.10, not improved
C) 9.13, improved
D) 9.13, not improved
E) 91, not improved
12.3-20) Referring to Table 12–5, what is the total–debt–to–total–assets ratio for Amazon Pools and Spas in
2X10? Has the total–debt–to–total–assets ratio improved or not improved since 2X09?
A) 0.14, improved
B) 0.18, improved
C) 0.18, not improved
D) 0.50, improved
E) 0.50, not improved
12.3-21) Referring to Table 12–5, what is the total–debt–to–total–equity ratio for Amazon Pools and Spas in
2X10? Has the total–debt–to–total equity ratio improved or not improved since 2X09?
A) 0.28, improved
B) 0.36, improved
C) 0.36, not improved
D) 1.00, improved
E) 1.00, not improved
24
12.3-22) Referring to Table 12–5, what is the earnings per share for Amazon Pools and Spas in 2X10? Has
the earnings per share improved or not improved since 2X09?
A) $1.28, improved
B) $1.28, not improved
C) $6.40, improved
D) $6.40, not improved
E) $12.80, not improved
Table 12–6
Howard Company
Income Statement
(in thousands)
For the Years Ended December 31, 2X10 and 2X09
2X10 2X09
Sales $ 930 $700
Less Cost of Goods Sold 410 235
Gross Profit $520 $465
Less Operating Expenses:
Wage Expenses $110 $100
Rent Expense 84 80
Miscellaneous Expense 50 35
Depreciation Expense 40 40
Total Operating Expenses $284 $255
Operating Income $236 $210
Less Other Expense:
Interest Revenue $ 24 $ 24
Interest Expense (30) (30)
Income before Tax $230 $204
Less: Income Tax Expense 92 82
Net Income $138 $122
Earnings Per Share $ .50 $ .45
Annual Common Dividends Per Share $ .20 $ .15
Closing Market Price Common Stock, 12/31 $9.75 $6.50
Current Assets: 2X10 2X09
Cash $145 $ 57
Accounts Receivable 90 60
Accrued Interest Receivable 15 15
Inventory 83 50
Prepaid Rent 5 —
Total Current Assets $338 $182
Long–Term Assets:
Long–Term Note Receivable $388 $388
Equipment, less Accumulated Depreciation
of $120 and $80 80 120
Total Long–Term Assets $468 $508
Total Assets $806 $690
Current Liabilities:
Accounts Payable $ 75 $ 45
Accrued Wages Payable 29 10
Accrued Income Taxes Payable 16 12
Accrued Interest Payable 9 9
Unearned Sales Revenue — 5
Current Portion of
Long–Term Notes Payable 80 —
Total Current Liabilities $209 $ 91
Long–Term Liabilities:
Notes Payable 140 220
Total Liabilities $349 $301
Stockholders’ Equity:
Common Stock $102 $102
Retained Earnings 365 287
Total Stockholders’ Equity $467 $389
Total Liabilities and
Stockholders’ Owners’ Equity $816 $690
12.3-23) Referring to Table 12–6, what is the return on sales for Howard Company in 2X10? Has the return
on sales improved or not improved since 2X09?
A) 17.6%, not improved
B) 14.8%, not improved
C) 14.8%, unknown
D) 10.0%, improved
E) 9.0%, improved
12.3-24) Referring to Table 12–6, what is the asset turnover for Howard Company in 2X10? Has the asset
turnover improved or not improved since 2X09?
A) 1.2, improved
B) 1.2, unknown
C) 1.5, improved
D) 1.6, unknown
E) 1.6, not improved
12.3-25) Tampico Enterprises inventory turnover was 8.2 in 2X10. After analyzing several similar,
competing companies, Tampico Enterprises found that the average inventory turnover for those
companies was 11.8. What should Tampico Enterprises consider doing?
A) Increase inventory by purchasing on credit
B) Increase inventory by purchasing with cash
C) Change the number of days Tampico Enterprises uses to calculate inventory turnover
D) Decrease inventory by dumping obsolete goods
E) Decrease inventory by increasing sales
12.3-26) The cornerstone of financial statement analysis is the use of ratios.
12.3-27) A comparison of a company’s financial ratios with its own historical ratios is referred to as a
cross–sectional comparison.
12.3-28) A cross–sectional comparison is performed by contrasting the financial results of different
companies within the same industry.
