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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

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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

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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

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**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

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**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.

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Problem Solution ROI = Margin * Turnover

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

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

= $51,000 / $870,000 ROI = Margin * Turnover

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

= $51,000 / $870,000 = 5.86% ROI = Margin * Turnover

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

= $51,000 / $870,000 = 5.86% Turnover = Sales / Average Total Assets ROI = Margin * Turnover

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**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

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**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

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**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

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**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

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**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.

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Problem Solution ROE = Net income / Average stockholders’ equity

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**Problem Solution ROE = Net income / Average stockholders’ equity**

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**Problem Solution ROE = Net income / Average stockholders’ equity**

($250,500 + $294,000) / 2

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**Problem Solution ROE = Net income / Average stockholders’ equity**

($250,500 + $294,000) / 2 = $272,250

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**Problem Solution ROE = Net income / Average stockholders’ equity**

($250,500 + $294,000) / 2 = $272,250 ROE = $51,000 / $272,250

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**Problem Solution ROE = Net income / Average stockholders’ equity**

($250,500 + $294,000) / 2 = $272,250 ROE = $51,000 / $272,250 = 18.7%

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**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.

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Problem Solution Working capital = Current assets - Current liabilities

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

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

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

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

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**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.

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Problem Solution Current ratio = Current assets / Current liabilities

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**Problem Solution Current ratio = Current assets / Current liabilities**

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**Problem Solution Current ratio = Current assets / Current liabilities**

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**Problem Solution Current ratio = Current assets / Current liabilities**

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**Problem Solution Current ratio = Current assets / Current liabilities**

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**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.

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**Problem Solution Acid-test ratio =**

(Cash + Accounts receivable) / Current liabilities

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**Problem Solution Acid-test ratio =**

(Cash + Accounts receivable) / Current liabilities Cash + Accounts receivable = $31,500 + $117,000 =

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**Problem Solution Acid-test ratio =**

(Cash + Accounts receivable) / Current liabilities Cash + Accounts receivable = $31,500 + $117,000 = $148,500

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**Problem Solution Acid-test ratio =**

(Cash + Accounts receivable) / Current liabilities Cash + Accounts receivable = $31,500 + $117,000 = $148,500 Current liabilities = $141,000

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**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

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**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

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**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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