ACC 205 Week 5: Assignment
Week 5 – Assignment
Ilba Rodriguez
ACC 205: Principles of Accounting I
Prof. Theresa Murray
November 16, 2014
Problem 1 – Liquidity ratios.
A.
Edison
Stagg
Thornton
Current ratio
3.56
3.69
3.83
Quick ratio
3.06
2.78
2.5
Current ratio calculations:
Edison
($6,000 (cash) + $3,000 (short-term investments) + $2,000 (AR) + $1,000 (inventory) + $800 (prepaid expenses)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 3.56
Stagg
($5,000 (cash) + $2,500 (short-term investments) + $2,500 (AR) + $2,500 (inventory) + $800 (prepaid expenses)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 3.69
Thornton
($4,000 (cash) + $2,000 (short-term investments) + $3,000 (AR) + $4,000 (inventory) + $800 (prepaid expenses)) …show more content…
/ ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 2.5
Quick ratio calculations:
Edison
($6,000 (cash) + $3,000 (short-term investments) + $2,000 (AR)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 3.06
Stagg
($5,000 (cash) + $2,500 (short-term investments) + $2,500 (AR)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 2.78
Thornton
($4,000 (cash) + $2,000 (short-term investments) + $3,000 (AR)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 2.5
Based on the current ratios Thornton has the most liquid because he has more inventory and has the opportunity to turn the inventory into cash.
Based on quick ratios Edison has the most liquid because quick ratios does not use the inventory or prepaid accounts as part of assets in the computation process.
Problem 2 – Computation and evaluation of activity ratios.
A.
Accounts receivable turnover ratio for Alaska Products, Inc. 20X5:
20X5 = $205,000 and 20X4 = $156,000
$205,000 + $156,000 = $361,000
$361,000 / 2 = $180, 500
$832,000 (net credit sales) / $180,000 (average accounts receivable) = 4.61
Inventory turnover ratio for Alaska Products, Inc. 20X5:
20X5 = $70,000 and 20X4 = $50,000
$70,000 + $50,000 = $120,000
$120,000 / 2 = $60,000
$530,000 (cost of goods sold) / $60,000 (average inventory) = 8.83
Problem 3 – Profitability ratios, trading on the equity.
A.
Profit Margin on sales ratio for Digital Relay.
$130,000 (net income) / $1,750,000 (net sales) = 0.0742 (7.42%)
Return on equity ratio for Digital Relay.
$130,000(net income) / $500,000(average common equity) = 0.26 (26%)
Return on assets ratio for Digital Relay.
($130,000 (net income) + $120,000 (interest expense)) / $1,200,000 (average assets) = 0.2083 (20.8%)
Digital Relay has a positive financial leverage because both the ROE and the ROA ratios are at least equal. In this case, Digital relay is able to show that they know how to manage their debts accretive to the shareholders’ best interest.
Problem 4 – Horizontal analysis.
A.
Mary Lynn Corporation
Horizontal Analysis
20X1 and 20X2
Increase or (Decrease)
20X2
20X1
Amount
Percent
Current Assets
86,000
80,000
6,000
7.50%
Property, Plant, and Equipment (net)
99,000
90,000
9,000
10%
Intangibles
25,000
50,000
(25,000)
(50%)
Current Liabilities
40,800
48,000
(7,200)
(15%)
Long-Term Liabilities
153,000
160,000
(7,000)
(4.38%)
Stockholders’ Equity
16,200
12,000
4,200
35%
Net Sales
500,000
500,000
0
0%
Cost of Goods Sold
322,500
350,000
(27,500)
(7.86%)
Operating Expenses
93,500
85,000
8,500
10%
Dollar change = Amount of the item in comparison – Amount of the item in the base year
$86,000 – $80,000 = $6,000
$99,000 – $90,000 = $9,000
$25,000 – $50,000 = ($25,000)
$40,800 – $48,000 = ($7,200)
$153,000 – $160,000 = ($7,000)
$16,200 – $12,000 = $4,200
$500,000 – $500,000 = $0
$322,500 – $350,000 = ($27,500)
$93,500 – $85,000 = $8,500
Percentage change = Dollar change / amount of the item in the base year * 100.
$6,000 / $80,000 * 100 = 7.50%
$9,000 / $90,000 * 100 = 10%
($25,000) / $50,000 * 100 = (50%)
($7,200) / $48,000 * 100 = (15%)
($7,000) / $160,000 * 100 = (4.38%)
$4,200 / $12,000 * 100 = 35%
$0 / $500,000 * 100 = 0%
($27,500) / $350,000 * 100 = (7.86%)
$8,500 / $85,000 * 100 = 10%
Based on the results of my work the company did decrease in some areas that helps the company. Most of those areas were the liabilities, which increases their assets. Unfortunately, on the net sales, it did not increase but it also did not decrease. I believe the company is handling its assets and equity very well and an investor would be interested in this company.
Problem 5 – Vertical analysis.
A.
