22
Analyzing Financial
Statements
ANSWERS TO DISCUSSION QUESTIONS AND
CRITICAL THINKING/ETHICAL CASE
1. Investor’s needs: profitability, dividends, financing, etc.
Creditor’s needs: can company pay debts on time?
Management’s needs: are we operating efficiently?
3. In vertical analysis, each line item is analyzed as a percent of a certain base
total, such as total assets.
5. The base year allows each item to be stated as a percentage of the amount
of the base year. The base year is the comparison point.
7. A. Liquidity: ability to meet short-term obligations.
8. Merchandise Inventory and Prepaid Expenses are not included in the quick
ratio. Both assets are not easily converted into cash.
10. Disagree. Just the opposite.
13. The question in this case is whether Loon Company is holding too much
cash at the risk of alienating customers. The company’s goal is to serve the
SOLUTIONS TO CONCEPT CHECKS
1.
Amount
Percent
Increase/Decrease
2.
c.
3.
Net Sales
100.00%
Cost of Goods Sold
35.00%
Gross Profit
Operating Expenses
25.00%
Net Income
4.
2022
2021
2020
2019
Sales
138%
Net Income
5.
a.
Current assets
/ Current liabilities
= Current ratio
$51,300
/ $19,000
= 2.7
Inventory
liabilities
ratio
– $14,000
– $8,800)
/ $19,000
= 1.5
c.
Net sales
/ Total assets
= Asset turnover
$240,000
d.
Gross profit
/ Net sales
= Gross profit rate
SOLUTIONS TO SET A EXERCISES
22A–1. ALVIN COMPANY
COMPARATIVE INCOME STATEMENT
FOR THE YEARS ENDED DEC. 31 2020 AND 2019
AMOUNT OF
PERCENT OF
INCREASE OR
INCREASE OR
DECEMBER 31
DECREASE DURING
DECREASE DURING
2020
2019
2020
2020
Net Sales
$110
0
0
0
00
$60
0
0
0
00
$50
0
0
0
00
8
3
33
Cost of Goods Sold
38
0
0
0
00
19
0
0
0
00
19
0
0
0
00
1
0
0
00
Operating Expenses
7
0
0
00
12
0
0
0
00
7
0
0
00
4
7
50
Less Interest Expense
7
0
0
00
0
0
0
00
7
0
0
00
1
7
50
22A–2. TONY CO.
COMMON SIZE COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2020 AND 2019
2020
2019
Net Sales
1
0
0
00%
1
0
0
00%
Gross Profit from Sales
2
8
1
8
22A–3. HOWARD COMPANY
COMMON SIZE COMPARATIVE BALANCE SHEET
DECEMBER 31, 2020 AND 2019
2020
2019
Current Assets
1
7
00%
1
8
0
Plant and Equipment
8
3
0
8
2
0
0
Common Stock
4
2
0
5
5
0
EXERCISES (CONTINUED)
22A–4.
2022
2021
2020
2019
Gross Profit
Net Income
22A-5.
a.
Net sales
/ Total assets
= Asset turnover
SOLUTIONS TO SET B EXERCISES
22B–1. ABBIE COMPANY
COMPARATIVE INCOME STATEMENT
FOR THE YEARS ENDED DEC. 31 2020 AND 2019
AMOUNT OF
PERCENT OF
INCREASE OR
INCREASE OR
DECEMBER 31
DECREASE
DECREASE DURING
2020
2019
DURING 2020
2020
Net Sales
$70
0
0
0
00
$45
0
0
0
00
$25
0
0
0
00
5
5
56%
Cost of Goods Sold
36
0
0
0
00
20
0
0
0
00
16
0
0
0
00
8
0
00
Operating Expenses
9
11
6
0
0
0
5
4
31
Operating Income
16
1
0
0
00
13
4
0
0
00
7
0
0
00
2
0
Less Interest Expense
7
0
0
00
9
0
0
00
8
0
0
00
2
0
51
22B–2. TOM CO.
COMMON SIZE COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2020 AND 2019
2020
2019
Net Sales
1
0
0
00%
1
0
0
00%
Cost of Goods Sold
7
2
00
7
7
00
Gross Profit from Sales
2
8
2
3
Operating Expenses
9
8
00
Net Income
1
9
1
5
22B-3. HOLT COMPANY
COMMON SIZE COMPARATIVE BALANCE SHEET
DECEMBER 31, 2020 AND 2019
2020
2019
Current Assets
2
1
0%
1
5
0%
Plant and Equipment
7
9
0
8
5
0
Current Liabilities
6
1
8
Common Stock
4
4
0
4
7
0
Retained Earnings
1
1
2
Total Liabilities and Stockholders’ Equity
0
0
0
EXERCISES (CONTINUED)
22B–4.
