3.
cause it is a good indicator of a company’s ability to pay its bills and to repay
Current Assets
Owner’s Equity
a.
b.
A user of the classified balance sheet would want to know the current ratio be-
$133,140
Current Ratio
Debt to Equity
Ratio =Total Liabilities
=
P4. Classified Balance Sheet (Concluded)
2. Current Liabilities
*Rounded
5-19
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
4.
5.
6.
7.
8.
must disclose the change, the effect of the change on net income, and why the
the conservatism convention. This method of valuing inventory is less likely to over-
The change in the method of accounting for inventory is a violation of the consis-
determined that the benefits of the new reporting system outweigh the costs.
of it is important to users of the financial statements.
This is an acceptable application of the cost-benefit convention if management has
P5. Accounting Conventions
tency convention. If a company changes its method of accounting for inventory, it
Delays in issuing financial statements is a violation of the enhancing qualitative
Use of uncommon technical terms in the financial statements is a violation of the
enhancing qualitative characteristic of understandability.
characteristic of comparability.
Alternate Problems
Valuing inventory at lower of cost or market is a generally accepted application of
Producing financial statements that are not helpful in assessing future prospects is
ments so that the reader will be aware of the inconsistency. The change in the
newly adopted accounting principle is preferable in the notes to its financial state-
5-20
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
$ 31,000
33,000
$114,600
$394,960
Short-term investments
P6. Classified Balance Sheet
Assets
Matt’s Hardware Company
Balance Sheet
April 30, 2014
Current assets:
Cash
Accounts payable
Owner’s Equity
Liabilities
M. Shah, capital
Current liabilities:
5-21
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Current Ratio
a.
b.
P6. Classified Balance Sheet (Concluded)
2. Current Liabilities
=
Current Assets
Total Owner’s Equity
Total Liabilities
Debt to Equity
Ratio =
$506,800
$120,640 =
$200,640
5-22
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1. a.
Working Capital
P7. Liquidity and Profitability Ratios
$366,000 = 2.0
$180,000
Current Ratio =
$366,000
2014:
b.
Current Liabilities
*Rounded
2013
$310,000
Current Assets
Working Capital
2014
Current Assets
*
5-23
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
b.
2014: $4,600,000
2013: $700,000 = 67.3%
$1,040,000
P7. Liquidity and Profitability Ratios (Continued)
Asset Turnover = Net Sales
Average Total Assets
*Rounded
*
5-24
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
e.
2014: $300,000
Average Owner’s Equity
P7. Liquidity and Profitability Ratios (Concluded)
Return on Equity = Net Income
5-25
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
1.
$ 31,000
43,500
$129,600
$337,340
Cash
Short-term investments
Current assets:
P8. Classified Balance Sheet
Owner’s Equity
Rodriguez’s Tools Company
Balance Sheet
April 30, 2014
Assets
C. Rodriguez, capital
Liabilities
Current liabilities:
Accounts payable
5-26
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
3.
ure is very important to liquidity analysis because it is related to debt and its repay-
ment. It is also relevant to profitability analysis because the amount of debt affects
the amount of interest expense and the owner’s return on investment.
$337,340
Current Ratio
Debt to Equity
Ratio
a.
b.
A user of the classified balance sheet would want to know the current ratio because
it is a good indicator of a company’s ability to pay its bills and to repay outstanding
Total Owner’s Equity
=Total Liabilities
P8. Classified Balance Sheet (Concluded)
2. = Current Assets
Current Liabilities
*Rounded
5-27
© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.