Chapter Thirteen
Challenge Exercise 1
Financial information for Nealon Inc. is presented below.
December 31, 2014 December 31, 2013
Current assets $140,000 $110,000
Challenge Exercise 1 – Solution
(a)
NEALON INC.
Condensed Balance Sheets
December 31
Increase or (Decrease)
2014
2013
Amount
Percentage
Assets
Total assets
Current liabilities
Long-term liabilities
Total liabilities
165,000
(26.7%)
(65.0%)
Current assets
Plant assets (net)
$140,000
440,000
$110,000
360,000
($30,000
( 80,000
(27.3%)
(22.2%)
Challenge Exercise 2
Operating data for Poll Corporation are presented below.
2014 2013
Net sales $900,000 $700,000
Cost of goods sold 570,000 450,000
Selling expenses 140,000 90,000
Administrative expenses 80,000 60,000
Income tax expense 33,000 30,000
Net income 77,000 70,000
Instructions:
(a) Prepare a schedule showing a vertical analysis for 2014 and 2013.
(b) What is the primary use of vertical analysis?
(c) What does the schedule from part (a) tell you about Poll?
Challenge Exercise 2 – Solution
(a)
POLL CORPORATION
Condensed Income Statements
For the Years Ended December 31
2014
2013
Amount
Percent
Amount
Percent
$900,000
570,000
100.0%
63.3%
$700,000
450,000
100.0%
64.3%
Challenge Exercise 3
Robin Incorporated has the following potential transactions involving current assets and current liabilities.
1. Accounts receivable of $20,000 are collected.
2. Equipment is purchased for $37,000 cash.
3. Equipment is purchased by signing a 1-year, $37,000 note.
4. Paid $6,000 for a 3-year insurance policy.
5. Paid $16,000 of accounts payable.
6. Cash dividends of $7,000 are declared.
7. Borrowed $40,000 by signing a short-term note payable.
8. Paid a $50,000 short-term note payable.
As of the beginning of the month, current assets were $175,000, and current liabilities were $120,000. Current
assets included $45,000 of inventory and $5,000 of prepaid expenses.
Instructions:
(a) Compute the current ratio and acid-test ratio as of the beginning of the month.
(b) Compute the current ratio and acid-test ratio after each transaction. Treat each transaction independently
(assume each occurs on the first day of the month, and no other transactions have affected the beginning–of–
month balances.
Challenge Exercise 3 – Solution
(a) Current ratio as of beginning of month = 1.46 ($175,000 ÷ $120,000).
(b) 1. Current ratio: 1.46 (no change since both assets are current).
Acid-test ratio: 1.04 (no change since both assets are included in the acid-test numerator).
2. Current ratio: 1.15 [($175,000 – $37,000) ÷ $120,000].
Challenge Exercise 3 – Solution(Continued)
6. Current ratio: 1.38 [$175,000 ÷ ($120,000 + $7,000)].
Challenge Exercise 4
Selected comparative statement data for Tyrone Company are presented below. All balance sheet data are as
of December 31.
2014 2013
Net sales $1,160,000 $1,120,000
Cost of goods sold 700,000 640,000
Interest expense 15,000 10,000
Net income 150,000 140,000
Accounts receivable 140,000 120,000
Inventory 100,000 95,000
Total assets 780,000 700,000
Preferred stock (6%) 200,000 200,000
Total stockholders’ equity 630,000 525,000
Instructions:
Compute the following ratios for 2014.
(a) Profit margin.
(b) Asset turnover.
(c) Return on assets.
(d) Return on common stockholders’ equity
Challenge Exercise 4 – Solution
(a) Profit margin $150,000 = 12.9%.
$1,160,000
Challenge Exercise 5
Mulder Corporation’s comparative balance sheets are presented below.
MULDER CORPORATION
Balance Sheets
December 31
2014 2013
Cash $ 10,300 $ 3,900
Accounts receivable 16,200 24,400
Inventory 11,000 8,000
Land 32,000 28,000
Building 74,000 74,000
Accumulated depreciation (15,000) (12,000)
Total $128,500 $126,300
Accounts payable $ 17,370 $ 31,100
Common stock ($5 par) 70,000 70,000
Retained earnings 41,130 25,200
Total $128,500 $126,300
Mulder’s 2014 income statement included net sales of $100,000, cost of goods sold of $60,000, and net
income of $20,000.
Instructions:
Compute the following ratios for 2014.
(a) Current ratio.
(b) Acid-test ratio.
(c) Accounts receivables turnover and average collection period.
(d) Inventory turnover and days in inventory.
(e) Profit margin.
(f) Asset turnover.
(g) Return on assets.
(h) Return on common stockholders’ equity.
(i) Earnings per share.
(j) Payout ratio.
(k) Debt to total assets ratio.
Challenge Exercise 5 – Solution
(a) ($10,300 + $16,200 + $11,000)/$17,370 = 2.16
(b) ($10,300 + $16,200)/$17,370 = 1.53
Challenge Exercise 6
For its fiscal year ending October 31, 2014, Antonio Corporation reports the following partial data.
Income before income taxes $600,000
Income tax expense (40% X $480,000) 192,000
Income from continuing operations 408,000
Gain from discontinued operations 100,000
Extraordinary loss from flood (220,000)
Net income $288,000
The flood loss is considered an extraordinary item. The income tax rate is 40% on all items.
Instructions:
(a) Prepare a correct income statement, beginning with income before income taxes.
(b) Explain in memo form why the income statement data are misleading.
Challenge Exercise 6 – Solution
(a) ANTONIO CORPORATION
Partial Income Statement
For the Year Ended October 31, 2014
Income before income taxes ………………………………………………………………………. $600,000
Income tax expense ($600,000 X 40%) ……………………………………………………….. 240,000
(b) To: Chief Accountant
From: Your name, Independent Auditor
After reviewing your income statement for the year ended 10/31/14, we believe it is misleading for the
following reasons: