Study Guide for Working Papers for Heintz/Parry's College Accounting, Chapters 16-27, 23rd
Study Guide for Working Papers for Heintz/Parry's College Accounting, Chapters 16-27, 23rd
23rd Edition
ISBN: 9781337913577
Author: HEINTZ, James A., Parry, Robert W.
Publisher: Cengage Learning
Question
100%
Book Icon
Chapter 24, Problem 1MP

1.

To determine

Prepare horizontal analysis of the comparative income statement and balance sheet.

1.

Expert Solution
Check Mark

Explanation of Solution

Ratio analysis: The analysis of a company using the financial ratios and comparing its trends and measure its performance within the company and the companies of the industry is known as ratio analysis. The main categories of ratio analyses are liquidity ratios, profitability ratios, activity ratios, and leverage ratios.

Horizontal analysis: The comparison of an item of a financial statement of one year against the same item of the same financial statement of another year, to determine the relation between the two items, is referred to as horizontal analysis. The horizontal analysis percentage is calculated by using the given formula:

Horizontal analysis percentage =Current yearPrevious yearBase year×100

Prepare horizontal analysis of the comparative income statement of Company NPC.

Company CPC
Comparative Income Statement
For the Year Ended December 31, 20-2 and 20-1
Particulars

20-2

(A)

20-1

(B)

Increase (Decrease)
Amount (C)Percentage (C÷B)×100
Net sales$466,451$291,613$174,83860.0
Cost of goods sold$285,889$188,626$97,26351.6
Gross Profit$180,562$102,987$77,57575.3
operating expenses$125,650$78,200$47,45060.7
Operating income$54,912$24,787$30,125121.5
Interest expenses$1,200$500$700140.0
Income before income taxes$53,712$24,287$29,425121.2
Income tax expense$18,250$7,285$10,965150.5
Net income$35,462$17,002$18,460108.6

Table (1)

Prepare horizontal analysis of the comparative balance sheet of Company NPC.

Company NPC
Comparative Balance Sheet
For the Year Ended December 31, 20-2 and 20-1
Particulars

20-2

(A)

20-1

(B)

Increase (Decrease)
Amount (C)Percentage (C÷B)×100
Assets
Current assets:    
Cash$8,600$7,500$1,10014.7
Government notes$3,000$2,000$1,00050.0
Receivables (net)$10,500$8,600$1,90022.1
Merchandise inventory$53,600$33,200$20,40061.4
Supplies and prepayments$4,500$3,200$1,30040.6
Total current assets$80,200$54,500$25,70047.2
Property, plant and equipment:    
Land$40,000$40,000$00.0
Building$200,000$150,000$50,00033.3
Delivery equipment$13,000$15,000($2,000)-13.3
Office equipment (net)$5,400$6,000($600)-10.0
Patents$5,000$6,000($1,000)-16.7
Factory equipment (net)$200,000$52,930$147,070277.9
Total property, plant and equipment$263,400$217,000$46,40021.4
Total Assets$343,600$271,500$72,10026.6
     
Liabilities    
Current liabilities:    
Notes payable$5,000$3,000$2,00066.7
Accounts payable$28,700$22,300$6,40028.7
Accrued interest payable$500$1,700($1,200)-70.6
Accrued and withheld payment taxes$4,200$5,600($1,400)-25.0
     
Total current liabilities$38,400$32,600$5,80017.8
Long-term liabilities:    
Bonds payable$50,000$20,000$30,000150.0
Total liabilities$88,400$52,600$35,80068.1
     
Stockholders' Equity    
Common stock$115,000$100,000$15,00015.0
Paid in capital in excess of par$65,000$60,000$5,0008.3
Retained earnings$75,200$58,900$16,30027.7
Total stockholders' equity$255,200$218,900$36,30016.6
Total liabilities and stockholders' equity$343,600$271,500$72,10026.6

Table (2)

2.

To determine

Prepare vertical analysis of the comparative income statement and balance sheet of Company NPC.

2.

Expert Solution
Check Mark

Explanation of Solution

Vertical Analysis: Vertical analysis is prepared to analyze the relationship among various financial statements with a particular base amount. This analysis is otherwise called as common-size statement.

