Algorithmic Work4Me. Problem Seventeen

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1 Algorithmic Work4Me Algorithmic Accounting Simulations 1 st Web-Based Edition Problem Seventeen Financial Statement Analysis Page 1

2 Introduction You will be recording a variety of transactions involving assets, liabilities, and stockholders equity. After recording all of the business transactions, you will analyze the effect they have on one or more financial analysis ratios. Furthermore, calculate financial ratios from your printed income statement and balance sheet. To expedite dealing with financial statement analysis, sales and expenses will be recorded in summary. CHART OF ACCOUNTS ASSETS STOCKHOLDERS EQUITY 101 Cash 301 Common Stock 105 Accounts Receivable 302 Common Stock Dividends Declared 106 Allowance for Doubtful Accounts 303 Preferred Stock 115 Merchandise Inventory 304 Preferred Stock Dividends Declared 121 Prepaid Insurance REVENUE 127 Office Supplies 401 Sales 131 Office Equipment EXPENSES 132 Accum. Deprec. Office Euipment 141 Office Building 401 Service Revenue 142 Accum. Deprec. Office Building EXPENSES LIABILITIES 501 Cost of Goods Sold 201 Accounts Payable 601 Selling Expenses 205 Dividends Payable 650 Administrative Expenses 208 Interest Payable 701 Interest Expense 209 Income Tax Payable 801 Income Tax Expense 210 Short-Term Notes Payable SUMMARY ACCOUNT 230 Long-Term Notes Payable 901 Income Summary 240 Mortgage Notes Payable Page 2

3 Getting Started 1) Log in to the Algorithmic Work4Me II, and from the problem set drop-down menu bar select Problem 17: Analysis of Financial Statements. 3) Print a copy of the beginning Trial Balance. 3) Click on Data Entry and record the following transactions Note: Identify each journal entry by Transaction Number. The stock transactions are made in relatively small dollar amounts, for illustrative purposes. In the Date column, enter each transaction as 01, 02, 03, etc. TRANSACTIONS Student Analysis Tran 01: Cash sales Record the cash sales of $10,000. Invoice Number: CSALE. Tran 02: Write-off of an uncollectible account Record the write-off of a $500 uncollectible account receivable under the allowance method. Invoice Number: WROFF. Tran 03: Purchase of merchandise on credit Record the purchase of $30,000 of merchandise inventory on account. Invoice Number: MACCP. Tran 04: Credit sales Record the sales of $120,000 to credit customers. Invoice Number: ASALE. Tran 05: Borrowing money Record the issuance of a short-term note payable of $10,000. Invoice Number: STNTP. Page 3

4 Transactions continued Tran 06: Purchase of a plant asset Record the purchase of a small office building by issuing a mortgage note payable for $140,000 and a check for $10,000. Check Number: Invoice Number: MTPAY. Student Analysis Tran 07: Borrowing money Record the issuance of a long-term note payable of $50,000. Invoice Number: LTNTP. Tran 08: Sale of common stock Record the issuance of 10,000 shares of common stock at its par value of $10.00 a share. Invoice Number: CMSTK. Tran 09: Paying accounts payable Record a payment by check to a vendor for $32,000. Check Number: Invoice Number: PAYAP. Tran 10: Record payment on mortgage notes Record a $25,000 payment by check on a mortgage note. Check Number: Invoice Number: PYMNP. Tran 11: Declare a common stock cash dividend Record the declaration of a $20,000 cash dividend on common stock. Invoice Number: DVDEC. Tran 12: Purchase merchandise inventory with cash Record the cash purchase of $30,000 of merchandise inventory. Check Number: Invoice Number: CPINV. Page 4

5 Transactions continued Student Analysis Tran 13: Record cash and credit sales Record the cash sales of $50,000 and credit sales of $40,000. Invoice Number: SALES. Tran 14: Declare a preferred stock cash dividend Record the declaration of a $1,000 cash dividend on preferred stock. Invoice Number: DVDEC. Tran 15: Paying dividends declared Record the payment of the common stock dividend of $20,000 and the preferred stock dividend of $1,000. Check number: Invoice Number: PAYDV. Tran 16: Collected accounts receivable Record the receipt of $150,000 from credit customers. Invoice Number: ARCOL. Tran 17: Record the cost of goods sold Record the cost of goods sold for all cash and credit sales. The cost of goods sold is $88,000. Debit Cost of Goods Sold and credit Merchandise Inventory. Invoice Number: 17CGS. Tran 18: Record Selling and Administrative Record the payment of the total selling expenses of $40,000 and the total administrative expenses of $20,000. Check Number: Invoice Number: TOTEX. Tran 19: Record accrued interest expense Record the accrued interest expense of $1,200 on all short-term and long-term obligations. Invoice Number: INTEX. Page 5

