Chapter 21 Financial Statements

Transcription

1 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:43 PM Page 181 Chapter 21 Financial Statements Section Exercises 21-1, p Total assets = $1,985 + $4,219 + $2,512 = $8,716 Total liabilities = $3,483 + $1,696 = $5,179 Total liabilities and owner s equity = $5,179 + $3,537 = $8,716 See Exercise 9 for completed balance sheet for Miss Muffins Bakery. 3. Total assets = $8,917 + $7,521 + $17,826 = $34, Total liabilities = $10,215 + $3,716 = $13,931 Total liabilities and owner s equity = $13,931+ $20,333 = $34,264 See Exercise 10 for completed balance sheet for O Dell s Nursery. 5. Cash percent of total assets = $1,985 (100%) = 22.8% $8, Accounts receivable $4,219 (100%) = 48.4% percent of total assets = $8,716 Merchandise inventory $2,512 = (100%) = 28.8% percent of total assets $8,716 Total assets percent $8,716 = (100%) = 100% of total assets $8,716 Accounts payable: $3,483 (100%) = 40.0% $8,716 Wages payable: $1,696 (100%) = 19.5% $8,716 Total liabilities: $5,179 (100%) = 59.4% $8,716 Owner s equity: $3,537 (100%) = 40.6% $8,716 Total liabilities and owner s equity = $8,716 (100%) = 100% $8, Total assets = $1,762 + $3,785 + $2,036 = Total liabilities = $3,631 + $1,421 = $5,052 Total liabilities and owner s equity = $5,052 + $2,531 = Total assets = $12,842 + $5,836 + $18,917 = Total liabilities = $8,968 + $2,582 = $11,550 Total liabilities and owner s equity = $11,550 + $26,045 = Cash: $1,762 (100%) = 23.2% Accounts receivable: $3,785 (100%) = 49.9% Merchandise inventory: $2,036 (100%) = 26.8% Total assets: (100%) = 100% Accounts payable: $3,631 (100%) = 47.9% Wages payable: $1,421 (100%) = 18.7% Total liabilities: $5,052 (100%) = 66.6% Owner s equity: $2,531 (100%) = 33.4% Total liabilities and owner s equity = (100%) = 100% Chapter

2 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:44 PM Page Cash: $8,917 (100%) = 26.0% $34, Cash: $12,842 (100%) = 34.2% Accounts receivable: $7,521 (100%) = 22.0% $34,264 Merchandise inventory: $17,826 (100%) = 52.0% $34,264 Total assets: $34,264 (100%) = 100% $34,264 Total assets = (100%) = 100% Accounts payable: $10,215 (100%) = 29.8% $34,264 Wages payable: $3,716 (100%) = 10.8% Wages payable = $2,582 (100%) = 6.9% $34,264 Total liabilities: $13,931 (100%) = 40.7% $34,264 Total liabilities = $11,550 (100%) = 30.7% Owner s equity: $20,333 (100%) = 59.3% $34,264 Owner s equity = $26,045 (100%) = 69.3% 9. Total liabilities $34,264 (100%) = 100% and owner s equity: $34,264 Cash increase = $1,985 - $1,762 = $223 increase = $223 (100%) = 12.7% $1,762 Accounts receivable increase = $4,219 - $3,785 = $434 increase = $434 (100%) = 11.5% $3,785 Merchandise inventory increase = $2,512 - $2,036 = $476 increase = $476 (100%) = 23.4% $2,036 Total assets increase = $8,716 - = $1,133 increase = $1,133 (100%) = 14.9% Accounts payable decrease = $3,483 - $3,631 = ($148) Accounts receivable: $5,836 (100%) = 15.5% Merchandise inventory: $18,917 (100%) = 50.3% Accounts payable = $8,968 (100%) = 23.9% Total liabilities and owner s equity = (100%) = 100% increase = ($148) (100%) = (4.1%) $3,631 Wages payable increase = $1,696 - $1,421 = $275 increase = $275 (100%) = 19.4% $1,421 Total liabilities increase = $5,179 - $5,052 = $127 increase = $127 (100%) = 2.5% $5,052 Owner s equity increase = $3,537 - $2,531 = $1,006 increase = $1,006 (100%) = 39.7% $2,531 Total liabilities and owner s equity increase = $8,716 - = $1,133 increase = $1,133 (100%) = 14.9% 182 Chapter 21

3 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 11:23 PM Page 183 Solutions for Exercises 1, 2, 5, 6, 9 Miss Muffins Bakery Comparative Balance Sheet December 31, 2011 and 2012 Increase (Decrease) Total Assets Amount Percent Assets Current assets Cash $1,985 $1,762 $ Accounts receivable 4,219 3, Merchandise inventory 2,512 2, Total assets $8,716 $1, Liabilities Current liabilities Accounts payable $3,483 $3,631 ($148) (4.1) Wages payable 1,696 1, Total liabilities 5,179 5, Owner s Equity Mildred Galloway, capital 3,537 2,531 1, Total liabilities and owner s equity $8,716 $1, Cash decrease = $8,917 - $12,842 = ($3,925) decrease = ($3,925) (100%) = (30.6%) $12,842 Accounts receivable increase = $7,521 - $5,836 = $1,685 increase = $1,685 (100%) = 28.9% $5,836 Merchandise inventory decrease = $17,826 - $18,917 = ($1,091) decrease = ($1,091) (100%) = (5.8%) $18,917 Total assets decrease = $34,264 - = ($3,331) decrease = ($3,331) (100%) = (8.9%) Accounts payable increase = $10,215 - $8,968 = $1,247 increase = $1,247 (100%) = 13.9% $8,968 Wages payable increase = $3,716 - $2,582 = $1,134 increase = $1,134 (100%) = 43.9% $2,582 Total liabilities increase = $13,931 - $11,550 = $2,381 increase = $2,381 (100%) = 20.6% $11,550 Owner s capital decrease = $20,333 - $26,045 = ($5,712) decrease = ($5,712) (100%) = (21.9%) $26,045 Total liabilities and owner s equity increase = $34,264 - = ($3,331) decrease = ($3,331) (100%) = (8.9%) Chapter

4 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:44 PM Page 184 Solutions for Exercises 3, 4, 7, 8, 10 O Dell s Nursery Comparative Balance Sheet December 31, 2011 and 2012 Increase (Decrease) Total Assets Amount Percent Assets Current assets Cash $8,917 $12,842 ($3,925) (30.6) Accounts receivable 7,521 5,836 1, Merchandise inventory 17,826 18,917 (1,091) (5.8) Total assets $34,264 ($3,331) (8.9) Liabilities Current liabilities Accounts payable $10,215 $8,968 $1, Wages payable 3,716 2,582 1, Total liabilities 13,931 11,550 2, Owner s Equity Janelle O Dell, capital 20,333 26,045 (5,712) (21.9) Total liabilities and owner s equity $34,264 ($3,331) (8.9) $5, Total debt to total assets = (100%) = 59.4% 12. Total debt to total assets = $5,052 (100%) = 66.6% $8, , p Gross profit for 2012 = $97,384 - $82,157 = $15,227 Net income for 2012 = $15,227 - $4,783 = $10,444 Gross profit for 2011 = $92,196 - $72,894 = $19,302 Net income for 2011 = $19,302 - $3,951 = $15, Net sales = $32,596 - $296 = $32, Cost of goods sold = $16,872 + $33,596 - $21,843 = $28,625 Gross profit = $32,300 - $28,625 = $3,675 Net income = $3,675 - $1,894 = $1,781 Sitha Ros's Oriental Groceries Income Statement for the Years Ending June 30, 2011 and 2012 Net sales Cost of goods sold Gross profit Operating expenses Net income $97,384 $92,196 82,157 72,894 15,227 19,302 4,783 3,951 $10,444 $15,351 Net sales = $35,403 - $342 = $35,061 Cost of goods sold = $17,403 + $27,983 - $22,583 = $22,803 Gross profit = $35,061 - $22,803 = $12,258 Net income = $12,258 - $3,053 = $9,205 Miss Muffins Bakery Comparative Income Statement for the Months Ending July 31, 2010 and July 31, Gross sales $35,403 $32,596 Returns and allowances Net sales 35,061 32,300 Cost of beginning inventory 17,403 16,872 Cost of purchases 27,983 33,596 Cost of ending inventory 22,583 21,843 Cost of goods sold 22,803 28,625 Gross profit 12,258 3,675 Total operating expenses 3,053 1,894 Net income $ 9,205 $ 1, Chapter 21

5 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:44 PM Page Sitha Ros s Oriental Groceries Income Statement for Years Ending June 30, 2011 and Net Sales 2011 Net Sales Net sales $97, $92, Cost of goods sold 82, , Gross profit 15, , Operating expenses 4, , Net income $10, $15, Cost of goods sold percent of net sales = $82,157 (100%) = 84.4% $97,384 Gross profit percent of net sales = $15,227 (100%) = 15.6% $97,384 Operating expenses percent of net sales = $4,783 (100%) = 4.9% $97,384 Net income percent of net sales = $10,444 (100%) = 10.7% $97,384 Percentages for 2011 are found similarly. 5. Miss Muffins Bakery Vertical Analysis of Income Statement for the Months Ending July 31, 2010 and July 31, Net Sales 2010 Net Sales Gross sales $35, $32, Returns and allowances Net sales 35, , Cost of beginning inventory 17, , Cost of purchases 27, , Cost of ending inventory 22, , Cost of goods sold 22, , Gross profit 12, , Total operating expenses 3, , Net income $ 9, $ 1, Gross sales percent of net sales = $35,403 (100%) = 101.0% $35,061 Returns and allowances percent of net sales = $342 (100%) = 1.0% $35,061 Cost of beginning inventory percent of net sales = $17,403 (100%) = 49.6% $35,061 Remaining percentages for 2011 and percentages for 2012 are found similarly. Chapter

6 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:44 PM Page Sitha Ros s Oriental Groceries Horizontal Analysis of Income Statement for Years Ending June 30, 2011 and 2012 Increase Percent Increase (Decrease) (Percent Decrease) Net sales $97,384 $92,196 $5, Cost of goods sold 82,157 72,894 9, Gross profit 15,227 19,302 (4,075) (21.1) Operating expenses 4,783 3, Net income $10,444 $15,351 ($4,907) (32.0) Net sales increase = $97,384 - $92,196 = $5,188 increase = $5,188 (100%) = 5.6% $92,196 Cost of goods sold increase = $82,157 - $72,894 = $9,263 increase = $9,263 (100%) = 12.7% $72,894 Gross profit decrease = $19,302 - $15,227 = ($4,075) decrease = ($4,075) (100%) = (21.1%) $19,302 Operating expenses increase = $4,783 - $3,951 = $832 increase = $832 (100%) = 21.1% $3,951 Net income decrease = $15,351 - $10,444 = ($4,907) decrease = ($4,907) $15,351 = (32.0%) 7. Miss Muffins Bakery Horizontal Analysis of Income Statement for the Months Ending July 31, 2010 and July 31, 2011 Increase (Decrease) Amount Percent Gross sales $35,403 $32,596 $2, Returns and allowances Net sales 35,061 32,300 2, Cost of beginning inventory 17,403 16, Cost of purchases 27,983 33,596 (5,613) (16.7) Cost of ending inventory 22,583 21, Cost of goods sold 22,803 28,625 (5,822) (20.3) Gross profit 12,258 3,675 8, Total operating expenses 3,053 1,894 1, Net income $ 9,205 $ 1,781 $7, Gross sales increase = $35,403 - $32,596 = $2,807 increase = $2,807 (100%) = 8.6% $32,596 Returns and allowances increase = $342 - $296 = $46 increase = $46 (100%) = 15.5% $296 Net sales increase = $35,061 - $32,300 = $2,761 increase = $2,761 (100%) = 8.5% $32,300 Cost of beginning inventory increase = $17,403 - $16,872 = $531 increase = $531 (100%) = 3.1% $16,872 Remaining increases or decreases and percentages are found similarly. 21-3, p Current ratio = $148,947 = 1.44 to 1 2. $103,537 Operating ratio = $315,842 + $62,917 $597,064 = $378,759 $597,064 = to Chapter 21

