Problem 13-1A (concluded)
Part 2
2. a. Yes.
Sales grew steadily for the entire period of 2013 to 2019. (However,
beginning in 2017, cost of goods sold and operating expenses
increased dramatically relative to sales, resulting in a significant
reduction in net income.)
Problem 13-2A (60 minutes)
Part 1
Current ratio: December 31, 2019: $52,390 / $22,800 = 2.3 to 1
December 31, 2018: $37,924 / $19,960 = 1.9 to 1
December 31, 2017: $51,748 / $20,300 = 2.5 to 1
Part 2
KORBIN COMPANY
Common-Size Comparative Income Statements
For Years Ended December 31
2019
2018
2017
Sales ……………………………………………………
100.00%
100.00%
100.00%
Cost of goods sold …………………………..
51.08
62.50
55.36
Gross profit …………………………………………
48.92
37.50
44.64
Selling expenses ………………………………….
18.54
13.80
18.27
Administrative expenses ……………………..
9.13
8.80
8.20
Total expenses …………………………………….
27.67
22.60
26.47
Income before taxes …………………………..
21.25
14.90
18.17
7.35
3.05
5.64
Problem 13-2A (Concluded)
Part 3
KORBIN COMPANY
Balance Sheet Data in Trend Percents
At December 31
2019
2018
2017
Assets
Current assets …………………………….
101.24%
73.29%
100.00%
Long-term investments ……………….
0.00
12.66
100.00
Plant assets, net………………………….
166.67
160.00
100.00
Total assets ………………………………..
131.71
116.19
100.00
Current liabilities…………………………
112.32%
98.33%
100.00%
Common stock …………………………...
120.00
120.00
100.00
150.00
150.00
100.00
Retained earnings ……………………….
165.28
113.83
100.00
Part 4
a. No.
Cost of goods sold as a percent of sales was 51.08% in 2019. This
compares to 62.50% in the prior year.
b. Yes.
Net income as a percent of sales was 13.90% in the recent year. This
compares to 11.85% in the prior year.
Problem 13-3A (60 minutes)
Trans-
action
Current
Assets
Quick
Assets
Current
Liabilities
Current
Ratio
Acid-Test
Ratio
Working
Capital
Beginning*
$700,000
$308,000
$280,000
2.50
1.10
$420,000
May 2
+ 50,000
_______
+ 50,000
____
____
_______
Bal.
750,000
308,000
330,000
2.27
0.93
420,000
May 8
+110,000
+110,000
– 55,000
_______
_______
____
____
_______
Bal.
805,000
418,000
330,000
2.44
1.27
475,000
May 10
+ 20,000
+ 20,000
– 20,000
– 20,000
_______
____
____
_______
Bal.
805,000
418,000
330,000
2.44
1.27
475,000
May 15
– 22,000
– 22,000
– 22,000
____
____
_______
Bal.
783,000
396,000
308,000
2.54
1.29
475,000
May 17
+0
+0
_______
____
____
_______
Bal.
783,000
396,000
308,000
2.54
1.29
475,000
May 22
_______
_______
+ 50,000
____
____
_______
Bal.
783,000
396,000
358,000
2.19
1.11
425,000
May 26
– 50,000
– 50,000
– 50,000
____
____
_______
Bal.
733,000
346,000
308,000
2.38
1.12
425,000
May 27
+100,000
+100,000
+100,000
____
____
_______
Bal.
833,000
446,000
408,000
2.04
1.09
425,000
May 28
+ 80,000
____
____
_______
Bal.
913,000
526,000
408,000
2.24
1.29
505,000
Bal.
