1. Demonstration Problem
Accounting
What the Numbers Mean 10e
Demonstration Problem
Chapter 3 – Problem 18 (parts a-e)
Calculate Profitability and Liquidity Measures

2. Problem Definition
Presented here are the comparative balance sheets of Hames, Inc., at December 31, 2014, and Sales for the year ended December 31, 2014, totaled $870,000.
HAMES, INC.
Balance Sheets
December 31, 2014 and 2013
Assets
Cash $ 31, $ 28,500
Accounts receivable , ,000
Merchandise inventory , ,500
Total current assets $303, $285,000
Land , ,000
Plant and equipment , ,000
Less: accumulated depreciation (97,500) (90,000)
Total assets $468, $420,000

3. Problem Definition
HAMES, INC.
Balance Sheets
December 31, 2014 and 2013
Liabilities
Short-term debt $ 27, $ 25,500
Accounts payable , ,000
Other accrued liabilities , ,000
Total current liabilities $141, $124,500
Long-term debt , ,000
Total liabilities $174, $169,500

4. Problem Definition Common stock, no par, 100,000 shares authorized,
HAMES, INC.
Balance Sheets
December 31, 2014 and 2013
Stockholders’ Equity
Common stock, no par, 100,000 shares authorized,
40,000 and 25,000 shares issued, respectively $111, $ 88,500
Retained earnings:
Beginning balance , ,500
Net income for the year , ,000
Dividends for the year (30,000) (7,500)
Ending balance $183, $162,000
Total stockholders’ equity $294, $250,500
Total liabilities and stockholders’ equity $468, $420,000

5. Problem Definition Calculate ROI for 2014. Calculate ROE for 2014.
Calculate working capital at December 31, 2014.
Calculate the current ratio at December 31, 2014.
e. Calculate the acid-test ratio at December 31, 2014.

6. Problem Solution
ROI = Margin * Turnover

7. Problem Solution
Margin = Net income / Sales
ROI = Margin * Turnover

8. Problem Solution ROI = Margin * Turnover Margin = Net income / Sales
= $51,000 / $870,000
ROI = Margin * Turnover

9. Problem Solution ROI = Margin * Turnover Margin = Net income / Sales
= $51,000 / $870,000
= 5.86%
ROI = Margin * Turnover

10. Problem Solution ROI = Margin * Turnover Margin = Net income / Sales
= $51,000 / $870,000
= 5.86%
Turnover = Sales / Average Total Assets
ROI = Margin * Turnover

11. Problem Solution ROI = Margin * Turnover Margin = Net income / Sales
= $51,000 / $870,000
= 5.86%
Turnover = Sales / Average Total Assets
= $870,000 / (($420,000 + $468,000) / 2 )
ROI = Margin * Turnover

12. Problem Solution ROI = Margin * Turnover Margin = Net income / Sales
= $51,000 / $870,000
= 5.86%
Turnover = Sales / Average Total Assets
= $870,000 / (($420,000 + $468,000) / 2 )
= 1.959
ROI = Margin * Turnover

13. Problem Solution ROI = Margin * Turnover Margin = Net income / Sales
= $51,000 / $870,000
= 5.86%
Turnover = Sales / Average Total Assets
= $870,000 / (($420,000 + $468,000) / 2 )
= 1.959
ROI = 5.86% Margin * Turnover
ROI = Margin * Turnover

14. Problem Solution ROI = Margin * Turnover Margin = Net income / Sales
= $51,000 / $870,000
= 5.86%
Turnover = Sales / Average Total Assets
= $870,000 / (($420,000 + $468,000) / 2 )
= 1.959
ROI = 5.86% Margin * Turnover = 11.5%
ROI = Margin * Turnover

15. Problem Definition Calculate ROI for 2014. Calculate ROE for 2014.
Calculate working capital at December 31, 2014.
Calculate the current ratio at December 31, 2014.
e. Calculate the acid-test ratio at December 31, 2014.

16. Problem Solution
ROE = Net income / Average stockholders’ equity

17. Problem Solution ROE = Net income / Average stockholders’ equity

18. Problem Solution ROE = Net income / Average stockholders’ equity
($250,500 + $294,000) / 2

19. Problem Solution ROE = Net income / Average stockholders’ equity
($250,500 + $294,000) / 2 = $272,250

20. Problem Solution ROE = Net income / Average stockholders’ equity
($250,500 + $294,000) / 2 = $272,250
ROE = $51,000 / $272,250

21. Problem Solution ROE = Net income / Average stockholders’ equity
($250,500 + $294,000) / 2 = $272,250
ROE = $51,000 / $272,250 = 18.7%

22. Problem Definition Calculate ROI for 2014. Calculate ROE for 2014.
Calculate working capital at December 31, 2014.
Calculate the current ratio at December 31, 2014.
e. Calculate the acid-test ratio at December 31, 2014.

23. Problem Solution
Working capital = Current assets - Current liabilities

24. Problem Solution
Working capital = Current assets - Current liabilities
Current assets = $303,000

25. Problem Solution
Working capital = Current assets - Current liabilities
Current assets = $303,000
Current liabilities = $141,000

26. Problem Solution
Working capital = Current assets - Current liabilities
Current assets = $303,000
Current liabilities = $141,000
Working capital = $303,000 - $141,000

27. Problem Solution
Working capital = Current assets - Current liabilities
Current assets = $303,000
Current liabilities = $141,000
Working capital = $303,000 - $141,000 = $162,000

28. Problem Definition Calculate ROI for 2014. Calculate ROE for 2014.
Calculate working capital at December 31, 2014.
Calculate the current ratio at December 31, 2014.
e. Calculate the acid-test ratio at December 31, 2014.

29. Problem Solution
Current ratio = Current assets / Current liabilities

30. Problem Solution Current ratio = Current assets / Current liabilities

31. Problem Solution Current ratio = Current assets / Current liabilities

32. Problem Solution Current ratio = Current assets / Current liabilities

33. Problem Solution Current ratio = Current assets / Current liabilities

34. Problem Definition Calculate ROI for 2014. Calculate ROE for 2014.
Calculate working capital at December 31, 2014.
Calculate the current ratio at December 31, 2014.
e. Calculate the acid-test ratio at December 31, 2014.

35. Problem Solution Acid-test ratio =
(Cash + Accounts receivable) / Current liabilities

36. Problem Solution Acid-test ratio =
(Cash + Accounts receivable) / Current liabilities
Cash + Accounts receivable = $31,500 + $117,000 =

37. Problem Solution Acid-test ratio =
(Cash + Accounts receivable) / Current liabilities
Cash + Accounts receivable = $31,500 + $117,000 = $148,500

38. Problem Solution Acid-test ratio =
(Cash + Accounts receivable) / Current liabilities
Cash + Accounts receivable = $31,500 + $117,000 = $148,500
Current liabilities = $141,000

39. Problem Solution Acid-test ratio =
(Cash + Accounts receivable) / Current liabilities
Cash + Accounts receivable = $31,500 + $117,000 = $148,500
Current liabilities = $141,000
Acid-test ratio = $148,500 / $141,000

40. Problem Solution Acid-test ratio =
(Cash + Accounts receivable) / Current liabilities
Cash + Accounts receivable = $31,500 + $117,000 = $148,500
Current liabilities = $141,000
Acid-test ratio = $148,500 / $141,000 = 1.05

41. Accounting What the Numbers Mean 10e David H. Marshall
You should now have a better understanding of calculating profitability and liquidity measures.
Remember that there is a demonstration problem for each chapter that is here for your learning benefit.
David H. Marshall
Wayne W. McManus
Daniel F. Viele