7 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:45 PM Page $392,054 - $179,515 Gross profit margin ratio = $392, Asset turnover ratio = $289,512 = 1.98 to 1 $145,753 = $212,539 = to 1 $392, current assets George s current ratio = current liabilities 6. = $28,000 = 4 or 4 to 1 $7, José s current ratio = $840,000 $819,000 Operating ratio = 1.03 or 1.03 to 1 cost of goods sold + operating expenses = net sales $7,500 + $3,500 = = $11,000 $15,500 $15,500 = or 71.0% net sales - cost of goods sold Gross profit margin ratio = net sales $15,500 - $7,500 = $15,500 = $8,000 $15,500 = or 51.6% quick current assets Acid-test ratio = current liabilities $32,981 + $12,045 = $22,178 = $45,026 $22,178 = 2.03 or 2.03 to 1 Exercises Set A, p Fawcett s Plumbing Supplies Balance Sheet March 31, 2011 Assets Current assets Cash $1, Office supplies Accounts receivable 9, Total current assets 11, Plant and equipment Equipment 12, Total plant and equipment 12, Total assets $23, Liabilities Current liabilities Accounts payable $2, Wages payable Property and taxes payable Total current liabilities 3, Total liabilities 3, Owner s equity D. W. Fawcett, capital 20, Total liabilities and owner s equity $23, Total current assets = $1,724 + $173 + $9,374 = $11,271 Total assets = $11,271 + $12,187 = $23,458 Total current liabilities = $2,174 + $674 + $250 = $3,098 Total liabilities and owner s equity = $3,098 + $20,360 = $23,458 Chapter

8 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:45 PM Page Seymour s Videos, Inc. Comparative Balance Sheet December 31, 2010 and 2011 Increase (decrease) total assets Amount Percent Assets Current assets Cash $2,374 $2,184 $ Accounts receivable 5,374 4,286 1, Merchandise inventory 15,589 16,107 (518) (3.2) Total assets $23,337 $22,577 $ Liabilities Current liabilities Accounts payable $7,384 $6,118 $1, Wages payable 1, Total liabilities 8,408 7,082 1, Owner s equity James Seymour, capital 14,929 15,495 (566) (3.7) Total liabilities and owner s equity $23,337 $22,577 $ Total assets for 2011 = $2,374 + $5,374 + $15,589 = $23,337 Total assets for 2010 = $2,184 + $4,286 + $16,107 = $22,577 Total liabilities for 2011 = $7,384 + $1,024 = $8,408 Total liabilities for 2010 = $6,118 + $964 = $7,082 Total liabilities and owner s equity for 2011 = $8,408 + $14,929 = $23,337 Total liabilities and owner s equity for 2010 = $7,082 + $15,495 = $22,577 Cash increase = $2,374 - $2,184 = $190 Percent increase = $190 (100%) = 8.7% $2,184 Accounts receivable increase = $5,374 - $4,286 = $1,088 Percent increase = $1,088 (100%) = 25.4% $4,286 Merchandise inventory decrease = $16,107 - $15,589 = ($518) Present decrease = ($518) (100%) = -3.2% or (3.2%) $16,107 Remaining table values for increases/decreases and percent of increases/decreases are calculated in a similar manner. Cash percent of total assets for 2011 = $2,374 (100%) = 10.2% $23,337 Accounts receivable percent of total assets for 2011 = $5,374 (100%) = 23.0% $23,337 Merchandise inventory percent of total assets for 2011 = $15,589 (100%) = 66.8% $23,337 Total assets percent of total assets for 2011 = $23,337 (100%) = 100% $23,337 Remaining percents for 2011 and percents of total assets for 2010 are calculated similarly. For 2010 use $22,577 as denominator. 188 Chapter 21

9 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:45 PM Page Marten s Family Store Income Statement For Year Ending December 31, 2011 net sales Revenue: Gross sales $238, Sales returns and allowances 13, Net sales 225, Cost of goods sold: Beginning inventory, January 1, , Purchases 109, Ending inventory, December 31, , Cost of goods sold 112, Gross profit from sales 112, Operating expenses: Salary 42, Rent 8, Utilities 1, Insurance 2, Fees Depreciation 1, Miscellaneous 3, Total operating expenses 61, Net income $51, Net sales = $238,923 - $13,815 = $225,108 Gross profit from sales = $225,108 - $112,229 = $112,879 Net income = $112,879 - $61,689 = $51,190 Gross sales percent of net sales = $238,923 (100%) = 106.1% $225,108 Sales returns and allowances percent of net sales = $13,815 (100%) = 6.1% $225,108 Remaining percents of net sales are calculated similarly. Chapter

10 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:45 PM Page Alonzo s Auto Parts Comparative Income Statement For years ending June 30, 2011 and 2012 Increase (decrease) Amount Percent Revenue: Gross sales $291,707 $275,873 15, Sales returns and allowances 5,895 6,821 (926) (13.6) Net sales 285, ,052 16, Cost of goods sold: Beginning inventory, July 1 35,892 32,587 3, Purchases 157, ,999 10, Ending inventory, June 30 32,516 30,013 2, Cost of goods sold 160, ,573 11, Gross profit from sales 125, ,479 5, Operating expenses: Salary 42,000 40,000 2, Insurance 3,800 3, Utilities 1,986 2,097 (111) (5.3) Rent 3,600 3, Depreciation 4,000 4,500 (500) (11.1) Total operating expenses 55,386 53,697 1, Net income $69,837 $65,782 4, Net sales for 2012 = $291,707 - $5,895 = $285,812 Cost of goods sold for 2012 = $35,892 + $157,213 - $32,516 = $160,589 Gross profit from sales = $285,812 - $160,589 = $125,223 Total operating expenses = $42,000 + $3,800 + $1,986 + $3,600 + $4,000 = $55,386 Net income = $125,223 - $55,386 = $69,837 Similar calculations are used for Gross sales increase = $291,707 - $275,873 = $15,834 increase = $15,834 (100%) = 5.7% $275,873 Sales returns and allowances decrease = $6,821 - $5,895 = ($926) decrease = ($926) (100%) = (13.6%) $6,821 Remaining increases/decreases and percent increases/decreases are calculated similarly. $1,231, Current ratio = = 1.57 to 1 6. Current ratio = $174,316 = 1.39 to 1 $784,184 $125,342 $2,345 + $5,450 + $4, Acid-test ratio = 8. $6,748 + $7,457 = $12,295 = 0.87 to 1 $14,205 $23,500 + $12,300 Acid-test ratio = $27,800 = $35,800 = 1.29 to 1 $27,800 $18,750 + $3, Operating ratio: = 0.9, or 90% 10. $25,000 $25,000 - $18,750 Gross profit margin = $25,000 = 0.25, or 25% $138,400 + $16,300 Operating ratio = $173,200 = $154,700 = , or 89.3% $173, Chapter 21

11 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:46 PM Page 191 $173,200 - $138,400 $198,530 + $36, Gross profit margin ratio = 12. Operating ratio = $173,200 $285,832 = , or 82.3% = $34,800 $173,200 $285,832 - $198,530 Gross profit margin ratio = = , or 20.1% $285,832 = $87,302 $285,832 = , or 30.5% Exercises Set B, p Rooter Company Balance Sheet June 30, 2012 Assets Current assets Cash $2, Supplies Accounts receivable 8, Total current assets 11, Plant and equipment Equipment 11, Total plant and equipment 11, Total assets $22, Liabilities Current liabilities Accounts payable $1, Wages payable Rent payable Total current liabilities 3, Total liabilities 3, Owner s equity Wilson Rooter, capital 19, Total liabilities and owner s equity $22, Total current assets = $2,350 + $175 + $8,956 = $11,481 Total assets = $11,481 + $11,375 = $22,856 Total current liabilities = $1,940 + $855 + $775 = $3,570 Total liabilities and owner s equity = $3,570 + $19,286 = $22,856 Chapter

12 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:46 PM Page Miller s Model Ships Comparative Balance Sheet December 31, 2010 and 2011 Increase (decrease) total assets Amount Percent Assets Current assets Cash $2,176 $1,948 $ Accounts receivable 2,789 1,742 1, Merchandise inventory 4,985 5,450 (465) (8.5) Total assets $9,950 $9,140 $ Liabilities Current liabilities Accounts payable $901 $872 $ Wages payable 1,342 1, Insurance payable Total liabilities 2,933 2, Owner s equity Kathy Miller, capital 7,017 6, Total liabilities and owner s equity $9,950 $9,140 $ Total assets for 2011 = $2,176 + $2,789 + $4,985 = $9,950 Total assets for 2010 = $1,948 + $1,742 + $5,450 = $9,140 Total liabilities for 2011 = $901 + $1,342 + $690 = $2,933 Total liabilities for 2010 = $872 + $1,224 + $680 = $2,776 Total liabilities and owner s equity for 2011 = $2,933 + $7,017 = $9,950 Total liabilities and owner s equity for 2010 = $2,776 + $6,364 = $9,140 Cash increase = $2,176 - $1,948 = $228 increase = $228 (100%) = 11.7% $1,948 Accounts receivable increase = $2,789 - $1,742 = $1,047 increase = $1,047 (100%) = 60.1% $1,742 Merchandise inventory decrease = $5,450 - $4,985 = ($465) decrease = ($465) (100%) = (8.5%) $5,450 Remaining table values for increases/decreases and percent of increases/decreases are calculated in a similar manner. Cash percent of total assets for 2011 = $2,176 (100%) = 21.9% $9,950 Accounts receivable percent of total assets for 2011 = $2,789 (100%) = 28.0% $9,950 Merchandise inventory percent of total assets for 2011 = $4,985 (100%) = 50.1% $9,950 Total assets percent of total assets for 2011 = $9,950 (100%) = 100% $9,950 Remaining percents for 2010 and 2011 are calculated similarly. For 2010 use $9,140 as denominator. 192 Chapter 21

