Demonstration Problem Accounting What the Numbers Mean 10e Demonstration Problem Chapter 3 – Problem 18 (parts a-e) Calculate Profitability and Liquidity Measures
Problem Definition Presented here are the comparative balance sheets of Hames, Inc., at December 31, 2014, and 2013. Sales for the year ended December 31, 2014, totaled $870,000. HAMES, INC. Balance Sheets December 31, 2014 and 2013 Assets 2014 2013 Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,500 $ 28,500 Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,000 108,000 Merchandise inventory. . . . . . . . . . . . . . . . . . . . . . . . . . 154,500 148,500 Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . $303,000 $285,000 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 60,000 Plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,500 165,000 Less: accumulated depreciation. . . . . . . . . . . . . . . . (97,500) (90,000) Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $468,000 $420,000
Problem Definition HAMES, INC. Balance Sheets December 31, 2014 and 2013 Liabilities 2014 2013 Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,000 $ 25,500 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000 72,000 Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 30,000 27,000 Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . $141,000 $124,500 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000 45,000 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,000 $169,500
Problem Definition Common stock, no par, 100,000 shares authorized, HAMES, INC. Balance Sheets December 31, 2014 and 2013 Stockholders’ Equity 2014 2013 Common stock, no par, 100,000 shares authorized, 40,000 and 25,000 shares issued, respectively. . . . . . $111,000 $ 88,500 Retained earnings: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,000 127,500 Net income for the year . . . . . . . . . . . . . . . . . . . . . . . 51,000 42,000 Dividends for the year . . . . . . . . . . . . . . . . . . . . . . . . (30,000) (7,500) Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . $183,000 $162,000 Total stockholders’ equity. . . .. . . . . . . . . . . . . $294,000 $250,500 Total liabilities and stockholders’ equity . . . . . . . . . . . . . $468,000 $420,000
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.
Problem Solution ROI = Margin * Turnover
Problem Solution Margin = Net income / Sales ROI = Margin * Turnover
Problem Solution ROI = Margin * Turnover Margin = Net income / Sales = $51,000 / $870,000 ROI = Margin * Turnover
Problem Solution ROI = Margin * Turnover Margin = Net income / Sales = $51,000 / $870,000 = 5.86% ROI = Margin * Turnover
Problem Solution ROI = Margin * Turnover Margin = Net income / Sales = $51,000 / $870,000 = 5.86% Turnover = Sales / Average Total Assets ROI = Margin * Turnover
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
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
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 * 1.959 Turnover ROI = Margin * Turnover
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 * 1.959 Turnover = 11.5% ROI = Margin * Turnover
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.
Problem Solution ROE = Net income / Average stockholders’ equity
Problem Solution ROE = Net income / Average stockholders’ equity
Problem Solution ROE = Net income / Average stockholders’ equity ($250,500 + $294,000) / 2
Problem Solution ROE = Net income / Average stockholders’ equity ($250,500 + $294,000) / 2 = $272,250
Problem Solution ROE = Net income / Average stockholders’ equity ($250,500 + $294,000) / 2 = $272,250 ROE = $51,000 / $272,250
Problem Solution ROE = Net income / Average stockholders’ equity ($250,500 + $294,000) / 2 = $272,250 ROE = $51,000 / $272,250 = 18.7%
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.
Problem Solution Working capital = Current assets - Current liabilities
Problem Solution Working capital = Current assets - Current liabilities Current assets = $303,000
Problem Solution Working capital = Current assets - Current liabilities Current assets = $303,000 Current liabilities = $141,000
Problem Solution Working capital = Current assets - Current liabilities Current assets = $303,000 Current liabilities = $141,000 Working capital = $303,000 - $141,000
Problem Solution Working capital = Current assets - Current liabilities Current assets = $303,000 Current liabilities = $141,000 Working capital = $303,000 - $141,000 = $162,000
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.
Problem Solution Current ratio = Current assets / Current liabilities
Problem Solution Current ratio = Current assets / Current liabilities
Problem Solution Current ratio = Current assets / Current liabilities
Problem Solution Current ratio = Current assets / Current liabilities
Problem Solution Current ratio = Current assets / Current liabilities
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.
Problem Solution Acid-test ratio = (Cash + Accounts receivable) / Current liabilities
Problem Solution Acid-test ratio = (Cash + Accounts receivable) / Current liabilities Cash + Accounts receivable = $31,500 + $117,000 =
Problem Solution Acid-test ratio = (Cash + Accounts receivable) / Current liabilities Cash + Accounts receivable = $31,500 + $117,000 = $148,500
Problem Solution Acid-test ratio = (Cash + Accounts receivable) / Current liabilities Cash + Accounts receivable = $31,500 + $117,000 = $148,500 Current liabilities = $141,000
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
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
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