12–81
152.
Match the following
1. Aggressive accounting
2. Other revenues and
The sale or disposal of a significant component of a
3. Discontinued operation
Refers to the ability of reported earnings to reflect the
company’s true earnings, as well as the usefulness of
4. Conservative
Practices that result in reporting lower income, lower
Practices that result in reporting higher income, higher
Essay Questions
12–82
153.
Perform a vertical analysis on the following information:
2017
Cash
$200,000
Accounts receivable
800,000
Inventory
500,000
Long-term assets
2,500,000
Total assets
$4,000,000
Cash
$500,000
$200,000
12–83
154.
Perform a horizontal analysis on the following information providing both the dollar
amount and percentage change:
2017
Cash
$200,000
Accounts receivable
800,000
Inventory
500,000
Long-term assets
2,500,000
Total assets
$4,000,000
155.
Assume a company’s sales are $1.6 million in 2017, $1.8 million in 2018, and $1.7 million in
2019. What is the percentage change from 2017 to 2018? What is the percentage change
from 2018 to 2019? Be sure to indicate whether the percentage change is an increase or a
decrease.
156.
If a company’s sales are $648,000 in 2018, and this represents an 8% increase over sales
in 2017, what were sales in 2017?
157.
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.
158.
United Products began the year with an Inventory balance of $180,000, and had a year–
end balance of $200,000. Sales of $800,000 generated a gross profit of $150,000. Calculate
the inventory turnover ratio for the year.
159.
BC Training reports sales revenue of $2,200,000. Average inventory during the year was
$200,000. The inventory turnover ratio for the year is 8.0. What amount of gross profit
would the company report in its income statement?
160.
LeBron’s Kids Camps has a current ratio of 0.75 to 1, based on current assets of $3 million
and current liabilities of $4 million. How, if at all, will a $500,000 cash purchase of
inventory affect the current ratio? How, if at all, will a $500,000 purchase of inventory on
account affect the current ratio?
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161.
The following income statement and balance sheets for Laser World are provided:
Laser World
Income Statement
For the year-ended December 31, 2018
Sales revenue
$2,200,000
Cost of goods sold
1,500,000
Gross profit
700,000
Expenses:
Operating expenses
350,000
Depreciation expense
70,000
Loss on sale of land
5,000
Interest expense
25,000
Income tax expense
60,000
Total expenses
510,000
Net income
$190,000
Laser World
Balance Sheets
December 31
Assets
2018
2017
Current assets:
Cash
$120,000
$112,000
Accounts receivable
90,000
70,000
Inventory
120,000
100,000
Prepaid rent
10,000
10,000
Long-term assets:
Land
260,000
200,000
Equipment
350,000
210,000
Accumulated depreciation
(70,000)
(42,000)
Total assets
$880,000
$660,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$55,000
$75,000
Interest payable
8,000
7,000
Income tax payable
15,000
12,000
Long-term liabilities:
Notes payable
400,000
300,000
Stockholders’ equity:
Common stock
200,000
200,000
Retained earnings
202,000
66,000
Total liabilities and equity
$880,000
$660,000
Assuming that all sales were on account, calculate the following risk ratios for 2018:
1. Receivables turnover
ratio
5. Current ratio
2. Average collection
period
6. Acid-test ratio
3. Inventory turnover ratio
7. Debt to equity ratio
4. Average days in
inventory
8. Times interest
earned ratio
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
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162.
The following income statement and balance sheets for Laser World are provided:
Laser World
Income Statement
For the year-ended December 31, 2018
Sales revenue
$2,200,000
Cost of goods sold
1,500,000
Gross profit
700,000
Expenses:
Operating expenses
350,000
Depreciation expense
70,000
Loss on sale of land
5,000
Interest expense
25,000
Income tax expense
60,000
Total expenses
510,000
Net income
$190,000
Laser World
Balance Sheet
December 31
Assets
2018
2017
Current assets:
Cash
$120,000
$112,000
Accounts receivable
90,000
70,000
Inventory
120,000
100,000
Prepaid rent
10,000
10,000
Long-term assets:
Land
260,000
200,000
Equipment
350,000
210,000
Accumulated depreciation
(70,000)
(42,000)
Total assets
$880,000
$660,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable
$55,000
$75,000
Interest payable
8,000
7,000
Income tax payable
15,000
12,000
Long-term liabilities:
Notes payable
400,000
300,000
Stockholders’ equity:
Common stock
200,000
200,000
Retained earnings
202,000
66,000
Total liabilities and equity
$880,000
$660,000
Earnings per share for the year ended December 31, 2018, is $1.90. The closing stock
price on December 31, 2018, is $30.40.
Calculate the following profitability ratios for 2018:
1. Gross profit ratio
4. Asset turnover
2. Return on assets
5. Return on equity
3. Profit margin
6. Price-earnings ratio
($880,000 + $660,000)/2
($880,000 + $660,000)/2
($402,000 + $266,000)/2
163.
Barry’s BBQ had sales revenue for the year of $200 million and net income of $20 million.
Total assets were $70 million at the beginning of the year, and $80 million at the end of
the year. Calculate Barry’s return on assets, profit margin, and asset turnover ratios.
164.
Paul Pierce Enterprises reports net income of $800,000, average total assets of
$2,400,000, and average total liabilities of $400,000. Calculate the return on assets and
return on equity ratios.
165.
Phillip’s Fun Center has several playgrounds areas, go-karts, miniature golf, bumper boats,
paintball, and laser tag. Determine whether the company should report each of the
following items as discontinued operations, other revenues, or other expenses:
1. The company sells an outdoor playground at a gain of $5,000.
2. The company sold its old go-karts at a loss of $25,000 and replaced them with all new
go-karts.
3. The company sold its laser tag center at a loss of $10,000 to focus on the other more
profitable segments. Laser tag is considered to be a separate business segment.
4. The company restructured its business at a cost of $75,000, replacing some employee
positions with automated equipment.
166.
Classify each of the following accounting practices as conservative or aggressive:
1. Increase the allowance for uncollectible accounts.
2. When costs are rising, change from FIFO to LIFO.
3. Increase the estimated useful life of equipment.
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167.
Classify each of the following accounting practices as conservative or aggressive:
1. Choosing a shorter life for calculating depreciation.
2. The write-down of inventory.
3. Decrease the allowance for uncollectible accounts.
4. Recording revenues sooner.
168.
The Sports Warehouse operates in two distinct segments; equipment and apparel. The
income statements for each operating segment are presented below.
The Sports Warehouse
Income Statements
For the Year Ended December 31, 2018
Equipment
Apparel
Amount
%
Amount
%
Sales
$1,700,000
$2,850,000
Cost of goods
sold
1,100,000
1,400,000
Gross profit
600,000
1,450,000
Operating
expenses
250,000
500,000
Operating
income
350,000
950,000
Other income
(expense)
25,000
(60,000)
Income before
tax
375,000
890,000
Income tax
expense
90,000
280,000
Net income
$285,000
$610,000