13 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:46 PM Page Serpa s Gifts Income Statement For Year Ending December 31, 2010 net sales Revenue: Gross sales $148, Sales returns and allowances 8, Net sales 139, Cost of goods sold: Beginning inventory, January 1, , Purchases 47, Ending inventory, December 31, , Cost of goods sold 47, Gross profit from sales 91, Operating expenses: Salary 25, Rent 4, Utilities 1, Insurance 2, Fees Depreciation 1, Miscellaneous Total operating expenses 35, Net income $56, Net sales = $148,645 - $8,892 = $139,753 Cost of goods sold = $12,100 + $47,800 - $11,950 = $47,950 Gross profit from sales = $139,753 - $47,950 = $91,803 Total operating expenses = $25,500 + $4,500 + $1,445 + $2,100 + $225 + $1,240 + $750 = $35,760 Net income = $91,803 - $35,760 = $56,043 Gross sales percent of net sales = $148,645 $139,753 (100%) Sales returns and allowances percent of net sales = 106.4% $8,892 = (100%) = 6.4% $139,753 Remaining percents of net sales are similarly calculated. Chapter

14 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:47 PM Page Designer Crafts Comparative Income Statement For Years Ending December 31, 2011 and 2012 Increase (decrease) Amount Percent Revenue: Gross sales $239,873 $236,941 $2, Sales returns and allowances 12,815 13,895 (1,080) (7.8) Net sales 227, ,046 4, Cost of goods sold: Beginning inventory, January 1 27,814 25,887 1, Purchases 123, ,604 10, Ending inventory, December 31 24,482 23, Cost of goods sold 126, ,653 11, Gross profit from sales 100, ,393 (7,880) (7.3) Operating expenses: Salary 44,772 42,640 2, Insurance 3,006 2, Utilities 1,597 1, Rent 3,600 3, Depreciation 4,100 3, Total operating expenses 57,075 54,024 3, Net income $43,438 $54,369 ($10,931) (20.1) Net sales for 2012 = $239,873 - $12,815 = $227,058 Cost of goods sold for 2012 = $27,814 + $123,213 - $24,482 = $126,545 Gross profit from sales = $227,058 - $126,545 = $100,513 Total operating expenses = $44,772 + $3,006 + $1,597 + $3,600 + $4,100 = $57,075 Net income = $100,513 - $57,075 = $43,438 Similar calculations are used for Gross sales increase = $239,873 - $236,941 = $2, Current assets = $32,194; current liabilities = $38, Current ratio = $32,194 = 0.83 to 1 $38, $5,745 + $12,496 Acid-test ratio = $10, = $18,241 = 1.74 to 1 $10,475 increase = $2,932 (100%) = 1.2% $236,941 Sales returns and allowances decrease = $13,895 - $12,815 = ($1,080) decrease = ($1,080) (100%) = (7.8%) $13,895 Remaining increases/decreases and percent increases/decreases are calculated similarly. Current assets = $724,987; current liabilities = $334,169 Current ratio = $724,987 $334,169 = 2.17 to 1 $6,700 + $12,756 Acid-test ratio = $18,345 = $19,456 = 1.06 to 1 $18, $16,435 + $3,100 Operating ratio = $23, = $19,535 = , or 83.1% $23,500 $23,500 - $16,435 Gross profit margin ratio = $23,500 = $7,065 $23,500 = , or 30.1% 194 Chapter 21

