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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 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

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

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

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 * 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 * 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

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