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    Accounting And Ratio Questions

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    Practice Problems for final exam

    1. Use the basic accounting equation (Assets=Liabilities + Owners Equity) to answer each of the following questions. Show any calculations you make.

    a) The assets of Bugs Bunny Company are $650,000 and the owners equity is $360,000. Mr. Bunny wants to know--what is the amount of liabilities?

    b) The liabilities and owners equity of Gotitall Company are $95,000 and $32,000, respectively. Mr. Gotit wants to know-what is the amount of assets?

    c) At the beginning of the year, the Bonnie Company's assets were $220,000 and its owners' equity was $100,000. During the year, assets increased $60,000 and liabilities decreased $10,000. Billy, the owner, wants to know what the owner's equity is at the end of the year?

    2. Congratulations you have been promoted to the position of Chief Financial Officer of The Daily Planet, which produces a newspaper. One of your financial analysts has presented you with a set of comparative ratios for your firm. Since that particular analyst tends to disappear at a moments notice, you decide to check his work. So you need to do the following: First, provide the formula for calculating each of the ratios listed below. Second, his analysis shows the following and you need to decide if it is good news or bad news? Why? Consider each one as an independent case. Assume all else is unchanged.
    a. He reports an increase in the average collection period.
    b. He reports a decrease in the inventory turnover ratio.
    c. He reports a decrease in the times interest earned.
    d. He reports an increase in the return on assets ratio.
    e. He reports an decrease in the cash coverage ratio.

    3. Pat Summers has decided to invest some of her savings in common stock. She feels that the chemical industry has good growth prospects and has narrowed her choice to two companies in that industry. As a final step in making the choice she has decided to perform a comprehensive analysis of the two companies, Morton and Pound. Income Statement and Balance Sheet data for the two companies appear below:

    Income Statement

    Morton Pound

    Net Sales 9,486,200 27,287,300
    Cost of Goods Sold 5,812,200 18,372,400
    Gross Martin 3,674,000 8,914,900

    Operating Expenses
    Selling Expenses 1,194,000 1,955,700
    Administrative Expense 1,217,400 4,126,000
    Interest Expense 270,000 1,360,000
    Income Taxes Expense 450,000 600,000
    Total Operating Expenses 3,131,400 8,041,700

    Net Income 542,600 873,200

    Earnings Per Share $1.55 $0.88

    Balance Sheet

    Morton Pound


    Cash 126,100 514,300
    Marketable Securities 117,500 1,200,000
    Accounts Receivable 456,700 2,600,000
    Inventories 1,880,000 4,956,000
    Prepaid Expenses
    Total Current Assets 72,600
    2,652,900 156,600
    Property, Plant & Equipment (Net) 5,342,200 19,356,000
    Intangible and Other Assets 217,000 580,000
    Total Assets 8,212,100 29,362,900

    Liabilities and Stockholders' Equity

    Accounts Payable 517,400 2,342,000
    Notes Payable 1,000,000 2,000,000
    Income Taxes Payable
    Total Current Liabilities 85,200
    1,602,600 117,900
    Bonds Payable
    Total Liabilities 2,000,000
    3,602,600 15,000,000
    Common Stock-$1 par value 350,000 1,000,000
    Paid in Capital in Excess of Par
    Value, Common 1,747,300 5,433,300
    Retained Earnings 2,512,200 3,469,700
    Total Liabilities and Stockholders' Equity 8,212,100 29,362,900

    Additional Information: During the year, Morton paid a total of $140,000 in dividends, and its current market price per share is $20. Pound paid a total of $600,000 in dividends during the year and its current market price per share is $9. Morton has net cash flows from operations of $771,500 and net capital expenditures of $450,000. Pound has net cash flows from operations of $843,000 and net capital expenditures of $1,500,000. Information pertaining to prior years is not readily available. Assume that all notes payable are current liabilities and that all bonds payable are long-term liabilities. Assume that all assets except property, plant and equipment and Intangible and Other Assets are current assets. No taxes are shown on the Income Statement so they will not be considered in your analysis.


    3a) Prepare a common size balance sheet for each company.

    3b) Prepare an analysis of liquidity by calculating for each company (a) current ratio, (b) quick ratio, (c) net working capital to assets ratio.

    3c) Prepare an analysis of profitability by calculating for each company the (a) operating profit margin, (b) payout ratio.

    3d) Prepare an analysis of leverage ratios by calculating for each company the (a) long term debt ratio, (b) total debt ratio (c) debt to equity ratio.

    3e) Prepare a presentation to Pat, recommending the company in which she should invest her funds. Defend your recommendation via an analysis of the information calculated in Nos. 3a through 3d above and any other information provided for Morton and Pound. Your analysis should be about 250 words.

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    Solution Summary

    The solution has ratio calculations, preparation of common size statements and the use of accounting equation to calculate assets, liabilities and equity