15 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:47 PM Page 195 Practice Test, p O Toole s Hardware Store Comparative Balance Sheet December 31, 2011 and 2012 Increase (Decrease) Amount Percent Assets Current assets Cash $7,318 $5,283 $2, Accounts receivable 3,147 3, Merchandise inventory 63,594 60,187 3, Total current assets 74,059 68,478 5, Plant and equipment Building 36,561 37,531 (970) (2.6) Equipment 8,256 4,386 3, Total plant and equipment 44,817 41,917 2, Total assets $118,876 $110,395 $8, Liabilities Current liabilities Accounts payable $5,174 $4,563 $ Wages payable Total current liabilities 5,954 5, Long-term liabilities Mortgage note payable 34,917 36,510 (1,593) (4.4) Total long-term liabilities 34,917 36,510 (1,593) (4.4) Total liabilities 40,871 41,697 (826) (2.0) Owner s Equity James O Toole, capital 78,005 68,698 9, Total liabilities and owner s equity $118,876 $110,395 $8, Total current assets for 2012 = $7,318 + $3,147 + $63,594 = $74,059 Total plant and equipment for 2012 = $36,561 + $8,256 = $44,817 Total assets for 2012 = $74,059 + $44,817 = $118,876 Total current liabilities for 2012 = $5,174 + $780 = $5,954 Total long-term liabilities for 2012 = $34,917 Total liabilities for 2012 = $5,954 + $34,917 = $40,871 Total liabilities and owner s equity for 2012 = $40,871 + $78,005 = $118,876 Similar calculations are used for Cash increase = $7,318 - $5,283 = $2,035 increase = $2,035 (100%) = 38.5% $5,283 Accounts receivable increase = $3,147 - $3,008 = $139 increase = $139 (100%) = 4.6% $3,008 Merchandise inventory increase = $63,594 - $60,187 increase = $3,407 (100%) = 5.7% $60,187 = $3,407 Remaining increases/decreases and percent increases/decreases are calculated similarly. Chapter

16 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:48 PM Page Current ratio for 2012 = $74,059 = to 1 3. $5, Current ratio for 2011 = $68,478 = to 1 5. $5,187 $7,318 + $3,147 Acid-test ratio for 2012 = $5,954 = 1.76 to 1 $5,283 + $3,008 Acid-test ratio for 2011 = $5,187 = 1.60 to 1 6. Mile Wide Woolens, Inc. Comparative Income Statement For Years Ending December 31, 2010 and 2011 Increase (decrease) Amount Percent Revenue Gross sales $219,827 $205,852 $13, Sales returns and allowances 8,512 7, Net sales 211, ,869 13, Cost of goods sold Beginning inventory, January 1 42,816 40,512 2, Purchases 97,523 94,812 2, Ending inventory, December 31 43,182 42, Cost of goods sold 97,157 92,803 4, Gross profit from sales 114, ,066 9, Operating expenses Salary 28,940 27,000 1, Insurance Utilities 1,700 1, Rent 3,600 3, Depreciation 2,000 2,400 (400) (16.7) Total operating expenses 37,040 34,730 2, Net income $77,118 $70,336 $6, Net sales for 2011 = $219,827 - $8,512 = $211,315 Cost of goods sold for 2011 = $42,816 + $97,523 - $43,182 = $97,157 Gross profit from sales = $211,315 - $97,157 = $114,158 Total operating expenses = $28,940 + $800 + $1,700 + $3,600 + $2,000 = $37,040 Net income = $114,158 - $37,040 = $77,118 Similar calculations are used for Gross sales increase = $219,827 - $205,852 = $13,975 increase = $13,975 (100%) = 6.8% $205,852 Sales returns and allowances increase = $8,512 - $7,983 = $529 increase = $529 (100%) = 6.6% $7,983 Remaining increases/decreases and percent increases/ decreases are calculated similarly $92,803 + $34,730 Operating ratio for 2010 = $197,869 $97,157 + $37,040 Operating ratio for 2011 = $211,315 Gross profit margin ratio for 2010 Gross profit margin ratio for 2011 = $211,315 - $97,157 $211,315 = = or 54.0% $197,869 - $92,803 $197,869 = $127,533 = 0.645, or 64.5% $197,869 = $134,197 = 0.635, or 63.5% $211,315 = or 53.1% $197, Asset turnover ratio = 10. Asset turnover ratio = $211,315 $126,432 = 1.56 $138,057 = Chapter 21

