154.Wyatt Parks is interested in purchasing the stock of Dobbins Products, a company that sells bricks to the construction industry. Before purchasing the stock, Parks would like to learn as much as possible about the company. However, all he has to go on is the current year’s (Year 3) annual report, which contains no comparative data other than the summary of the ratios given below:
Year 3Year 2Year 1
Current ratio1.72.32.1
Acid-test (quick) ratio0.81.01.2
Accounts receivable turnover8.9 times10.1 times12.5 times
Inventory turnover6.1 times8.1 times8.3 times
Return on total assets15.50%12.10%10.30%
Return on common stockholders’ equity18.10%14.70%11.90%
Price-earnings ratio12.317.217.7
Earnings per share$1.53$1.52$1.55
Is it becoming easier for the company to pay its bills as they come due? Support your answer with accounting justification citing specific information in the analysis.
155.Comparative financial statements for Smart Buy for the years ending December 31, 2014 and 2013 are shown below:
December 31
Assets 2014 2013
Current assets:
Cash$ 14,000 $ 12,458
Accounts receivable45,48935,486
Inventory39,23932,568
Prepaid expenses 3,400 2,581
Total current assets102,128 83,093
Long-term investments128,580 104,600
Property, plant and equipment, net 789,145 771,258
Total assets$1,019,853 $958,951
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$ 98,789 $ 85,451
Other current liabilities 3,456 5,157
Total current liabilities102,245 90,608
Long-term debt 456,781 414,760
Total liabilities559,026 505,368
Stockholders’ equity:
Common stock100,000 100,000
Additional paid-in capital275,000 275,000
Retained earnings 85,827 78,583
Total stockholders’ equity 460,827 453,583
Total liabilities and stockholders’ equity $1,019,853 $ 958,951
Year Ended December 31
20142013
Net sales $2,281,789 $2,074,354
Cost of goods sold 1,505,981 1,348,330
Gross margin 775,808 726,024
Operating expenses 458,245 420,408
Operating income 317,563 305,616
Interest expense 36,542 33,181
Earnings before income taxes 281,021 272,435
Income tax expense 98,357 95,352
Net earnings $ 182,664 $ 177,083
Calculate the following ratios for 2014 for Smart Buy:
a.Current ratio
b.Quick ratio
c.Debt-to-equity ratio
d.Times interest earned
CHALLENGE EXERCISES
156.Comparative balance sheets for Save-A-Penny for the years ending December 31, 2014 and 2013 are shown below:
December 31
Assets2014 2013
Current assets:
Cash$ 15,600$ 14,200
Accounts receivable19,80017,500
Inventory21,20024,500
Prepaid expenses3,100 4,800
Total current assets59,70061,000
Property, plant and equipment, net285,300266,000
Total assets$345,000 $327,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable$ 14,500$ 15,900
Other current liabilities26,500 23,100
Total current liabilities41,00039,000
Long-term debt216,000204,000
Total liabilities257,000243,000
Stockholders’ equity:
Common stock22,00019,800
Retained earnings66,000 64,200
Total stockholders’ equity88,000 84,000
Total liabilities and stockholders’ equity$345,000 $327,000
Selected additional amounts for Save-A-Penny follow for the years ending December 31, 2014 and 2013:
Year Ended December 31
2014 2013
Net sales$432,000$398,000
Interest expense12,90012,000
Income tax expense15,90015,600
Net earnings37,10036,400
Calculate at least 3 debt-related ratios for Save-A-Penny for 2014 and 2013. Evaluate the risk considerations and any changes between the two years as it relates to Save-A-Penny’s ability to satisfy its obligations.
157.Harry’s Fresh Seafood just completed its first three years of operations. The accountant performed the following ratio analysis for the company:
Year 3 Year 2Year 1
Accounts receivable turnover16.9 times13.1 times11.5 times
Inventory turnover144.1 times120.3 times99.3 times
Calculate day’s sale in receivables and day’s sales in inventory for all three years. Interpret the ratios.
Evaluate the efficiency with which Harry’s Fresh Seafood manages its receivables and inventory. Interpret the ratios and support your answer with accounting justification citing specific information in the analysis.
For what reason do the two turnovers differ so dramatically?
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