P11.11.
e.
(continued)
Solution approach:
The journal entries for the sale of inventory would be:
Dr. Cash (included in acid-test numerator) .. ……….. ……….. ……….. 180,000
Cr. Sales .. ……….. ……….. ……….. ……….. ……….. ……….. ……….. 180,000
Dr. Cost of Goods Sold ……… ……….. ……….. ……….. ……….. ……….. 150,000
Cr. Merchandise Inventory (excluded from acid-test numerator) 150,000
Before transaction: After transaction:
$1,350,000 / $900,000 = 1.5 ($1,350,000 + $180,000) / $900,000 = 1.7
Note that the $1,350,000 amount above (both before and after the sale transaction)
Additional point of discussion (not required):
Note also that the current ratio would increase as a result of this sale transaction, but
nearly as significantly. Current assets increase by $180,000 of cash received but also
decrease by $150,000 of merchandise inventory sold. The net increase in current
assets of $30,000 causes the current ratio to increase slightly.
P11.12.
a.
Working capital = current assets – current liabilities = $420,000 – $240,000 = $180,000
Current ratio = current assets / current liabilities = $420,000 / $240,000 = 1.75
Acid-test ratio = Cash (including temporary cash investments) + Accounts receivable
b.
Solution approach:
Record the appropriate journal entry(ies) for each transaction described, taking note of
the effects of the entry(ies) on current assets (CA) and current liabilities (CL). Keep in
mind that certain current assets (i.e., inventory and prepaid expenses) are excluded from
the numerator of the acid-test ratio.
1. Dr. Accounts receivable (CA) …. ……….. ……….. ……….. ……….. 360,000
2. Dr. Cash (CA) ….. ……….. ……….. ……….. ……….. ……….. ……….. 378,000
Cr. Accounts receivable (CA) ……….. ……….. ……….. ……….. 378,000
4. Dr. Cash (CA) ….. ……….. ……….. ……….. ……….. ……….. ……….. 13,500
Cr. Common stock / Additional paid-in capital ……… ……….. 13,500
6. Dr. Retained earnings ….. ……….. ……….. ……….. ……….. ……….. 30,000
Cr. Cash (CA) ……….. ……….. ……….. ……….. ……….. ……….. 30,000
7. Dr. Cash (CA) ….. ……….. ……….. ……….. ……….. ……….. ……….. 46,500
9. Dr. Cash (CA) ….. ……….. ……….. ……….. ……….. ……….. ……….. 15,000
Cr. Notes payable (CL) ………. ……….. ……….. ……….. ……….. 15,000
10. Dr. Notes payable ………. ……….. ……….. ……….. ……….. ……….. 60,000
P11.12.
(continued)
Working Current Acid-Test
Capital Ratio Ratio
1. Credit sales for the year amounted + + +
to $360,000. The cost of goods sold
was $234,000.
3. Purchased inventory on account, $252,000. NE – –
5. Wrote off $10,500 as uncollectible accounts NE NE NE
using the allowance method.
8. Recorded insurance expense for the year, – – NE
9. Borrowed cash on a short-term bank NE – –
loan, $15,000.
P11.13.
a.
ROI = MARGIN x TURNOVER
NET INCOME NET INCOME SALES .
AVERAGE TOTAL ASSETS = SALES x AVERAGE TOTAL ASSETS
2017 ROI = ($300 / $3,300) * [$3,300 / (($2,950 + $3,400) / 2)]
= 9.1% margin * 1.04 turnover = 9.4%
b.
ROE = Net income / Average stockholders’ equity
2017 ROE = $300 / (($1,150 + $1,400) / 2) = 23.5%
P11.13.
(continued)
d.
Earnings per share = Net income / Weighted-average number of shares outstanding
2017 EPS = $300 / 44 = $6.82
2016 EPS = $230 / 42 = $5.48
e.
h.
Average days’ sales = ($3,300 sales / 365 days) = $9.041 million
Price/Earnings ratio = Market price / Earnings per share
14 = $??? / $6.82
$9.041 average day’s sales) = 34.3 days
i.
Debt ratio = Total liabilities / (Total liabilities + Total stockholders’ equity)
12/31/17 Debt ratio = ($500 + $1,500) / $3,400 = 58.8%
P11.13.
(continued)
k.
A young, single professional would probably be more interested in potential growth of
about 1.2 for the three-year period, although collection efforts appear to be adequate.
Without further information about the composition of the current asset and current
than 4.0 each year, which suggests that operating income is supporting the company’s debt
P11.14.
a.
1. Margin = ($807 net earnings / $8,268 net sales) = 9.8%
Turnover = Net sales / Average total assets = $8,268 / (($8,323 + $8,113) / 2)
P11.14.
a.
(continued)
1. Alternative calculations:
Students may have calculated margin and ROI based on “Net earnings attributable
to Campbell Soup Company” rather than “Net earnings,” as follows:
2. ROE = Net earnings / Average total equity
= $807 / (($1,210 + $1,603) / 2) = $807 / $1,406.5 = 57.4%
Alternative calculations:
4. Dividend yield = ($1.248 dividends declared per share / $41.96 market value per
common share) = 3.0%
b.
1. Working capital = ($2,100 current assets – $2,989 current liabilities)
= $(889) million
P11.14.
(continued)
c.
1. Average day’s sales = ($8,268 annual net sales / 365 days) = $22.652 million
Number of days’ sales in accounts receivable = ($670 accounts receivable /
$22.652 average day’s sales) = 29.6 days
(Note: This result may be understated to some extent because it is based on the
$14.712 million
3. Accounts receivable turnover = Net sales / Average accounts receivable =
$8,268 / (($635 + $670) / 2) = $8,268 / $652.5 = 12.7 times
5. Net property, plant, and equipment turnover = Net sales / Average plant assets, net of
depreciation = $8,268 / (($2,260 + $2,318) / 2) = $8,268 / $2,289 = 3.6 times
2. Debt/equity ratio = (Total liabilities / Total stockholders’ equity)
= (($6,510 total liabilities) / $1,603 total equity) = 406.1%
2. Operating income per employee = Earnings before interest and taxes / Number* of
employees for the year = $1,192 million / 19,400 employees = $61,443 per employee
C11.16
a.
ROI = Net income / Average total assets
Coca Cola PepsiCo
= $7,124 / (($90,055 + $92,023) / 2) = $6,558 / (($77,478 + $70,509) /2)
= $7,124 / $91,039 = 7.8% = $6,558 / $73,993.50 = 8.9%
Note: Total assets at the end of the year is equal to ending liabilities plus ending
b.
c.
Yes. PepsiCo uses more financial leverage than does Coca-Cola. The magnification
effect on PepsiCo’s ROE (of 31.3%) relative to its ROI (of 8.9%) is approximately
Debt ratio = Total liabilities / (Total liabilities + Total stockholders’ equity)
Coca Cola PepsiCo
= $61,462 / ($61,462 + $30,561) = $52,961 / ($52,961 + $17,548)
C11.15
Answers will vary based on the annual report of the focus company selected.