$733,000
$408,000
Problem 13-4A (50 minutes)
1. Current ratio
2. Acid-test ratio
= 2.2 to 1
3. Days’ sales uncollected
4. Inventory turnover
5. Days’ sales in inventory
x 365 = 39.5 days
6. Debt–to-equity ratio
($17,500 + $3,200 + $3,300 + $63,400) / ($90,000 + $62,800) = 0.57 to 1
7. Times interest earned
($151,350 – $98,600) / $4,100 = 12.9 times
$10,000 + $8,400 + $33,700
$17,500 + $3,200 + $3,300
$32,150
$297,250
Problem 13-4A (Concluded)
8. Profit margin ratio
= 6.5%
9. Total asset turnover
10. Return on total assets
11. Return on common stockholders’ equity
= 21.0%
$29,052
($152,800 + $123,748)/2
$29,052
$448,600
Problem 13-5A (60 minutes)
Part 1
Barco Company
Kyan Company
a. Current ratio
= 2.5 to 1
= 2.6 to 1
* $19,500 + $46,500 + $84,440 + $5,000 = $155,440
**$34,000 + $64,600 + $132,500 + $6,950 = $238,050
b. Acid-test ratio
= 1.1 to 1
= 1.1 to 1
= 8.4 times = 5.3 times
e. Days’ sales in inventory
x 365 = 52.7 days x 365 = 76.5 days
f. Days’ sales uncollected
x 365 = 22.0 days x 365 = 26.8 days
Short-term credit risk analysis: Barco and Kyan have essentially equal
current ratios and equal acid-test ratios. However, Barco both turns its
merchandise and collects its accounts receivable more rapidly than does
Kyan. On this basis, Barco probably is the better short-term credit risk.
($84,440 + $55,600)/2
$84,440
$585,100
$46,500
$770,000
$155,440*
$61,340
($132,500 + $107,400)/2
$132,500
$632,500
$64,600
$880,200
$238,050**
$93,300
Problem 13–5A (Concluded)
Part 2
Barco Company
Kyan Company
a. Profit margin ratio
= 21.1% = 23.9%
d. Return on common stockholders’ equity
= 55.8% = 65.0%
e. Price-earnings ratio
= 16.6 = 14.7
f. Dividend yield
= 5.1% = 5.2%
$162,200
$770,000
$162,200
($303,300 + $278,300)/2
$75
$4.51
$3.81
$75
$210,400
$880,200
$210,400
($348,150 + $299,600)/2
$75
$5.11
$3.93
$75
Problem 13–6AA (60 minutes)
Part 1
Effect of income taxes (debits or losses in parentheses)
Pretax
30% Tax
Effect
After–Tax
i. Loss from operating a discontinued segment …………..
(18,250)
(5,475)
(12,775)
(16,000)
(4,800)
Part 2 Income from continuing operations (and its components)
k.
Net sales ………………………………………………………...
$ 998,000
a.
Interest revenue ………………………………………………
14,000
g.
j.
Gain from settling lawsuit ………………………………..
Gain on insurance recovery of tornado damage
44,000
20,000
Total revenues and gains ………………………………..
1,076,000
q.
Cost of goods sold ………………………………………….
$482,500
b.
Depreciation expense—Equipment ………………….
34,000
l.
Depreciation expense—Buildings ……………………
52,000
e.
Other operating expenses ……………………………….
c.
25,850
o.
Total expenses ………………………………………………..
p.
Income tax expense (30%) ……………………………….
Problem 13–6AA (Concluded)
Part 3 Income from discontinued segment
i.
Loss from operating a discontinued
segment (after-tax) …………………………..…………………………..
$ (12,775)
assets (after-tax) ……………………………………………………….
Part 4 Net income
Income from continuing operations after taxes …………………………..
$246,400
Income from discontinued segment ………………………………………………….
11,025
Net income ……………………………………………………………………………………
$257,425
PROBLEM SET B
Problem 13-1B (120 minutes)
Part 1
TRIPOLY COMPANY
Income Statement Trends
For Years Ended December 31
2019
2018
2017
2016
2015
2014
2013
Sales ……………………………….
65.1%
70.9%
73.3%
79.1%
86.0%
89.5%
100.0%
Cost of goods sold …………..
72.6
76.3
77.4
82.6
89.5
92.1
100.0
Gross profit ……………………..
59.2
66.7
70.0
76.3
83.3
87.5
100.0
Operating expenses …………
56.0
69.3
74.7
84.0
93.3
96.0
100.0
TRIPOLY COMPANY
Balance Sheet Trends
At December 31
2019
2018
2017
2016
2015
2014
2013
Cash ………………………………
64.7%
67.6%
76.5%
79.4%
88.2%
91.2%
100.0%
Accounts recble., net ……….
81.3
85.0
87.5
90.0
93.8
96.3
100.0
Merchandise inventory ……..
79.8
82.7
85.6
86.5
89.4
91.3
100.0
Other current assets …………
85.0
85.0
90.0
95.0
95.0
100.0
100.0
Long-term investments …….
