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Business Accounting Financial Accounting: Information for Decisions

1 Introduction: Current ratio refers to the ratio of current assets and current liabilities. This ratio shows the resources a company has to pay off its short term debts and obligations. To compute: The current ratio of the company. Current ratio for 2014 − 2.5 Current ratio for 2015 − 1.9 Current ratio for 2016 − 2.3 Calculation of current ratio for 2014 − Current ratio = Current assets Current liabilities = 51748 20300 = 2.5 Calculation of current ratio for 2015 − Current ratio = Current assets Current liabilities = 37924 19960 = 1.9 Calculation of current ratio for 2016 − Current ratio = Current assets Current liabilities = 52390 22800 = 2.3 2 Introduction: While making a common-size income statement, each line item is expressed as a percentage of sales or revenue. These percentages can be used to compare the performance of the company with the company itself or the competitors. To express: The income statement data in common-size percents. K Company Common size Income Statement For years ended December 31, 2016, 2015 and 2014 Particulars 2016 (%) 2015 (%) 2014 (%) Sales 555000 555000 = 100 340000 340000 = 100 278000 278000 = 100 Cost of goods sold 283500 555000 = 51.08 212500 340000 = 62.5 153900 278000 = 55.36 Gross profit ( Sales − Cost of goods sold ) 48.92 37.50 44.64 Selling expenses 102900 555000 = 18.54 46920 340000 = 13.80 50800 278000 = 18.27 Administrative expenses 50668 555000 = 9.13 29920 340000 = 8.80 22800 278000 = 8.20 Total expenses ( Selling expenses + Administrative expenses ) 27.67 22.60 26.47 Income before taxes ( Gross profit − Total expenses ) 21.25 14.90 18.17 Income taxes 40800 555000 = 7.35 10370 340000 = 3.05 15670 278000 = 5.64 Net income ( Income before taxes − Income taxes ) 13.90 11.85 12.53 3 Introduction: The trend percentages help in analyzing the changes in financial statements of a company over a period of time. To express: The balance sheet data in trend percents with 2014 as the base year. K Company Balance Sheet For years ended December 31, 2016, 2015 and 2014 Particulars 2016 2015 Assets Current assets 52390 51748 = 101.24 37924 51748 = 73.29 Long-term investments 0 3950 = 0.00 500 3950 = 12.66 Plant assets, net 100000 60000 = 166.67 96000 60000 = 160 Total assets 152390 115698 = 131.71 134424 115698 = 116.19 Liabilities and equity Current liabilities 22800 20300 = 112.32 19960 20300 = 98.33 Common stock 72000 60000 = 120 72000 60000 = 120 Other paid-in capital 9000 6000 = 150 9000 6000 = 150 Retained earnings 48590 29398 = 165.28 33464 29398 = 113.83 Total liabilities and equity 152390 115698 = 131.71 134424 115698 = 116.19 4 Introduction: The trend percentages help in analyzing the changes in financial statements of a company over a period of time. To comment: The notable relations revealed by the ratios and percents computed. The current ratio of the company shows that the company was sound enough to pay its short term debts and obligations but its current ratio dropped in the year 2015 indicating inadequate current assets that are not enough to pay for the current liabilities. The ratio is good in the year 2016 which means company is able to pay its short term obligations with the available current assets. Cost of goods sold was lower in the year 2014 which means higher gross profit and on the other hand cost of goods sold has increased in the year 2015 resulting in lower gross profit. Cost of goods sold is the lowest in the year 2016 and therefore the gross profit is the highest. Trend in current assets and plant assets is quite favorable in the year 2016 as compared to the year 2015. Although the long-term investments have reduced in the year 2016 but overall total assets are on the positive side. Current liabilities have also increased when compared to the year 2015 may be because of more selling on credit. Retained earnings also show an increasing trend.