Formula:

Vertical analysis percentage =Financial statement itemBase item×100

Prepare vertical analysis of the comparative income statement of Company NPC.

Company NPC
Comparative Income Statement
For Years Ended December 31, 20-2 and 20-1
Particulars20-220-1
AmountpercentAmountPercent
Net sales$466,451100%$291,613100%
Cost of goods sold285,88961.30%188,62664.70%
Gross profit$180,56238.70%$102,98735.30%
Operating expenses125,65026.90%78,20026.80%
Operating income$54,91211.80%$24,7878.50%
Other expenses1,2000.30%5000.20%
Income before income taxes$53,71211.50%$24,2878.30%
Income tax expense18,2503.90%7,2852.50%
Net income$35,4627.60%$17,0025.80%

Table (3)

Prepare vertical analysis of the comparative balance sheet of Company NPC.

Company NPC
Comparative Balance Sheet
December 31, 20-2 and 20-1
20-220-1
AmountPercentAmountPercent
Assets
Current assets:    
Cash$8,6002.50%$7,5002.80%
Government notes3,0000.90%2,0000.70%
Accounts receivable (net)10,5003.10%8,6003.20%
Merchandise inventory53,60015.60%33,2001.20%
Supplies and prepayments4,5001.30%3,2001.20%
Total current assets$80,20023.30%$54,50020.10%
Property, plant, and equipment:    
Land$40,00011.60%$40,00014.70%
Building (net)200,00058.20%150,00055.20%
Delivery equipment (net)13,0003.80%15,0005.50%
Office equipment (net)5,4001.60%6,0002.20%
Patents5,0001.50%6,0002.20%
Total property, plant, and equipment$263,40076.70%$217,00079.90%
Total assets$343,600100%$271,500100%
     
Liabilities    
Current liabilities:    
Notes payable$5,0001.50%$3,0001.10%
Accounts payable28,7008.40%22,3008.20%
Accrued and withheld payroll  taxes4,2001.20%5,6002.10%
Accrued interest payable5000.10%1,7000.60%
Total current liabilities$38,40011.20%$32,60012%
Long-term liabilities:    
Bonds payable50,00014.60%20,0007.40%
Total liabilities$88,40025.70%$52,60019.40%
     
Stockholders’ Equity    
Common stock ($5 par)$115,00033.50%$100,00036.80%
Paid-in capital in excess of par65,00018.90%60,00022.10%
Retained earnings75,20021.90%58,90021.70%
Total stockholders’ equity$255,20074.30%$218,90080.60%
Total liabilities and stockholders' equity$343,600100%$271,500100%

Table (4)

3.

To determine

Compute the following liquidity measures for 20-2.

  1. (a) Working capital
  2. (b) Current ratio
  3. (c) Quick or acid –test ratio

3.

Expert Solution
Check Mark

Explanation of Solution

Liquidity measures:

Liquidity measures denote a company’s capacity to meet its current liabilities. These measures focus on balance sheet amounts initially and on the ability of the company to generate funds to liquidate its current obligations.

(a)

Calculate working capital on December 31, 20-2.

Working capital=Current assets Current liabilites=$80,200 $38,400=$41,800

(b)

Calculate current ratio on December 31, 20-2.

Current ratio =Current assetsCurrent liabilites=$80,200$38,400=2.09:1

(c)

Calculate quick or acid test ratio on December 31, 20-2.

Quick ratio =Quick assetsCurrent liabilites=($8,600+$3,000+$10,500)$38,400=0.58to1

4.

To determine

Activity measures:

Activity measures initially focus on how efficiently the assets are used. For example, the speed of the receivables collected and inventories sold, as well as the usage of the assets to generate revenue.

Calculate the following activity measures for 20-2.

  1. (a) Accounts receivable and average number of days to collect.
  2. (b) Merchandise inventory turnover and average number of days to sell inventory.
  3. (c) Asset turnover

4.

Expert Solution
Check Mark

Explanation of Solution

(a)

Calculate accounts receivable turnover.

Accounts receivable turnover = Net salesAverage accounts receivable=$120,000($8,600+$10,5002)=$120,000$9,550=12.57times

Calculate average collection period.

Average collection period =365Accounts receivable turnover=36512.57times=29.04times

(b)

Calculate merchandise inventory turnover.

