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CH18 Practice Exercises Solution - Financing Statement
analysis
Principles of Accounting (Trường Đại học Kinh tế Thành phố Hồ Chí Minh)
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CHAPTER 18 – FINANCIAL STATEMENT ANALYSIS
PRACTICE EXERCISES SOLUTIONS
Exercise 10.1
Selected comparative financial statements of SES Company follow:
SES COMPANY
Comparative Income Statements
For The Years Ended December 31 2021 2020 2019
Sales $ 555,000 $ 340,000 $ 278,000
Cost of goods sold 283,500 212,500 153,900
Gross profit 271,500 127,500 124,100
Selling expenses 102,900 46,920 50,800
Administrative expenses 50,668 29,920 22,800
Total expenses 153,568 76,840 73,600
Income before taxes 117,932 50,660 50,500
Income tax expense 40,800 10,370 15,670
Net income $ 77,132 $ 40,290 $ 34,830
SES COMPANY
Comparative Balance Sheets
At December 31 2021 2020 2019
Assets
Current assets $ 52,390 $ 37,924 $ 51,748
Long-term investments 0 500 3,950
Plant assets, net 100,000 96,000 60,000
Total assets $ 152,390 $ 134,424 $ 115,698
Liabilities and Equity
Current liabilities $ 22,800 $ 19,960 $ 20,300
Common stock 72,000 72,000 60,000
Other paid-in capital 9,000 9,000 6,000
Retained earnings 48,590 33,464 29,398
Total liabilities and equity $ 152,390 $ 134,424 $ 115,698
Requirements:
1. Compute each year’s current ratio. Round ratios to one decimal.
2. Express the income statement data in vertical analysis. Round percents to two
decimals.
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3. Express the balance sheet data in horizontal analysis with 2019 as base year. Round
percents to two decimals.
4. Refer to the results from parts 1, 2, and 3. (a) Did cost of goods sold make up a greater
portion of sales for the most recent year compared to the prior year? (b) Did income as
a percent of sales improve in the most recent year compared to the prior year? (c) Did
plant assets grow over this period?
Solutions:
Part 1
Current ratio: December 31, 2021: $52,390 / $22,800 = 2.3 to 1
December 31, 2020: $37,924 / $19,960 = 1.9 to 1
December 31, 2019: $51,748 / $20,300 = 2.5 to 1
Part 2
SES COMPANY
Comparative Income Statements
For The Years Ended December 31
2021 2020 2019
Sales............................................................... 100.00% 100.00% 100.00%
Cost of goods sold .......................................... 51.08 62.50 55.36
Gross profit .................................................... 48.92 37.50 44.64
Selling expenses ............................................. 18.54 13.80 18.27
Administrative expenses ................................ 9.13 8.80 8.20
Total expenses ............................................... 27.67 22.60 26.47
Income before taxes....................................... 21.25 14.90 18.17
Income tax expense........................................ 7.35 3.05 5.64
Net income .................................................... 13.90% 11.85% 12.53%
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Part 3
SES COMPANY
Balance Sheet
At December 31 2021 2020 2019
Assets
Current assets .............................................. 101.24% 73.29% 100.00%
Long-term investments ................................ 0.00 12.66 100.00
Plant assets, net ........................................... 166.67 160.00 100.00
Total assets .................................................. 131.71 116.19 100.00
Liabilities and Equity
Current liabilities .......................................... 112.32% 98.33% 100.00%
Common stock ............................................. 120.00 120.00 100.00
Other paid-in capital..................................... 150.00 150.00 100.00
Retained earnings ........................................ 165.28 113.83 100.00
Total liabilities and equity ............................ 131.71 116.19 100.00
Part 4
a. No.
Cost of goods sold as a percent of sales was 51.08% in 2021. This compares to 62.50% in
the prior year.
b. Yes.
Net income as a percent of sales was 13.90% in the recent year. This compares to 11.85%
in the prior year.
c. Yes.
The company expanded its plant assets in 2020, and again in 2021. The trend percents
were 160.00 and 166.67, respectively, for the two recent years.
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Exercise 10.2
Typo Corporation and its selected current year-end financial statements. All sales were on
credit
Selected balance sheet amounts at December 31 of the prior year were:
• Inventory, $48,900
• Total assets, $189,400
• Common stock, $90,000
• Retained earnings, $33,748
TYPO CORPORATION
Balance Sheet
December 31 of Current Year
Assets Liabilities and Equity
Cash $ 10,000 Account Payable $ 17,500
Short-term investments 8,400 Accrued wages payable 3,200
Account receivable, net 33,700 Income taxes payable 3,300
Merchandise inventory 32,150 Long-term note payable, secured
by mortgage on plant assets 63,400
Prepaid expenses 2,650 Common stock 90,000
Plant assets, net 153,300 Retained earnings 62,800
Total assets $ 240,200 Total liabilities and equity $ 240,200
TYPO CORPORATION
Income Statement
For The Current Year Ended December 31
Sales $ 448,600
Cost of goods sold 297,250
Gross profit 151,350
Operating expenses 98,600
Interest expense 4,100
Income before taxes 48,650
Income tax expense 19,598
Net income $ 29,052
Requirements:
Compute the following:
1. current ratio
2. acid-test ratio
3. inventory turnover
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4. times interest earned
5. profit margin ratio
6. total asset turnover
7. return on total assets
8. return on equity
Round to one decimal place; for part 6, round to two decimals
Solutions:
1. Current ratio
$10,000 + 8,400 + $33,700 + $32,150 + $2,650
= 3.6 to 1
$17,500 + $3,200 + $3,300
2. Acid-test ratio
$10,000 + $8,400 + $33,700 = 2.2 to 1
$17,500 + $3,200 + $3,300
3. Inventory turnover
$297,250 = 7.3 times
($48,900 + $32,150)/2
4. Times interest earned
($48,650 + $4,100) / $4,100 = 12.9 times
5. Profit margin ratio
$29,052 = 6.5%
$448,600
6. Total asset turnover
$448,600 = 2.1 times
($240,200 + $189,400)/2
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7. Return on total assets
$29,052 = 13.5%
($240,200 + $189,400)/2
8. Return on equity
$29,052 = 21.0%
($152,800 + $123,748)/2
