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Chapter 15: Q6SE (page 837)
Evaluating current ratio
Requirements
1. Compute Accel鈥檚 Companies鈥� current ratio at May 31, 2018 and 2017.
2. Did Accel鈥檚 Companies鈥� current ratio improve, deteriorate, or hold steady during 2018?
Answer
Decreasing Current ratio Over a year
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Great Value Optical Company reported the following amounts on its balance sheet at
December 31, 2018 and 2017:
2018 2017
Cash and Receivables \( 80,640 \) 80,575
Merchandise Inventory 56,840 54,450
Property, Plant, and Equipment, Net 142,520 139,975
Total Assets \( 280,000 \) 275,000
Prepare a vertical analysis of Great Value鈥檚 assets for 2018 and 2017.
Net sales revenue, net income, and commonA stockholders鈥� equity for Azbel Mission Corporation, a manufacturer of contact lenses, follow for a four-year period.
Requirements
1.Compute trend analyses for each item for 2017鈥�2019. Use 2016 as the base year,and round to the nearest whole percent.
2.Compute the rate of return on common stockholders鈥� equity for 2017鈥�2019, rounding to three decimal places.
Data for Oxford State Bank follow:
2018 | 2017 | |
Net Income | \(71,900 | \)64,300 |
顿颈惫颈诲别苍诲蝉鈥擟辞尘尘辞苍 | 22,000 | 22,000 |
顿颈惫颈诲别苍诲蝉鈥摈谤别蹿别谤谤别诲 | 16,800 | 16,800 |
Total Stockholders鈥� Equity at Year-End (includes 95,000 shares of common stock) | 770,000 | 610,000 |
Net Income | \( 71,900 | \) 64,300 |
Market Price per Share of Common Stock | \( 16.50 | \) 10.00 |
Evaluate the common stock of Oxford State Bank as an investment. Specifically,
use the three stock ratios to determine whether the common stock has increased or decreased in attractiveness during the past year. Round to two decimal places.
Ross鈥檚 Lipstick Company鈥檚 long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders鈥� equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company鈥檚 lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.
Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross鈥檚 management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management鈥檚 intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term鈥攁 current asset. On the controller鈥檚 recommendation, Ross鈥檚 board of directors votes to reclassify long-term investments as short-term.
Requirements
1. What effect will reclassifying the investments have on the current ratio? Is Ross鈥檚 true financial position stronger as a result of reclassifying the investments?
2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross鈥檚 management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.
Determining the effects of business transactions on selected ratios
Financial statement data of Modern Traveler鈥檚 Magazine include the following items:
Cash | \(19,000 |
Accounts Receivable, Net | 82,000 |
Merchandise Inventory | 183,000 |
Total Assets | 638,000 |
Accounts Payable | 102,000 |
Accrued Liabilities | 35,000 |
Short-term Notes Payable | 50,000 |
Long-term Liabilities | 221,000 |
Net Income | 69,000 |
Common Shares Outstanding | 50,000 shares |
Requirements
Current ratio | Debt ratio | Earnings per share |
2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately.
a. Purchased merchandise inventory of \)42,000 on account.
b. Borrowed \(121,000 on a long-term note payable.
c. Issued 5,000 shares of common stock, receiving cash of \)103,000.
d. Received cash on account, $5,000.
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