2022
2021
2020
2019
Sales
Gross Profit
Net Income
22B-5.
a.
Net sales
/ Total assets
= Asset turnover
b.
SOLUTIONS TO SET A PROBLEMS
PROBLEM 22A-1
DEAN CORPORATION
COMPARATIVE BALANCE SHEET
DECEMBER 31, 2019 AND 2020
(a)
Assets
2020
2019
Amount of
Increase or
Decrease
During
2020
Percent of
Increase
or
Decrease
During
2020
Current Assets
Cash
$3,800
$3,500
$300
8.6%
Merchandise Inventory
52,000
19,000
33,000
Prepaid Expenses
28.5%
Total Current Assets
$85,380
$40,030
Plant and Equipment
Office Equipment, Net
12.7%
Total Assets
39.6%
Accounts Receivable, Net
28,000
16,300
11,700
71.8%
Liabilities
Current Liabilities
Notes Payable
$21,000
$24,000
-$3,000
-12.5%
Total Current Liabilities
$41,700
Long Term Liabilities
Mortgage Payable
$51,500
$38,500
33.8%
Total Liabilities
$93,200
Stockholders’ Equity
Common Stock, $1 par
$51,000
$25,000
Retained Earnings
Total Stockholders’ Equity
$64,030
81.4%
Total Liabilities and Stockholders’ Equity
Accounts Payable
20,700
23,500
–2,800
-11.9%
PROBLEM 22A-1 (CONCLUDED)
DEAN CORPORATION
BALANCE SHEET
AS OF DECEMBER 31, 2020
(b)
2020
Percent
Assets
Current Assets:
Cash
$3
8
0
0
00
1
8
Accounts Receivable, Net
28
0
0
0
00
1
3
4
Merchandise Inventory
52
0
0
0
00
2
4
8
Prepaid Expenses
5
8
0
00
0
8
3
8
0
00
4
0
8
Plant and Equipment:
Office Equipment, Net
$124
0
0
0
00
5
9
2
Total Assets
$209
3
8
0
00
1
0
0
0
Liabilities
Current Liabilities
Notes Payable
0
0
0
00
1
0
0
Accounts Payable
20
7
0
0
00
9
9
7
0
0
00
1
9
9
Mortgage Payable
5
0
0
00
2
4
6
2
0
0
00
4
4
5
Common Stock, $1 Par
0
0
0
00
2
4
4
Retained Earnings
65
1
8
0
00
3
1
1
$116
1
8
0
00
5
5
5
Total Liabilities and Stockholders’ Equity
$209
3
8
0
00
1
0
0
0
PROBLEM 22A-2
Part (a)
WAYDA COMPANY
COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2020 AND 2019
Year Ended
December
31, 2020
Year
Ended
December
31, 2019
Amount of
Increase or
Decrease
During 2020
Percent
of Increase
or
Decrease
During
2020
Net Credit Sales
$290,000
$310,000
($20,000)
-6.5%
Cost of Sales
Gross Profit from Sales
$115,000
$146,000
($31,000)
Operating Expenses
Selling
($28,000)
Administrative
Total Operating Expenses
Operating Income
Less Interest Expense
6,800
Income Before Taxes
Income Taxes
Net Income
PROBLEM 22A-2 (CONTINUED)
(b)
WAYDA COMPANY
INCOME STATEMENT
FOR YEAR ENDED DECEMBER 31, 2020
2020
Percent
Net Sales
$290
0
0
0
00
1
0
0
0
Cost of Goods Sold
175
0
0
0
00
6
0
3
Gross Profit from Sales
0
0
0
00
3
9
7
Operating Expenses:
0
0
0
00
6
9
0
0
0
00
5
9
0
0
0
00
1
2
8
Operating Income
0
0
0
00
2
6
9
0
0
0
00
1
7
Income before Taxes
0
0
0
00
2
5
2
Income Taxes
2
0
0
00
1
0
1
Net Income
8
0
0
00
1
5
1
PROBLEM 22A-2 (CONCLUDED)
(c)
WAYDA COMPANY
COMMON-SIZE COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2020 AND 2019
2020
2019
Net Sales
1
0
0
0
1
0
0
0
Cost of Goods Sold
6
0
3
5
2
9
Gross Profit from Sales
3
9
7
4
7
1
Operating Expenses:
6
9
1
5
5
5
9
1
0
6
1
2
8
2
6
1
Operating Income
2
6
9
2
1
0
1
7
2
2
Income before Taxes
2
5
2
1
8
8
Income Taxes
1
0
1
7
5
Net Income
1
5
1
1
1
3
PROBLEM 22A-3
a.
