364
7.
Acid-Test Ratio
=
Cash Equivalents + Marketable
Securities + Accounts Receivable
Current Liabilities
$64,346 + $99,021
=
2.22
$73,730
Cash Ratio
=
Cash Equivalents + Marketable Securities
Current Liabilities
$64,346
=
0.87
$73,730
Debt:
Debt Ratio
=
Total Liabilities
Total Assets
$172,180
=
46.50%
$370,264
Debt/Equity
=
Total Liabilities
Shareholders’ Equity
$172,180
=
86.92%
$198,084
Times Interest Earned
=
Recurring Earnings, Excluded Interest Expense,
Tax Expense, Equity Earnings,
and Noncontrolling Interest
Interest Expense, Including Capitalized Interest
$43,138 + $4,308
=
$47,446
=
11.01 times per year
$4,308
$4,308
Profitability:
Net Profit Margin
=
Net Income Before
Noncontrolling Interest, Equity
Income and Nonrecurring Items
Net Sales
$23,018
=
3.98%
365
$578,530
2.
Total Asset Turnover
=
Net Sales
Average Total Assets
$578,530
=
$578,530
=
1.74 times per year
($370,264 + $295,433)/2
$332,848.5
Return on Assets
=
Net Income Before Noncontrolling
Interest and Nonrecurring Items
Average Total Assets
$23,018
=
$23,018
=
6.92%
($370,264 + $295,433)/2
$332,848.5
Return on Total Equity
=
Net Income Before Nonrecurring Items –
Dividends on Redeemable Preferred Stock
Average Total Equity
$23,018
=
$23,018
=
12.32%
($198,084 + $175,583)/2
$186,833.5
366
b. Approximate income for 2011 if inventory had been valued at approximate current
cost:
2011 net income as reported
$
23,018
Net decrease in inventory reserve
2011
$
35,300
2010
41,100
(a)
$
(5,800)
(b) Effective tax rate
36.6%
(c) Decrease in taxes (a) x (b)
$
2,123
(d) Net decrease in income
[(a) – (c)]
$5,800 – $2,123
(3,677)
Approximate income for 2011 if inventory had been
valued at approximate current cost
$
19,341
Inventory adjusted:
As disclosed on the balance sheet
$
63,414
Increase in inventory
35,300
$
98,714
Deferred current tax liability:
Increase related to inventory reserve
$35,300 x 36.6% =
12,920
Retained earnings adjusted:
As disclosed on the balance sheet
$
154,084
Increase related to inventory reserve
($35,300 – $12,920)
22,380
$
176,464
Liquidity:
1. Days’ Sales in Inventory
$63,414 + $35,300
=
$98,714
=
72.69 days
$495,651/365
$1,357.95
2. Merchandise Inventory Turnover
$495,651
=
$495,651
=
4.62 times per year
($63,414 + $35,300 + $74,890 + 41,100)/2
$107,352
367
3. Inventory Turnover in Days
$107,352
=
$107,352
=
79.05 days
$495,651/365
$1,357.95
4. Operating Cycle
58.07 days
+
79.05 days
=
137.12 days
5. Working Capital
($227,615 + $35,300)
–
($73,730 + $12,920)*
=
$176,265
*$35,300 x $36.6%
=
$12,920
6. Current Ratio
$262,915
=
3.03
$86,650
7. Acid-Test Ratio
$64,346 + $99,021
=
$163,367
=
1.89
$73,730 + $12,920
$86,650
8. Cash Ratio
$64,346
=
$64,346
=
0.74
$73,730 + $12,920
$86,650
Debt:
1. Debt Ratio
$370,264 – $198,084 + $12,920
=
$185,100
=
45.64%
$370,264 + $35,300
$405,564
2. Debt/Equity
$370,264 – $198,084 + $12,920
=
$185,100
=
83.96%
$198,084 + $22,380
$220,464
368
3. Times Interest Earned
$43,138 + $4,308 – $5,800
=
$41,646
=
9.67 times per year
$4,308
$4,308
Profitability:
1. Net Profit Margin
$23,018 – $3,677
=
$19,341
=
3.34%
$578,530
$578,530
2. Total Asset Turnover
$578,530
=
($370,264 + $295,433 + $35,300 + $41,200)/2
$578,530
=
$578,530
=
1.56 times per year
$742,097/2
$371,049
3. Return on Assets
$23,018 – $3,677
=
($370,264 + $295,433 + $35,300 + $41,200)/2
$19,341
=
5.21%
$371,049
4. Return on Total Equity
$19,341
=
($198,084 + $175,583 + $22,380 + $28,482*)/2
*$41,100 x (1 – 30.7%)
$41,100 x 69.30% = $28,482.30
$19,341
=
9.11%
$212,265
c.
