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Your friend, another accountant, has bet you that with your knowledge of accounting and just the computations for common analytical measures, you can figure out many aspects of a company's financial statements. You take the bet!

Match each computation to one of the liquidity and solvency measures in the table. (Hint: Begin by looking for simple computations and identifying the amounts in those computations. Look for other measures that use those amounts.)

**Liquidity and Solvency Measures**
**Computations**

1. Accounts receivable turnover
$8,280,000 ÷ [($714,000 + $740,000) ÷ 2]

2. Working capital
$3,091,000 – $900,000

3. Number of days' sales in receivables
[($714,000 + $740,000) ÷ 2] ÷ ($8,280,000 ÷ 365)

4. Current ratio
$3,091,000 ÷ $900,000

5. Number of days' sales in inventory
[($1,072,000 + $1,100,000) ÷ 2] ÷ ($4,100,000 ÷ 365)

6. Quick ratio
$1,866,000 ÷ $900,000

7. Ratio of fixed assets to long-term liabilities
$2,690,000 ÷ $1,690,000

8. Times interest earned
($989,400 + $127,000) ÷ $127,000

9. Inventory turnover
$4,100,000 ÷ [($1,072,000 + $1,100,000) ÷ 2]

10. Ratio of liabilities to stockholders' equity
$2,590,000 ÷ $4,015,000

Use the following balance sheet form to enter amounts you identify from the computations on the Liquidity and Solvency Measures panel. You will identify other amounts for the balance sheet on the Profitability Measures panel. If you have a choice of two amounts, assume the first amount in the ratio is for the end of the year. Compute any missing amounts.

**Balance Sheet**
**December 31, 20Y6**

1. **Assets**
2. **Current assets:**
3. Cash
$823,000.00
4. Marketable securities
5. Accounts receivable (net)
6. Inventory
7. Prepaid expenses
8. Total current assets
9. Long-term investments
10. Property, plant, and equipment (net)
11. Total assets

12. **Liabilities**
13. Current liabilities
14. Long-term liabilities
15. Total liabilities

16. **Stockholders’ Equity**
17. Preferred stock, $10 par
18. Common stock, $5 par
19. Retained earnings
20. Total stockholders’ equity
21. Total liabilities and stockholders’ equity

Match each computation to one of the profitability measures in the table.

**Profitability Measures**
**Computations**

1. Asset turnover
$801,420 ÷ [($4,015,000 + $3,814,250) ÷ 2]

2. Return on total assets
($801,420 + $127,000) ÷ [($6,605,000 + $6,415,000) ÷ 2]

3. Return on stockholders’ equity
$801,420 ÷ [($4,015,000 + $3,814,250) ÷ 2]

4. Return on common stockholders’ equity
($801,420 – $65,000) ÷ [($3,527,500 + $3,386,400) ÷ 2]

5. Earnings per share on common stock
($801,420 – $65,000) ÷ 250,000 shares

6. Price-earnings ratio
$35 ÷ $3.05

7. Dividends per share
$175,000 ÷ 250,000 shares

8. Dividend yield
$0.70 ÷ $35

Use the following comparative income statement form to enter amounts you identify from the computations on the Liquidity and Solvency Measures panel and on the Profitability Measures panel. Compute any missing amounts and complete the horizontal analysis columns. Enter percentages as decimal amounts, rounded to one decimal place. When rounding, look only at the figure to the right of one decimal place. If < 5, round down and if ≥ 5, round up. For example, for 32.048% enter 32.0%. For 32.058% enter 32.1%.

**Comparative Income Statement**
**For the Years Ended December 31, 20Y6 and 20Y5**

1. **20Y6**
**20Y5**
**Amount Increase (Decrease)**
**Percentage Increase (Decrease)**

2. Sales
$7,287,000.00

3. Cost of goods sold
$3,444,000.00

4. Gross profit
$3,843,000.00

5. Selling expenses
$1,457,600.00

6. Administrative expenses
$1,242,000.00
$1,106,000.00

7. Total operating expenses
$2,563,600.00

8. Income from operations
$1,279,400.00

9. Interest expense
$120,600.00

10. Income before income tax
$1,158,800.00

11. Income tax expense
$181,980.00

12. Net income
$976,820.00

Answer :

Liquidity and Solvency Measures: Accounts receivable turnover: This measure calculates how quickly the accounts receivable are collected from customers.

The computation is:

So, the Accounts receivable turnover = Sales / Average accounts receivable

In the given data, the computation is: $8,280,000 / [($714,000 + $740,000) / 2] = 11.39

Working capital: This measure indicates the company's short-term liquidity position and ability to cover its current liabilities. The computation is:

Working capital = Current assets - Current liabilities

In the given data, the computation is: $3,091,000 - $900,000 = $2,191,000

Number of days' sales in receivables:

This degree represents the normal number of days it takes for the company to gather its accounts receivable. The computation is:

So, the Number of days' sales in receivables = (Average accounts receivable / Sales) * 365

In the given data, the computation is: [($714,000 + $740,000) / 2] / ($8,280,000 / 365) = 31.8 days

Current ratio: This measure assesses the company's ability to cover its current liabilities with its current assets. The computation is:

So, the Current ratio = Current assets / Current liabilities

In the given data, the computation is: $3,091,000 / $900,000 = 3.43

Number of days' sales in stock:

This degree shows the average number of days it takes for the company to offer its stock. The computation is:

So, the Number of days' sales in inventory = (Average inventory / Cost of goods sold) * 365

The given data does not provide the average inventory or cost of goods sold, so this computation cannot be completed.

Quick ratio: This measure assesses the company's ability to cover its current liabilities with its quick assets (current assets excluding inventory). The computation is:

So, the Quick ratio = (Current assets - Inventory) / Current liabilities

In the given data, the computation is: ($1,866,000 - $900,000) / $900,000 = 1.07

Ratio of fixed assets to long-term liabilities: This measure shows the proportion of fixed assets relative to the long-term liabilities. The computation is:

So, the Ratio of fixed assets to long-term liabilities = Fixed assets / Long-term liabilities

In the given data, the computation is: $2,690,000 / $1,690,000 = 1.59

Times interest earned: This measure evaluates the company's ability to cover its interest expense with its income from operations. The computation is:

So, the Times interest earned = (Income from operations + Interest expense) / Interest expense

In the given data, the computation is: ($1,279,400 + $120,600) / $120,600 = 12.6

Ratio of liabilities to stockholders' equity: This measure indicates the proportion of liabilities relative to the stockholders' equity. The computation is:

So, the Ratio of liabilities to stockholders' equity = Total liabilities / Stockholders' equity

In the given data, the computation is: $2,590,000 / $4,015,000 = 0.645

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