Use the following comparative income statements and balance sheets to complete the required ratio analysis. Comparative Income Statement For the Years Ended December 31, 20-C and 20-B 20-C 20-B Net Sales $965,400 $1,028,600 Cost of goods sold 515,100 590,300 Gross profit $450,300 $438,300 Operating expenses Selling expenses $142,000 $173,400 Administrative expenses 150,200 182,400 Interest expense 29,300 34,100 Total operating expenses $321,500 $389,900 Income tax expense 45,500 18,200 Total expenses $367,000 $408,100 Net income $83,300 $30,200 Comparative Balance Sheet December 31, 20-C and 20-B Assets 20-C 20-B Cash $45,100 $48,500 Accounts receivable (net) 59,800 101,500 Merchandise inventory 150,900 171,600 Property, plant, and equipment (net) 710,500 808,800 Total assets $966,300 $1,130,400 Liabilities and Stockholders' Equity Accounts payable $108,200 $151,600 Notes payable (due 6/30/-D) 70,000 70,000 Bonds payable (45% due each June) 154,000 280,000 Common stock, $10 par value 420,000 420,000 Retained earnings 214,100 208,800 Total liabilities and stockholders' equity $966,300 $1,130,400 Additional information: All sales are made on account. Balances of selected accounts for December 31, 20-A are accounts receivable (net), $73,800; merchandise inventory, $153,100; total assets, $906,900; common stockholders' equity, $527,200; and common shares outstanding, 42,000. 20-C 20-B Number of common shares 42,000 42,000 Dividends paid $44,400 $49,000 Required: Prepare a liquidity analysis by calculating for 20-B and 20-C the (a) current ratio, (b) quick ratio, (c) accounts receivable turnover, and (d) merchandise inventory turnover. Indicate whether there has been an improvement or not from 20-B to 20-C. Assume 365 days in a year. Round all answers to two decimal places. 20-C 20-B Improvement? a. Current ratio fill in the blank 1 to 1 fill in the blank 2 to 1 No b. Quick ratio fill in the blank 4 to 1 fill in the blank 5 to 1 c. Accounts receivable turnover fill in the blank 7 times per year fill in the blank 8 times per year Average collection period fill in the blank 10 days fill in the blank 11 days d. Merchandise inventory turnover fill in the blank 12 times fill in the blank 13 times Average number of days to sell fill in the blank 15 days fill in the blank 16 days
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Use the following comparative income statements and balance sheets to complete the required ratio analysis.
| Comparative Income Statement For the Years Ended December 31, 20-C and 20-B |
||||
|---|---|---|---|---|
| 20-C | 20-B | |||
| Net Sales | $965,400 | $1,028,600 | ||
| Cost of goods sold | 515,100 | 590,300 | ||
| Gross profit | $450,300 | $438,300 | ||
| Operating expenses | ||||
| Selling expenses | $142,000 | $173,400 | ||
| Administrative expenses | 150,200 | 182,400 | ||
| Interest expense | 29,300 | 34,100 | ||
| Total operating expenses | $321,500 | $389,900 | ||
| Income tax expense | 45,500 | 18,200 | ||
| Total expenses | $367,000 | $408,100 | ||
| Net income | $83,300 | $30,200 |
| Comparative Balance Sheet December 31, 20-C and 20-B |
||||
|---|---|---|---|---|
| Assets | 20-C | 20-B | ||
| Cash | $45,100 | $48,500 | ||
| 59,800 | 101,500 | |||
| Merchandise inventory | 150,900 | 171,600 | ||
| Property, plant, and equipment (net) | 710,500 | 808,800 | ||
| Total assets | $966,300 | $1,130,400 | ||
| Liabilities and |
||||
| Accounts payable | $108,200 | $151,600 | ||
| Notes payable (due 6/30/-D) | 70,000 | 70,000 | ||
| Bonds payable (45% due each June) | 154,000 | 280,000 | ||
| Common stock, $10 par value | 420,000 | 420,000 | ||
| 214,100 | 208,800 | |||
| Total liabilities and stockholders' equity | $966,300 | $1,130,400 |
Additional information:
All sales are made on account. Balances of selected accounts for December 31, 20-A are accounts receivable (net), $73,800; merchandise inventory, $153,100; total assets, $906,900; common stockholders' equity, $527,200; and common shares outstanding, 42,000.
| 20-C | 20-B | |||
|---|---|---|---|---|
| Number of common shares | 42,000 | 42,000 | ||
| Dividends paid | $44,400 | $49,000 |
Required:
Prepare a liquidity analysis by calculating for 20-B and 20-C the (a)
| 20-C | 20-B | Improvement? | |||
| a. Current ratio | fill in the blank 1 | to 1 | fill in the blank 2 | to 1 | No |
| b. Quick ratio | fill in the blank 4 | to 1 | fill in the blank 5 | to 1 | |
| c. Accounts receivable turnover | fill in the blank 7 | times per year | fill in the blank 8 | times per year | |
| Average collection period | fill in the blank 10 | days | fill in the blank 11 | days | |
| d. Merchandise inventory turnover | fill in the blank 12 | times | fill in the blank 13 | times | |
| Average number of days to sell | fill in the blank 15 | days | fill in the blank 16 | days |
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