Current assets
/ Current liabilities
= Current ratio
$128,400
/ $48,800
= 2.63
b.
(Current assets
– Merchandise
Inventory
– Prepaid expenses)
/ Current
liabilities
= Acid Test
ratio
$440,000
/ $40,000
= 11.0
d.
/ $61,800
= 3.74
f.
Net sales
/ Total assets
= Asset turnover
$440,000
/ $196,000
= 2.24
g.
Total liabilities
/ Total assets
= Debt to total
/ $110,600
= 8.17
/ $440,000
k.
Net income before
/ Net sales
= Return on sales
l.
/ $196,000
Net income before
taxes and interest
/ Total assets
= Return on total
assets
PROBLEM 22A-4
(a)
Current assets
/ Current liabilities
= Current ratio
2018
$3,200
/ $1,200
= 2.67
2019
$2,200
/ $1,000
= 2.20
2020
$2,300
/ $1,300
(Current assets – Merchandise
inventory – Prepaid expenses)
/ Current liabilities
= Acid Test ratio
2018
($3,200 – $580 – $0)
/ $1,200
= 2.18
2019
/ $1,000
2020
/ $1,300
VALERIUS CORPORATION
COMMON SIZE COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
(b)
2018
2019
2020
Net Sales
1
0
0
0%
1
0
0
0%
1
0
0
0%
Cost of Goods Sold
4
4
4
3
9
2
7
6
0
Gross Profit from Sales
5
5
6
6
0
8
2
4
0
Operating Expenses:
Selling
7
8
3
0
1
2
0
General and Administrative
7
8
2
0
1
0
0
Total Operating Expenses
1
5
6
5
0
2
2
0
Operating Income before Taxes
4
0
0
5
5
8
2
0
Income Taxes
1
6
4
1
2
Net Income
3
8
5
5
8%
PROBLEM 22A-4 (CONCLUDED)
VALERIUS CORPORATION
BALANCE SHEET
TREND ANALYSIS
FOR THE YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
(c)
2020
2019
2018
Assets
Current Assets
7
2
6
9
1
0
0
Plant and Equipment
9
0
7
9
1
0
0
Total Assets
8
5
7
6
1
0
0
Liabilities and Stockholders’ Equity
Current Liabilities
1
0
8
8
3
1
0
0
Common Stock
1
0
7
9
8
1
0
0
Retained Earnings
5
4
4
8
1
0
0
Total Liabilities and Stockholders’ Equity
8
5
7
6
1
0
0
SOLUTIONS TO SET B PROBLEMS
PROBLEM 22B-1
SALMON
COMPARATIVE BALANCE SHEET
DECEMBER 31, 2020 AND DECEMBER 31, 2019
(a)
Assets
2020
2019
Amount of
Increase or
Decrease
During
2020
Percent of
Increase
or
Decrease
During
2020
Current Assets
Cash
$4,300
$3,400
$900
26.5%
Merchandise Inventory
50,000
12,000
38,000
Prepaid Expenses
25.8%
Total Current Assets
$85,860
$32,540
Plant and Equipment
Office Equipment, Net
$7,000
Total Assets
41.7%
Accounts Receivable, Net
30,000
15,900
14,100
88.7%
Liabilities
Current Liabilities
Notes Payable
$19,900
$23,000
-$3,100
-13.5%
Accounts Payable
21,100
23,600
-10.6%
Total Current Liabilities
$41,000
$46,600
-$5,600
-12.0%
Long Term Liabilities
Mortgage Payable
$49,000
$40,500
$8,500
21.0%
Total Liabilities
$90,000
$87,100
$2,900
Stockholders’ Equity
Common Stock, $1 par
$47,500
$27,000
75.9%
Retained Earnings
67,360
30,440
36,920
Total Stockholders’ Equity
$57,440
Total Liabilities and Stockholders’ Equity
41.7%
PROBLEM 22B-1 (CONCLUDED)
SALMON CORPORATION
BALANCE SHEET
AS OF DECEMBER 31, 2020
(b)
2020
Percent
Assets
Current Assets:
Cash
$4
3
0
0
00
2
1
Accounts Receivable, Net
30
0
0
0
00
1
4
6
Merchandise Inventory
50
0
0
0
00
2
4
4
8
6
0
00
4
1
9