17 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:48 PM Page 197 Critical Thinking, p Step 5 states that Total assets = total liabilities and 2. In the formula Gross profit = net sales - cost of goods owner s equity. Step 1d states that Total assets = sold, add cost of goods sold to both sides of the equal total current assets + total plant and equipment. Because sign. The resulting formula will be Gross profit + cost total liabilities and owner s equity and total current of goods sold = net sales. The sides of the formula can assets + total plant and equipment both equal total be interchanged to be written: assets, then they should equal each other. Net sales = gross profit + cost of goods sold. 3. A rearranged formula would be Gross profit = net profit + operating expenses. Then, Gross profit = $25,982 + $150,986 = $176, Multiply both sides by net sales. net sales * net sales = amount of item net sales net sales * net sales = amount of item or Amount of item = percent of net sales net sales 5. The amount of sales tax is comparable to the amount of increase. The amount of the item is the untaxed or original amount similar to the earlier year s amount being the original amount. * net sales 6. The rate, R, corresponds to the percent of increase (decrease) or rate of sales tax. The portion or percentage, P, corresponds to the amount of increase (decrease) or the amount of sales tax. The base, B, corresponds to the earlier year s amount or the amount of the item. 7. Different values may be given, but the same formula can 8. It means they are equal. be used if any two out of the three values are given. 9. The current liabilities are higher. 10. The quick current assets are more than the current liabilities. Challenge Problem, p. 767 Rate of change = = amount of change (100%) original assets $580,000 - $120,000 (100%) $120,000 = $460,000 $120,000 (100%) = (100%) = 383.3% Chapter

18 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:49 PM Page 198 Case Studies 21.1, p Contemporary Wood Furniture Comparative Balance Sheet December 31, 2010 and Increase (decrease) total assets Amount Percent Assets Current assets Cash $1,844 $3,278 ($1,434) (43.7) Accounts receivable 11,807 6,954 4, Inventory 9,628 17,417 (7,789) (44.7) Plant and equipment 158, ,500 14, Total Assets $181,979 $172,149 $9, Liabilities Current Liabilities Accounts payable $13,446 $9,250 $4, Wages payable 650 1,110 (460) Property and taxes payable 4,124 3, Long-term debt 92,800 75,800 17, Total Liabilities 111,020 89,810 21, Owner s Equity Charles Royston, capital 70,959 82,339 (11,380) (13.8) Total liabilities and owner s equity $181,979 $172,149 $9, Current ratio = 2011 current ratio = 2010 current ratio = current assets current liabilities 2010 current ratio = $27,649 $14,010 = 1.97 Total debt to total assets ratio = $1,844 + $11,807 + $9,628 $13,446 + $650 + $4, current ratio = $23,279 $18,220 = 1.28 $3,278 + $6,954 + $17,417 $9,250 + $1,110 + $3,650 total liabilities total assets 2011 total debt to total assets ratio = $111,020 $181,979 = total debt to total assets ratio = $89,810 $172,149 = In total, the trends are something to be concerned about. Total debt has increased from 2010 to The current ratio is much better in 2010, and is approaching the value of 1 for 2011, which is a major problem. The total debt to total assets ratio is approaching the high range for 2011, which could be a problem. It will be important to continue to monitor the balance sheets for 2012 to make sure that these trends do not continue. 198 Chapter 21

19 M21_CLEA8261_09_ISM_C21.qxd 4/29/11 9:49 PM Page , p Balanced Books Bookkeeping Balance Sheet December 31, 2011 Assets Amount Percent Current assets Cash $4, Accounts receivable 6, Merchandise inventory 15, Total current assets 25, Plant and Equipment Equipment 15, Total assets $40, Liabilities Amount Percent Current liabilities Accounts payable $3, Wages payable 1, Insurance payable Total liabilities 5, Balanced Books Bookkeeping Income Statement For Year Ending December 31, 2011 Revenue Amount Percent Net sales $120, Cost of goods sold 85, Gross profit 35, Operating expenses Rent 15, Utilities 6, Depreciation 2, Wages 8, Miscellaneous expenses 1, Total operating expenses 33, Net income $2, Owner s equity Carlton, equity 34, Total liabilities and equity $40, Ratio Analysis: Current ratio = $25,000 $5,500 = 4.54 Acid - test = $10,000 $5,500 = 1.82 current assets current liabilities quick current assets current liabilities Chapter