1 Introduction: Current ratio refers to the ratio of current assets and current liabilities. This ratio shows the resources a company has to pay off its short term debts and obligations. To compute: The current ratio of the company. Current ratio for 2014 − 2.5 Current ratio for 2015 − 1.9 Current ratio for 2016 − 2.3 Calculation of current ratio for 2014 − Current ratio = Current assets Current liabilities = 51748 20300 = 2.5 Calculation of current ratio for 2015 − Current ratio = Current assets Current liabilities = 37924 19960 = 1.9 Calculation of current ratio for 2016 − Current ratio = Current assets Current liabilities = 52390 22800 = 2.3 2 Introduction: While making a common-size income statement, each line item is expressed as a percentage of sales or revenue. These percentages can be used to compare the performance of the company with the company itself or the competitors. To express: The income statement data in common-size percents. K Company Common size Income Statement For years ended December 31, 2016, 2015 and 2014 Particulars 2016 (%) 2015 (%) 2014 (%) Sales 555000 555000 = 100 340000 340000 = 100 278000 278000 = 100 Cost of goods sold 283500 555000 = 51.08 212500 340000 = 62.5 153900 278000 = 55.36 Gross profit ( Sales − Cost of goods sold ) 48.92 37.50 44.64 Selling expenses 102900 555000 = 18.54 46920 340000 = 13.80 50800 278000 = 18.27 Administrative expenses 50668 555000 = 9.13 29920 340000 = 8.80 22800 278000 = 8.20 Total expenses ( Selling expenses + Administrative expenses ) 27.67 22.60 26.47 Income before taxes ( Gross profit − Total expenses ) 21.25 14.90 18.17 Income taxes 40800 555000 = 7.35 10370 340000 = 3.05 15670 278000 = 5.64 Net income ( Income before taxes − Income taxes ) 13.90 11.85 12.53 3 Introduction: The trend percentages help in analyzing the changes in financial statements of a company over a period of time. To express: The balance sheet data in trend percents with 2014 as the base year. K Company Balance Sheet For years ended December 31, 2016, 2015 and 2014 Particulars 2016 2015 Assets Current assets 52390 51748 = 101.24 37924 51748 = 73.29 Long-term investments 0 3950 = 0.00 500 3950 = 12.66 Plant assets, net 100000 60000 = 166.67 96000 60000 = 160 Total assets 152390 115698 = 131.71 134424 115698 = 116.19 Liabilities and equity Current liabilities 22800 20300 = 112.32 19960 20300 = 98.33 Common stock 72000 60000 = 120 72000 60000 = 120 Other paid-in capital 9000 6000 = 150 9000 6000 = 150 Retained earnings 48590 29398 = 165.28 33464 29398 = 113.83 Total liabilities and equity 152390 115698 = 131.71 134424 115698 = 116.19 4 Introduction: The trend percentages help in analyzing the changes in financial statements of a company over a period of time. To comment: The notable relations revealed by the ratios and percents computed. The current ratio of the company shows that the company was sound enough to pay its short term debts and obligations but its current ratio dropped in the year 2015 indicating inadequate current assets that are not enough to pay for the current liabilities. The ratio is good in the year 2016 which means company is able to pay its short term obligations with the available current assets. Cost of goods sold was lower in the year 2014 which means higher gross profit and on the other hand cost of goods sold has increased in the year 2015 resulting in lower gross profit. Cost of goods sold is the lowest in the year 2016 and therefore the gross profit is the highest. Trend in current assets and plant assets is quite favorable in the year 2016 as compared to the year 2015. Although the long-term investments have reduced in the year 2016 but overall total assets are on the positive side. Current liabilities have also increased when compared to the year 2015 may be because of more selling on credit. Retained earnings also show an increasing trend.

Solution Summary: The author explains that the current ratio is the ratio of current assets and current liabilities, which shows the resources a company has to pay off its short term debts and obligations.

Financial Accounting: Information for Decisions

Financial Accounting: Information for Decisions

8th Edition

ISBN: 9781259533006

Author: John J Wild

Publisher: McGraw-Hill Education

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Financial Accounting: Information for Decisions

Ch. 13 - Explain the difference between financial reporting...Ch. 13 - Prob. 2DQ Ch. 13 - Prob. 3DQ Ch. 13 - Prob. 4DQ Ch. 13 - Prob. 5DQ Ch. 13 - Prob. 6DQ Ch. 13 - Prob. 7DQ Ch. 13 - Prob. 8DQ Ch. 13 - Prob. 9DQ Ch. 13 - Prob. 10DQ

Ch. 13 - Prob. 11DQ Ch. 13 - Prob. 12DQ Ch. 13 - Prob. 13DQ Ch. 13 - Prob. 14DQ Ch. 13 - Prob. 15DQ Ch. 13 - Prob. 16DQ Ch. 13 - Prob. 17DQ Ch. 13 - Financial reporting Cl. Which of the following...Ch. 13 - Prob. 2QS Ch. 13 - Prob. 3QS Ch. 13 - Prob. 4QS Ch. 13 - Prob. 5QS Ch. 13 - Prob. 6QS Ch. 13 - Prob. 7QS Ch. 13 - Prob. 8QS Ch. 13 - Prob. 9QS Ch. 13 - Prob. 1E Ch. 13 - Prob. 2E Ch. 13 - Prob. 3E Ch. 13 - Prob. 4E Ch. 13 - Prob. 5E Ch. 13 - Prob. 6E Ch. 13 - Prob. 7E Ch. 13 - Prob. 8E Ch. 13 - Risk and capital structure analysis P3 Refer to...Ch. 13 - Prob. 10E Ch. 13 - Prob. 11E Ch. 13 - Prob. 12E Ch. 13 - Prob. 14E Ch. 13 - Prob. 15E Ch. 13 - Prob. 1PSA Ch. 13 - Prob. 2PSA Ch. 13 - Prob. 3PSA Ch. 13 - Prob. 4PSA Ch. 13 - Prob. 5PSA Ch. 13 - Prob. 6PSA Ch. 13 - Prob. 1PSB Ch. 13 - Prob. 2PSB Ch. 13 - Prob. 3PSB Ch. 13 - Prob. 4PSB Ch. 13 - Prob. 5PSB Ch. 13 - Prob. 6PSB Ch. 13 - Prob. 13SP Ch. 13 - Prob. 1BTN Ch. 13 - Prob. 2BTN Ch. 13 - Prob. 3BTN Ch. 13 - Prob. 7BTN Ch. 13 - Prob. 9BTN

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