Corporate Financial Accounting
14th Edition
ISBN: 9781305653535
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
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Chapter 10, Problem 10.1ADM
A.
To determine
Ratio analysis
It is the financial analysis tool for measuring the profitability, liquidity, capability and overall performance of a company.
Following are the two measures of liquidity:
- 1.
Current ratio : Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. - 2. Quick ratio: Quick ratio measures the immediate debt paying capacity of a business, which can be measured by dividing quick assets by the current liabilities. Quick assets represent cash, readily marketable securities, and
accounts receivable . - 3.
Working capital : Total current assets minus total current liabilities are the working capital of a company.
Vertical analysis: The analysis which compares the percentage change in the financial components in relation to a base item is referred to as vertical analysis.
Vertical analysis percentage: Vertical analysis denotes the percent of financial element or component in relation to a base amount. It is computed as shown below:
To compute: The working capital for each company.
B.
To determine
To compute: The current ratio for each company.
C.
To determine
To compute: The quick ratio for each company.
D.
To determine
To Explain: That the working capital is a good measure of relative liquidity in comparing the two companies.
E.
To determine
To identify: The company which has the highest debt-paying ability, based on the current ratio.
F.
To determine
To identify: The company which has the greater short-term debt-paying ability, based on the quick ratio.
G.
To determine
To explain: The reason behind the difference in the result between Part E and Part F.
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Review problem—understanding liquidity measures Assume that the currentratio for Arch Company is 2.0, its acid-test ratio is 1.5, and its working capital is$300,000. Answer each of the following questions independently, always referring tothe original information.a. How much does the firm have in current liabilities?b. If the only current assets shown on the balance sheet for Arch Company areCash, Accounts Receivable, and Merchandise Inventory, how much does thefirm have in Merchandise Inventory?c. If the firm collects an account receivable of $100,000, what will its new currentratio and working capital be?d. If the firm pays an account payable of $100,000, what will its new current ratioand working capital be?e. If the firm sells inventory that was purchased for $50,000 at a cash price of$60,000, what will its new acid-test ratio be?
Selected hypothetical comparative statement data for the giant bookseller Barnes & Noble are presented here. All balance sheet data
are as of the end of the fiscal year (in millions).
Net sales
Cost of goods sold
Net income
Accounts receivable (net)
Inventory
Total assets
Total common stockholders' equity
a.
b.
C.
d.
e.
Profit margin
Asset turnover
Return on assets
2025
$5,050.3
3,000.0
1
Gross profit rate
75.2
75.1
1,150.0
Compute the following ratios for 2025. (Round asset turnover to 2 decimal places, eg 1.83 and all other answers to 1 decimal place, e.g. 1.8
or 2.5%)
2,850.0
930.5
Return on common stockholders' equity
2024
$4,900.0
3,800.7
150.5
106.6
1,250.0
3,150.0
1,110.6
%
times
%
%
%
The DuPont equation shows the relationships among asset management, debt management, and -Select-
ROE = Profit margin x Total assets turnover x Equity multiplier
Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers. -Select-
Quantitative Problem: Rosnan Industries' 2019 and 2018 balance sheets and income statements are shown below.
Balance Sheets:
Cash and equivalents
Accounts receivable
Inventories
Total current assets
Net plant and equipment
Total assets
Accounts payable
Accruals
Notes payable
Total current liabilities
Long-term debt
Common stock
Retained earnings
Total liabilities and equity
Sales
Operating costs excluding depreciation
EBITDA
Depreciation and amortization
EBIT
Interest
EBT
Taxes (25%)
Net income
Income Statements:
Dividends paid
Addition to retained earnings
Shares outstanding
Price
WACC
2019
$100 Ś 85
275
300
375
350
750
$ 735
2,000
1,490
$2,750…
Chapter 10 Solutions
Corporate Financial Accounting
Ch. 10 - Does a discounted note payable provide credit...Ch. 10 - Employees are subject to taxes withheld from their...Ch. 10 - Prob. 3DQCh. 10 - Prob. 4DQCh. 10 - Prob. 5DQCh. 10 - To match revenues and expenses properly, should...Ch. 10 - Prob. 7DQCh. 10 - Installment notes require equal periodic payments....Ch. 10 - When should the liability associated with a...Ch. 10 - Prob. 10DQ
Ch. 10 - Proceeds from notes payable On January 26, Nyree...Ch. 10 - Prob. 10.2BECh. 10 - Journalize period payroll The payroll register of...Ch. 10 - Prob. 10.4BECh. 10 - Prob. 10.5BECh. 10 - Journalizing installment notes On the first day of...Ch. 10 - Prob. 10.7BECh. 10 - Current liabilities Bon Nebo Co. sold 25,000...Ch. 10 - Entries for notes payable Bennett Enterprises...Ch. 10 - Evaluating alternative notes A borrower has two...Ch. 10 - Entries for notes payable A business issued a...Ch. 10 - Entries for discounted note payable A business...Ch. 10 - Fixed asset purchases with note On June 30,...Ch. 10 - Prob. 10.7EXCh. 10 - Calculate payroll An employee earns 44 per hour...Ch. 10 - Prob. 10.9EXCh. 10 - Summary payroll data In the following summary of...Ch. 10 - Payroll tax entries According to a summary of the...Ch. 10 - Payroll entries The payroll register for D. Salah...Ch. 10 - Prob. 10.13EXCh. 10 - Prob. 10.14EXCh. 10 - Prob. 10.15EXCh. 10 - Accrued vacation pay A business provides its...Ch. 10 - Prob. 10.17EXCh. 10 - Prob. 10.18EXCh. 10 - Entries for installment note transactions On the...Ch. 10 - Entries for installment note transactions On...Ch. 10 - Entries for installment note transactions On...Ch. 10 - Prob. 10.22EXCh. 10 - Prob. 10.23EXCh. 10 - Prob. 10.24EXCh. 10 - Liability transactions The following items were...Ch. 10 - Entries for payroll and payroll taxes The...Ch. 10 - Wage and tax statement data on employer FICA tax...Ch. 10 - Prob. 10.4APRCh. 10 - Payroll accounts and year-end entries The...Ch. 10 - Prob. 10.1BPRCh. 10 - Prob. 10.2BPRCh. 10 - Wage and tax statement data and employer FICA tax...Ch. 10 - Prob. 10.4BPRCh. 10 - Payroll accounts and year-end entries The...Ch. 10 - Prob. 3COPCh. 10 - Prob. 10.1ADMCh. 10 - Prob. 10.2ADMCh. 10 - Neiman Marcus and Kohls: Short-term liquidity...Ch. 10 - Cabelas and Dicks Sporting Goods: Short-term...Ch. 10 - Ethics in Action Tonya Latirno is a staff...Ch. 10 - Prob. 10.3TIF
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