32.7
27.3
23.6
100.0
100.0
100.0
100.0
Plant assets, net ………………
112.3
113.2
114.5
90.7
92.5
94.3
100.0
Total assets ……………………..
88.5
89.6
91.5
90.2
92.7
94.6
100.0
Current liabilities ……………..
52.9
55.7
66.4
67.9
75.0
92.9
100.0
Long-term liabilities ………….
35.4
46.2
54.6
56.9
74.6
82.3
100.0
Common stock …………………
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Other paid-in capital …………
100.0
100.0
100.0
100.0
100.0
100.0
100.0
Retained earnings…………….
166.7
157.8
145.9
137.0
122.2
103.7
100.0
Problem 13-1B (Concluded)
Part 2
Analysis and Interpretation
• The statements and the trend percent data show that sales declined
every year. However, cost of goods sold did not fall as rapidly as sales.
As a result, gross profit fell more rapidly than sales.
• Except for the most recent period, operating expenses fell less rapidly
than gross profit, so the final result was that net income fell to 60.6% of
the base year.
Problem 13-2B (60 minutes)
Part 1
Current ratio: December 31, 2019: $54,860 / $22,370 = 2.5 to 1
December 31, 2018: $32,660 / $19,180 = 1.7 to 1
December 31, 2017: $36,300 / $16,500 = 2.2 to 1
Part 2
BLUEGRASS CORPORATION
Common-Size Comparative Income Statements
For Years Ended December 31
2019
2018
2017
Sales ……………………………………………………
100.00%
100.00%
100.00%
Cost of goods sold …………………………..
54.77
51.91
46.04
Gross profit …………………………………………
45.23
48.09
53.96
Selling expenses ………………………………….
11.41
11.92
12.52
Administrative expenses ……………………..
8.43
8.80
10.92
Total expenses …………………………………….
19.84
20.72
23.44
Income before taxes …………………………..
25.39
27.36
30.53
3.04
3.56
3.69
Problem 13-2B (Concluded)
Part 3
BLUEGRASS CORPORATION
Balance Sheet Data in Trend Percents
At December 31
2019
2018
2017
Assets
Current assets ……………………………………..
151.13%
89.97%
100.00%
Long-term investments ………………………..
0.00
16.04
100.00
Plant assets …………………………………………
142.80
143.87
100.00
Total assets …………………………………………
133.18
117.57
100.00
125.68
125.68
100.00
122.57
122.57
100.00
139.03
100.00
133.18
117.57
100.00
Part 4
Significant relations revealed
Bluegrass’s cost of goods sold took a larger percent of sales each year.
Selling and administrative expenses and income taxes took a somewhat
smaller portion each year, but not enough to offset the effect of cost of
goods sold. As a result, income became a smaller percent of sales each
year.
Problem 13-3B (60 minutes)
Trans-
action
Current
Assets
Quick
Assets
Current
Liabilities
Current
Ratio
Acid-Test
Ratio
Working
Capital
Beginning*
$300,000
$168,000
$120,000
2.50
1.40
$180,000
June 1
+120,000
+120,000
– 75,000
_______
________
____
____
_______
Bal.
345,000
288,000
120,000
2.88
2.40
225,000
June 3
+ 88,000
+ 88,000
– 88,000
– 88,000
________
____
____
_______
Bal.
345,000
288,000
120,000
2.88
2.40
June 5
+150,000
________
+150,000
____
____
_______
Bal.
495,000
288,000
270,000
1.83
1.07
225,000
June 7
+100,000
+100,000
+100,000
____
____
_______
Bal.
595,000
388,000
370,000
1.61
1.05
June 10
+120,000
+120,000
_______
____
____
_______
Bal.
715,000
508,000
370,000
1.93
1.37
345,000
June 12
– 275,000
– 275,000
________
____
____
_______
Bal.
440,000
233,000
370,000
1.19
0.63
70,000
June 15
________
________
+ 80,000
____
____
_______
Bal.
0.98
0.52
June 19
________
____
____
_______
Bal.
June 22
– 12,000
– 12,000
____
____
_______
Bal.
0.98
0.50
June 30
– 80,000
– 80,000
____
____
_______
Bal.
$348,000
$141,000
$358,000
0.97
0.39