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# Accounting equations, current assets, journal entries and ratios

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PE 2-4
LO1 The Accounting Equation

For the following four cases, use the accounting equation to compute the missing quantity.

Assets Liabilities Owners' Equity
Case A \$10,000 \$ 4,000 A
Case B 8,000 B \$3,500
Case C C 5,500 7,000
Case D 13,000 15,000 D

PE 2-6
LO1 Current Assets
Using the following information, compute total current assets.

Land . . . . . . . . . . . . . . . . . . . . \$7,000
Machinery . . . . . . . . . . . . . . . . 1,300
Accounts payable . . . . . . . . . . 1,600
Cash . . . . . . . . . . . . . . . . . . . . 625
Buildings . . . . . . . . . . . . . . . . . 7,500
Accounts receivable . . . . . . . . 800
Retained earnings . . . . . . . . . . 2,200
Inventory . . . . . . . . . . . . . . . . . 2,100

PE 3-16
LO3 Journal Entries with Revenues, Expenses, and Dividends
Make the journal entries necessary to record the following eight transactions.
a. Purchased inventory on account for \$130,000.
b. Sold goods for \$100,000 cash. The goods originally cost \$65,000.
c. Paid \$27,000 cash for employee wages.
d. Paid \$12,500 cash for advertising.
e. Sold goods for \$25,000 cash and \$60,000 on account (a total of \$85,000). The goods
originally cost \$57,000.
f. Collected cash of \$47,000 from the \$60,000 receivable on account; the remaining
\$13,000 is expected to be collected later.
g. Paid cash of \$55,000 on the \$130,000 payable on account; the remaining \$75,000 is
expected to be paid later.
h. Paid cash dividends of \$8,500.

PE 3-20
LO4 Using a Trial Balance to Prepare an Income Statement
Using the trial balance given below, prepare an income statement.
Debit Credit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 68,000
Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$ 150,000
Loan Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270,000
Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,000
Sales Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 370,000
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244,000
Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
Rental Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \$1,040,000 \$1,040,000

1. Calculating Ratios. Here are simplified financial statements of Phone Corporation from a recent year:

INCOME STATEMENT
(figures in millions of dollars)
Net sales 13,193
Cost of goods sold 4,060
Other expenses 4,049
Depreciation 2,518
Earnings before interest and taxes (EBIT) 2,566
Interest expenses 685
Income before tax 1,881
Taxes 570
Net income 1,311
Dividends 856

BALANCE SHEET
(figures in millions of dollars)
End of Year Start of Year
Assets
Cash and marketable securities 89 158
Receivables 2,382 2,490
Inventories 187 238
Other current assets 867 932
Total current assets 3,525 3,818
Net property, plant, and equipment 19,973 19,915
Other long-term assets 4,216 3,770
Total assets 27,714 27,503
Liabilities and shareholders' equity
Payables 2,564 3,040
Short-term debt 1,419 1,573
Other current liabilities 811 787
Total current liabilities 4,794 5,400
Long-term debt and leases 7,018 6,833
Other long-term liabilities 6,178 6,149
Shareholders' equity 9,724 9,121
Total liabilities and shareholders' equity 27,714 27,503

Calculate the following financial ratios:
a. Long-term debt ratio
b. Total debt ratio
c. Times interest earned
d. Cash coverage ratio
e. Current ratio
f. Quick ratio
g. Operating profit margin
h. Inventory turnover
i. Days in inventory
j. Average collection period
k. Return on equity
l. Return on assets
m. Payout ratio