Chapter 07 – Long-Term Assets
Requirement 2
Federer Sports Apparel
Balance Sheet
December 31
Year
Increase (Decrease)
Assets
2019
2018
Amount
%
Cash
$ 2,600,000
$ 1,100,000
$1,500,000
136.4
Accounts receivable
1,200,000
1,700,000
(500,000)
(29.4)
Inventory
2,200,000
1,900,000
300,000
Buildings
depreciation
$15,700,000
Accounts payable
$ 2,500,000
700,000
Litigation liability
400,000
200.0
Common stock
Retained earnings
$15,700,000
Exercise 12-5
Requirement 1
Risk Ratios
Calculations
Receivables turnover ratio
$15,200,000
($1,800,000 + $2,100,000) / 2
= 7.8 times
Average collection period
365
7.8
= 46.8 days
Inventory turnover ratio
= 6.5 times
Average days in inventory
365
= 56.2 days
Debt to equity ratio
= 52.4%
Requirement 2
Based on the above ratios, Adrian Express is less risky than the industry average. The
Exercise 12-6
Requirement 1
Profitability Ratios
Calculations
Gross profit ratio
$5,200,000
$15,200,000
= 34.2%
Return on assets
Profit margin
$3,200,000
$15,200,000
Asset turnover
$3,200,000
Requirement 2
Adrian Express is more profitable than the industry average. The gross profit ratio,
Exercise 12-7
Requirement 1
Risk Ratios
Calculations
a. Receivables turnover ratio
$1,800,000
($74,000 + $84,000) / 2
= 22.8 times
b. Inventory turnover ratio
= 16.3 times
c. Current ratio
= 2.0 to 1
d. Acid-test ratio
= 1.5 to 1
Requirement 2
Note that, for the same company, the current ratio will always be higher than the acid–
Exercise 12-8
Requirement 1
Profitability Ratios
Calculations
a. Gross profit ratio
$700,000
$1,800,000
= 38.9%
b. Return on assets
= 6.9%
c. Profit margin
$1,800,000
= 5.3%
d. Asset turnover
= 1.3 times
Requirement 2
One company can have a higher return on assets while the other company has a higher
Exercise 12-9
Requirement 1
Profitability Ratios
Calculations
a. Gross profit ratio
$3,400,000
$10,000,000
= 34.0%
b. Return on assets
= 8.4%
c. Profit margin
$10,000,000
= 2.7%
d. Asset turnover
= 3.1 times
Requirement 2
Dividends paid to shareholders in 2018 were $120,000. This amount can be
determined by analyzing the changes to retained earnings as follows:
Retained earnings, 2017
$200,000
$350,000
Exercise 12-10
Profitability Ratios
Calculations
Return on assets
$80,000
$400,000
= 20.0%
Profit margin
= 10.0%
Asset turnover
= 2.0 times
Return on equity
= 26.7%
Stockholders’ equity, beginning
$275,000
Exercise 12-11
Classification
Brief Justification
a. Other expenses
Restructuring costs are recorded as other expenses.
expenses.
revenues.
d. Discontinued operations
Sale of a major component of the business.
to be a major component of the business.
Exercise 12-12
LeBron’s Bookstores
Income Statement
For the Year Ended December 31, 2018
Revenues
$ 14,000,000
Cost of goods sold
8,000,000
Gross profit
6,000,000
Operating expenses
3,000,000
Income before tax
Income tax expense
Income from continuing operations
2,100,000
Net income
Exercise 12-13
Shaquille Corporation
Income Statement
For the Year Ended December 31, 2018
Income before tax
$1,600,000
Income tax expense
480,000
Income from continuing operations
Net income
Exercise 12-14
a. Aggressive (higher income, lower liabilities)
Exercise 12-15
Requirement 1
(a) Conservative
(b) Conservative
(c) Aggressive
(d) Conservative
Requirement 2
The total effect is conservative because net income is lower after the proposed