Transcript Accounting Demonstration Problem Chapter 3 – Problem 18 (parts a-e)

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
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . .
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
$ 27,000
84,000
30,000
$141,000
33,000
$174,000
$ 25,500
72,000
27,000
$124,500
45,000
$169,500
Problem Definition
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
a. Calculate ROI for 2014.
b. Calculate ROE for 2014.
c. Calculate working capital at December 31,
2014.
d. 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
ROI = Margin * Turnover
Margin = Net income / Sales
Problem Solution
ROI = Margin * Turnover
Margin = Net income / Sales
= $51,000 / $870,000
Problem Solution
ROI = Margin * Turnover
Margin = Net income / Sales
= $51,000 / $870,000
= 5.86%
Problem Solution
ROI = Margin * Turnover
Margin = Net income / Sales
= $51,000 / $870,000
= 5.86%
Turnover = Sales / Average Total Assets
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 )
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
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
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%
Problem Definition
a. Calculate ROI for 2014.
b. Calculate ROE for 2014.
c. Calculate working capital at December 31,
2014.
d. 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
Net income = $51,000
Problem Solution
ROE = Net income /
Average stockholders’ equity
Net income = $51,000
Average stockholders’ equity =
($250,500 + $294,000) / 2
Problem Solution
ROE = Net income /
Average stockholders’ equity
Net income = $51,000
Average stockholders’ equity =
($250,500 + $294,000) / 2 = $272,250
Problem Solution
ROE = Net income /
Average stockholders’ equity
Net income = $51,000
Average stockholders’ equity =
($250,500 + $294,000) / 2 = $272,250
ROE = $51,000 / $272,250
Problem Solution
ROE = Net income /
Average stockholders’ equity
Net income = $51,000
Average stockholders’ equity =
($250,500 + $294,000) / 2 = $272,250
ROE = $51,000 / $272,250 = 18.7%
Problem Definition
a. Calculate ROI for 2014.
b. Calculate ROE for 2014.
c. Calculate working capital at December
31, 2014.
d. 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
a. Calculate ROI for 2014.
b. Calculate ROE for 2014.
c. Calculate working capital at December 31,
2014.
d. 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
Current assets = $303,000
Problem Solution
Current ratio = Current
assets / Current liabilities
Current assets = $303,000
Current liabilities = $141,000
Problem Solution
Current ratio = Current
assets / Current liabilities
Current assets = $303,000
Current liabilities = $141,000
Current ratio = $303,000 / $141,000
Problem Solution
Current ratio = Current
assets / Current liabilities
Current assets = $303,000
Current liabilities = $141,000
Current ratio = $303,000 / $141,000 = 2.15
Problem Definition
a. Calculate ROI for 2014.
b. Calculate ROE for 2014.
c. Calculate working capital at December 31,
2014.
d. 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
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