Plant and Equipment:
Office Equipment, Net
$119
0
0
0
00
5
8
1
Liabilities
Current Liabilities
Notes Payable
$19
9
0
0
00
9
7
Accounts Payable
21
1
0
0
00
1
0
3
Mortgage Payable
0
0
0
00
2
3
9
Common Stock, $1 Par
47
5
0
0
00
2
3
2
Retained Earnings
67
3
6
0
00
3
2
9
PROBLEM 22B-2
MILLER COMPANY
COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2020 AND 2019
(a)
Year Ended
December
Year
Ended
December
Amount of
Increase or
Decrease
Percent
of Increase
or
Decrease
During
PROBLEM 22B-2 (CONTINUED)
(b) MILLER COMPANY
INCOME STATEMENT
FOR YEAR ENDED DECEMBER 31, 2020
2020
Percent
Net Sales
$260
0
0
0
00
1
0
0
0
Cost of Goods Sold
185
0
0
0
00
7
1
2
Gross Profit from Sales
75
0
0
0
00
2
8
8
Operating Expenses:
0
0
0
00
7
7
0
0
0
00
9
2
44
0
0
0
00
6
9
Operating Income
31
0
0
0
00
1
1
9
0
0
0
00
2
3
Income before Taxes
25
0
0
0
00
9
6
Income Taxes
0
0
0
00
3
8
Net Income
0
0
0
00
5
8
PROBLEM 22B-2 (CONCLUDED)
MILLER COMPANY
COMMON SIZE COMPARATIVE INCOME STATEMENT
YEARS ENDED DECEMBER 31, 2020 AND 2019
(c)
2020
2019
Net Sales
1
0
0
0%
1
0
0
0%
Cost of Goods Sold
7
1
2
4
9
0
Gross Profit from Sales
2
8
8
5
1
0
Operating Expenses:
7
2
5
Total Operating Expenses
1
9
6
3
Operating Income
1
1
9
4
7
2
3
3
9
Income before Taxes
9
6
1
0
8
Income Taxes
3
8
4
3
Net Income
5
8
6
5
PROBLEM 22B-3
a.
Current assets
/ Current liabilities
= Current ratio
$124,400
/ $48,800
= 2.55
b.
(Current assets
– Merchandise
Inventory
– Prepaid
expenses)
/ Current
liabilities
= Acid
Test ratio
($124,400
– $58,200
– $8,600)
/ $48,800
= 1.18
turnover
$420,000
/ $42,000
d.
receivable turnover
= Average
e.
Cost of goods
sold
/ Average inventory
= Inventory
turnover
$236,000
/ $61,700
= 3.82
f.
Net sales
/ Total assets
= Asset turnover
$420,000
/ $189,000
= 2.22
g.
Total liabilities
/ Total assets
= Debt to total
assets
/ $189,000
equity
/ $103,600
$40,000
Gross profit
/ $420,000
k.
Net income before
taxes
/ Net sales
= Return on sales
$31,800
/ $420,000
= 7.57%
equity
PROBLEM 22B-4
(a)
Current assets
/ Current liabilities
= Current ratio
2018
$3,000
/ $1,100
= 2.73
2019
$1,600
= 2.29
2020
$1,900
= 2.11
VARGO CORPORATION
COMMON SIZE COMPARATIVE INCOME STATEMENT
FOR YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
(b)
2020
2019
2018
Net Sales
1
0
0
0%
1
0
0
0%
1
0
0
0%
Cost of Goods Sold
3
0
0
4
9
0
4
0
0
Gross Profit from Sales
7
0
0
5
1
0
6
0
0
Operating Expenses:
2
5
6
3
4
0
7
5
2
5
4
0
1
0
0
8
8
8
0
Operating Income before Taxes
6
0
0
4
2
3
5
2
0
Income Taxes
1
2
1
3
1
0
Net Income
5
8
4
1
0%
5
1
0
PROBLEM 22B-4 (CONCLUDED) VARGO CORPORATION
BALANCE SHEET
TREND ANALYSIS
FOR YEARS ENDED DECEMBER 31, 2020, 2019, AND 2018
(c)
2020
2019
2018
Assets
Current Assets
6
3
5
3
1
0
0
Plant and Equipment
1
5
2
1
0
8
1
0
0
Total Assets
1
2
8
9
3
1
0
0
Common Stock
1
1
3
9
8
1
0
0
1
6
7
9
2
1
0
0
Total Liabilities and Stockholders’ Equity
1
2
8
9
3
1
0
0
FINANCIAL REPORT PROBLEM SOLUTION—2016 Amazon’s Annual Report