Ratio
Without considering
the LIFO reserve
Considering
the LIFO reserve
Liquidity:
Days’ sales in inventory
Merchandise inventory
turnover
Inventory turnover in days
Operating cycle
Working capital
Current ratio
Acid-test ratio
Cash ratio
Debt:
Debt ratio
Debt/equity
Times interest earned
Profitability:
Net profit margin
Total asset turnover
Return on assets
Return on total equity
46.70 days
7.17 times per year
50.92 days
108.99 days
$153,885
3.09
2.22
.87
46.50%
86.92%
11.01 times per year
3.98%
1.74 times per year
6.92%
12.32%
72.69 days
4.62 times per year
79.05 days
137.12 days
$176,265
3.03
1.89
.74
45.64%
83.96%
9.67 times per year
3.34%
1.56 times per year
5.21%
9.11%
improve was working capital.
Debt ratios were slightly more favorable when considering the LIFO reserve. Most
370
PROBLEM 11-7
1. Decreases retained earnings, increases payables
2. Reduces retained earnings, increases common stock
3. Increases cash, increases retained earnings
4. This creates an arrearage, which would increase the amount for preferred stock in
calculating book value for common
i
5. This merely increases the number of shares. No effect until the stock is sold.
6. Decreases cash, decreases dividends payable; increases current ratio if originally
more than 1:1
d
common stock
i
371
PROBLEM 11-8
a.
Argo Sales Corporation
Balance Sheet
December 31, 2011
Current assets:
Cash $ 20,000 (6)
Marketable securities 80,000 (7)
Accounts receivable 150,000 (5)
Fixed assets:
Land, buildings, and equipment $292,500 (15)
Current liabilities:
Accounts payable $100,000 (17)
Accrued expenses payable 25,000 (18)
(9) Total current liabilities $125,000
Long-term liabilities:
Stockholders’ Equity:
6% Preferred stock, $100 par value,
500 shares authorized, issued
and outstanding (25) $ 50,000 (24)
Common stock, $10 par value,
$22,500 shares authorized,
Argo Sales Corporation
Income Statement
For the Year Ended December 31, 2011
(1) Net sales $1,200,000
Selling expenses $240,000 (4)
Sales
=
Net Income
=
$120,000
=
$1,200,000
Net Profit Rate
0.10
(2) Gross Profit:
(3) Cost Of Goods Sold:
(4) Selling Expenses:
=
=
Accounts Receivable Turnover
373
7) Marketable Securities:
Quick Assets x Percent of Quick Assets in Securities
(8)
Inventory
=
Cost of Goods Sold
=
$720,000
=
$120,000
Inventory Turnover
6
(9)
Current Liabilities
=
Quick Assets
=
$250,000
=
$125,000
2*
2
*From Acid-Test Ratio
(10) Current Assets:
*From Current Ratio
(11) Prepaid Expenses:
Current Assets – (Cash + Securities + Receivables + Inventory) =
(12)
Total Assets
=
Sales
=
$1,200,000
=
$600,000
Asset Turnover
2
(13)
Intangible Assets
=
Total Assets
=
$600,000
=
$30,000
20*
20
*From Ratio Of Total Assets To Intangibles
(14) Fixed Assets (Net):