Merchandise inventory turnover =Cost of goods soldAverage inventory=$285,889($33,200+$53,6002)=$285,889$43,400=6.59times

Calculate average days to sell inventory.

Average days to sell inventory =365Merchandise inventory turnover=3656.59times=55.39days

(c)

Calculate asset turnover.

Asset turnover = Net salesAverage assets=$466,451($271,500+$343,6002)=$466,451$307,550=1.52times

5.

To determine

Compute the following profitability measures for 20-2.

  1. (a) Profit margin ratio
  2. (b) Return on assets
  3. (c) Return on common stockholders’ equity
  4. (d) Earnings per share of common stock

5.

Expert Solution
Check Mark

Explanation of Solution

Profitability measures:

Profitability measures show the ability of the company to earn income by operating proficiently (satisfactory return on investments). These ratios focus upon company’s’ profit margin and “the relationship between key income statement and balance sheet amounts”. Profit margin, return-on-assets, return on common stockholders’ equity, earnings per share of common stock are the profitability ratios.

(a)

Calculate profit margin ratio.

Profit margin ratio =Net incomeNet sales=$35,462$466,451=7.60%

(b)

Calculate return on assets for 20-2.

Return on assets=Net incomeAverage assets=$35,462($271,500+$343,6002)=$35,462$307,550=11.53%

(c)

Calculate return on common stockholders’ equity for 20-2.

Return on common stockholders' equity) =Net incomeAverage common stockholders' equtiy=$35,462($218,900+$255,2002)=$35,462$237,050=14.96%

(d)

Calculate earnings per share of common stock.

Earnings per share of common stock =Net incomeAverage common shares outstanding=$35,462(20,000 shares + 23,000shares2)=$35,46221,500shares=$1.65per share

Calculate beginning common shares outstanding.

Begining common shares outstanding =Common stock during the period 20-1Book value per common stock=$100,000$5=20,000shares

Calculate ending common shares outstanding.

Ending common shares outstanding =Common stock during the period 20-2Book value per common stock=$115,000$5=23,000shares

6.

To determine

Leverage measures:

Leverage measures overlook the mixture of debt and equity which is required for analyzing the ability of the Company to meet its debt obligations as they become due. Debt to equity ratio: Assets-to-equity ratio, Times interest earned ratio are the leverage measures.

Compute the following leverage ratios.

  1. (a) Debt-to-equity ratio
  2. (b) Times interest earned ratio.

6.

Expert Solution
Check Mark

Explanation of Solution

(a)

Calculate debt-to-equity ratio.

Debt-to-equity ratio =Total liabilitesTotal stockholders' equity=$88,400$255,200=0.35to 1

(b)

Calculate times interest earned ratio.

Times interest earned ratio =Income before interest and taxesInterest expense=($35,462+$18,250+$1,200)$1,200=45.76times

7.

To determine

Calculate the following market measures for 20-2.

  1. (a) Price earnings ratio
  2. (b) Book value per share of common stock.

7.

Expert Solution
Check Mark

Explanation of Solution

(a)

Calculate price earnings ratio.

Price earnings ratio =Market price of common stockEarnings per share of common stock=$23per share$1.65per share=13.94

(b)

Calculate book value per share of common stock.

Book value per share of common stock) =Common stockholders' equity as on 31st December 20-2Number of common shares outstanding as on 31st December 20-2=$255,20023,000shares=$11.10per share

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
General Accounting
Solve this question
Given answer general Accounting
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
College Accounting, Chapters 1-27
Accounting
ISBN:9781337794756
Author:HEINTZ, James A.
Publisher:Cengage Learning,
Text book image
Survey of Accounting (Accounting I)
Accounting
ISBN:9781305961883
Author:Carl Warren
Publisher:Cengage Learning
Text book image
Century 21 Accounting Multicolumn Journal
Accounting
ISBN:9781337679503
Author:Gilbertson
Publisher:Cengage
Text book image
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Text book image
Financial Accounting: The Impact on Decision Make...
Accounting
ISBN:9781305654174
Author:Gary A. Porter, Curtis L. Norton
Publisher:Cengage Learning
Text book image
Financial Accounting
Accounting
ISBN:9781337272124
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Cengage Learning