12.3-29) Liquidity focuses on whether there are sufficient current assets to satisfy current liabilities as they
become due.
12.3-30) The quick ratio is calculated as current assets divided by current liabilities.
12.3-31) Use the comparative income statement and balance sheet for Clorinator, Inc., for the years ended
December 31, 2X10 and 2X09, as shown in Table 12–3. Determine the following ratios for 2X10:
a. Quick ratio
b. Average collection period in days
c. Total–debt–to–equity
d. Pretax return on assets (ROA)
e. Return on stockholder’s equity (ROE)
12.3-32) For each of the following categories, give two examples of financial statement ratios that fit
within that category.
a. Short–term liquidity ratios
b. Long–term solvency ratios
c. Profitability ratios
d. Market price and dividend ratios
12.3-33) For each of the following transactions, indicate whether the current ratio increases (IN), decreases
(DE), or is not affected (NA).
a. Purchased equipment for cash
b. Paid a current liability
c. Cash received from outstanding accounts receivable
d. Cash sale of a long–term asset for a gain
e. Purchased inventory on credit
29
12.3-34) State whether the following ratios are classified as
a. ratios that measure long–term solvency,
b. ratios that measure profitability,
c. ratios used to analyze the company’s stock as an investment, or
d. ratios that measure short–term liquidity.
1. ________ Return on sales
2. ________ Earnings per share
3. ________ Dividend–yield
4. ________ Average collection period in days
5. ________ Total–debt–to–total assets ratio
6. ________ Price–earnings ratio
7. ________ Quick ratio
8. ________ Total–debt–to–total–equity
12.3-35) Based on the information for the following three companies, a) compute the number of days’
sales in receivables for 2X10 and 2X09 for each company assuming 365 days in a year and b) analyze each
company in accordance with a 45–day credit policy.
Hadman Teltor Comdok
Net credit sales 2X10 $122,000 $98,000 $178,000
2X09 120,000 99,000 169,000
Cost of goods sold 2X10 54,000 44,000 78,000
2X09 51,000 39,000 61,000
Accounts receivable 2X10 14,000 21,000 19,000
(ending balance) 2X09 16,000 18,000 13,000
Inventory 2X10 26,000 19,000 9,000
(ending balance) 2X09 20,000 20,000 13,000
12.3-36) Based on the information for the following three companies, a) compute the accounts receivable
turnover ratio for each company for 2X10 and b) determine which company is in the best liquidity
position based on the calculation in part a.
Hadman Teltor Comdok
Net credit sales 2X10 $122,000 $98,000 $178,000
2X09 120,000 99,000 169,000
Cost of goods sold 2X10 54,000 44,000 78,000
2X09 51,000 39,000 61,000
Accounts receivable 2X10 14,000 21,000 19,000
(ending balance) 2X09 16,000 18,000 13,000
Inventory 2X10 26,000 19,000 9,000
(ending balance) 2X09 20,000 20,000 13,000
32
Learning Objective 12.4 Questions
Table 12–6
Howard Company
Income Statement
(in thousands)
For the Years Ended December 31, 2X10 and 2X09
2X10 2X09
Sales $ 930 $700
Less Cost of Goods Sold 410 235
Gross Profit $520 $465
Less Operating Expenses:
Wage Expenses $110 $100
Rent Expense 84 80
Miscellaneous Expense 50 35
Depreciation Expense 40 40
Total Operating Expenses $284 $255
Operating Income $236 $210
Less Other Expense:
Interest Revenue $ 24 $ 24
Interest Expense (30) (30)
Income before Tax $230 $204
Less: Income Tax Expense 92 82
Net Income $138 $122
Earnings Per Share $ .50 $ .45
Annual Common Dividends Per Share $ .20 $ .15
Closing Market Price Common Stock, 12/31 $9.75 $6.50
Current Assets: 2X10 2X09
Cash $145 $ 57
Accounts Receivable 90 60
Accrued Interest Receivable 15 15
Inventory 83 50
Prepaid Rent 5 —
Total Current Assets $338 $182
Long–Term Assets:
Long–Term Note Receivable $388 $388
Equipment, less Accumulated Depreciation
of $120 and $80 80 120
Total Long–Term Assets $468 $508
Total Assets $806 $690