6 Transactions continued Tran 20: Record accrued income tax Record the accrued income tax expense of $7,000. Invoice Number: INCTX. Student Analysis This concludes the transactions for Problem 17 Financial Statement Analysis. Note: For this problem, all other adjustments for the end of the end-of-accounting period are ignored. Page 6

7 End of problem procedures: 1. Move the pointer to Journal/Ledgers/Statements and select General Ledger. 2. Print the Trial Balance. 3. Move the pointer to Check Figures in the Menu Bar. Select Problem Check Figures and Print the Check Figures for Problem 17 Financial Statement Analysis. If Your Balances do not match the Correct Balances of the selected account totals in the Check Figures for Problem 17, you must correct the unmatched balances before answering the evaluation questions. If Your Balances match the Correct Balances for the selected account totals in the Check Figures for Problem 17, then complete the instructions below, and answer the questions on the examination on the last page of this manual. 4. Move the pointer to Journal/Ledgers/Statements, select General Journal and Print the General Journal. 5. Move the pointer to Journal/Ledgers/Statements, select Financial Statements, click on Income Statement, and print the Income Statement. 6. Move the pointer to Journal/Ledgers/Statements, select Financial Statements, click on Balance Sheet, and print the Balance Sheet, Previous Period. 7. Move the pointer to Journal/Ledgers/Statements, select Financial Statements, click on Balance Sheet, and print the Balance Sheet. 8. When all of the required documents have been printed, you have completed your computer work for Problem 17. To exit this problem, click on Log Out. From the PKL Software Home Page, you may make another selection or click on File and exit the website. 9. Use your printed documents to answer the questions to the examination on the next page. Use the Ratios and Formulas from the following page when calculating your answers to the questions. After you have filled in the answers, log in to Problem 17 Financial Statement Analysis, move the pointer to Evaluations, and complete Exam 17 - Financial Statement Analysis. You may print the examination to hand in to your professor or, if required, it to your professor. Page 7

8 Ratios and Formulas (1) Working Capital = Current Assets Current Liabilities Current Ratio = Current Assets Current Liabilities Credit Risk Ratio = Allowance for Doubtful Accounts Accounts Receivable Inventory Turnover = Cost of Goods Sold Average Inventory Times Interest Earned Ratio = Income before Interest Expense and Income Taxes Interest Expense Gross Margin Ratio = Net Sales Cost of Goods Sold Net Sales Profit Margin Ratio = Net Income Net Sales Basic Earnings per Share = Net Income Preferred Dividends Weighted-average Common Shares Outstanding Return on Total Assets = Net Income (Beginning Total Assets + Ending Total Assets)/2 Return on Common Stockholders Equity = Net Income Preferred Dividends (Beginning Common Stockholder Equity + Ending Common Stockholder Equity/2) Price Earnings (PE) Ratio = Market Value per Common Share Earnings per Common Share Book Value per Common Share = Stockholders equity applicable to common shares (2) Number of common shares outstanding (1) Financial Accounting Information for Decisions, 2 nd edition John Wild, McGraw-Hill Irwin Publishing Page 8

9 (2) Total Stockholders Equity Par Value of Preferred Stock (or Call Price of Preferred Stock) Preferred Dividends in arrears. ALGORITHMIC WORK4ME PROBLEM 17 NAME FINANCIAL STATEMENT CLASS DAY AND TIME DATE ANALYSIS 1. A transaction that will increase a current asset and a revenue account by the same amount will increase the current ratio. A) True B) False 2. The write-off of an uncollectible account receivable will change the value of Net Accounts Receivable on the Balance Sheet. A) True B) False 3. An increase in the common stock shares will decrease the book value per common share. A) True B) False 4. A transaction that increases a current asset and a current liability by the same amount will not change the total of working capital. A) True B) False 5. Basic Earnings per Share = (Net Income Preferred Dividends)/ Weighted-average Common Shares Outstanding. A) True B) False 6. To the nearest hundredth, what is the credit risk ratio? 7. To the nearest hundredth what is the current ratio? 8. To the nearest hundredth, what is the inventory turnover ratio? 9. To the nearest whole number, what is the interest coverage (or times interest earned) ratio? 10. To the nearest tenth what is the gross margin ratio? % Page 9

10 AGORITHMIC WORK4ME II - PROBLEM To the nearest tenth, what is the profit margin ratio? % 12. To the nearest tenth, what is the return on total assets? % 13. To the nearest tenth, what is the return on common stockholders equity? 14. To the nearest hundredth, what is the price earnings (P/E) ratio, assuming a market price of $20 per share of common stock? % 15. What is the book value per common share? $ Page 10

Work4Me Accounting Simulations. Problem Seventeen

Work4Me Accounting Simulations 3 rd Web-Based Edition Problem Seventeen Financial Statement Analysis Page 1 Introduction You will be recording a variety of transactions involving assets, liabilities, and