Mary Lynn Corporation
Vertical Analysis
20X1 and 20X2
20X2
20X1
Amount
Percent
Amount
Percent
Assets:
Current Assets
86,000
40.95%
80,000
38.10%
Property, Plant, and Equipment (net)
99,000
47.14%
80,000
38.10%
Intangibles
25,000
11.90%
50,000
23.81%
Total assets
210,000
100%
210,000
100%
Liabilities:
Current Liabilities
40,800
19.43%
48,000
22.86%
Long-Term Liabilities
153,000
72.86%
150,000
71.43%
Stockholders’ Equity
16,200
7.71%
12,000
5.71%
Total liabilities and stockholders’ equity
210,000
100%
210,000
100%
Net Sales
500,000
100%
500,000
100%
Cost of Goods Sold
322,500
64.50%
350,000
70%
Operating Expenses
93,500
18.70%
85,000
17%
Assets Calculations: Percentage change = Dollar change / total assets for the year * 100
20X2 20X1
$86,000 / $210,000 * 100 = 40.95 $80,000 / $210,000 * 100 = 38.10
$99,000 / $210,000 * 100 = 47.14 $80,000 / $210,000 * 100 = 38.10
$25,000 / $210,000 * 100 = 11.90 $50,000 / $210,000 * 100 = 23.81
Liabilities Calculations: Percentage change = Dollar change / total liabilities for the year *100
20X2 20X1
$40,800 / $210,000 * 100 = 19.43 $48,000 / $210,000 * 100 = 22.86
$153,000 / $210,000 * 100 = 72.86 $150,000 / $210,000 * 100 = 71.43
$16,200 / $210,000 * 100 = 7.71 $12,000 / $210,000 * 100 = 5.71
Cost of goods sold and operating expense calculations = Dollar change / total net sales for the year * 100
20X2 20X1
$322,500 / $500,000 * 100 = 64.50 $350,500 / 500,000 * 100 = 70
$93,500 / $500,000 * 100 = 18.70 $85,000 / 500,000 * 100 = 17
Current assets and Property, Plant, and Equipment have increased in 20X2.
Current Liabilities have decreased in 20X2 with the exception of long-term liabilities, which has raised an additional $3,000 for the year. Cost of goods sold in 20X2 has lowered but the operating expenses has raised.
Problem 6 – Ratio computation.
a) ($400 (cash & short-term investments) +$ 3,000 (AR)) / $3,900 (current liabilities) = 0.87
b) $6,400 (current assets) / $3,900 (current liabilities) = 1.64
c) 20X2 = $3,000 and 20X1 = $2,300
$3,000 + $2,300 = …show more content…
$5,300
$5,300 / 2 = $2,650
20,000 (cost of goods sold) / 2,650 (average inventory) = 7.55
d) 20X2 = $3,000 and 20X1 = $2,400
$3,000 + $2,400 = $5,400
$5,400 / 2 = $2,700
$36,000 (net credit sales) / $2,700 (average net AR) = 13.33
e) 20X2 = $9,600 and 201 = $6,800
$9,600 + $6,800 = $16,400
$16,400 / 2 = $8,200
$3,600 (net income) / $8,200 (average assets) = 43.90
f) $3,600 (net income) / $36,000 (net sales) = 0.10
g) 20X2 = $1,600 and 20X1 = $ 1,100
$1,600 + $1,100 = $2,700
$2,700 / 2 = $1,350
$3,600 (net income) / $1,350 (average common stockholder’s equity) = 2.67
h) $8,000 (total liabilities) / $9,600 (total assets) =
0.83
i) $3,600 + $2,000 + 400 = $6,000
$6,000 (net income before income and interest expense) / $400 (interest expense) = 15 times
References
Wainwright, S. (Ed.). (2012). Principles of Accounting: Volume I. San Diego, CA: Bridgepoint Education, Inc.
Ilba Rodriguez
ACC 205: Principles of Accounting I
Prof. Theresa Murray
November 16, 2014
Problem 1 – Liquidity ratios.
A.
Edison
Stagg
Thornton
Current ratio
3.56
3.69
3.83
Quick ratio
3.06
2.78
2.5
Current ratio calculations:
Edison
($6,000 (cash) + $3,000 (short-term investments) + $2,000 (AR) + $1,000 (inventory) + $800 (prepaid expenses)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 3.56
Stagg
($5,000 (cash) + $2,500 (short-term investments) + $2,500 (AR) + $2,500 (inventory) + $800 (prepaid expenses)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 3.69
Thornton
($4,000 (cash) + $2,000 (short-term investments) + $3,000 (AR) + $4,000 (inventory) + $800 (prepaid expenses)) …show more content…
/ ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 2.5
Quick ratio calculations:
Edison
($6,000 (cash) + $3,000 (short-term investments) + $2,000 (AR)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 3.06
Stagg
($5,000 (cash) + $2,500 (short-term investments) + $2,500 (AR)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 2.78
Thornton
($4,000 (cash) + $2,000 (short-term investments) + $3,000 (AR)) / ($200 (AP) + $3,100 (notes payable) + $300 (accrued payables)) = 2.5
Based on the current ratios Thornton has the most liquid because he has more inventory and has the opportunity to turn the inventory into cash.
Based on quick ratios Edison has the most liquid because quick ratios does not use the inventory or prepaid accounts as part of assets in the computation process.
Problem 2 – Computation and evaluation of activity ratios.
A.
Accounts receivable turnover ratio for Alaska Products, Inc. 20X5:
20X5 = $205,000 and 20X4 = $156,000
$205,000 + $156,000 = $361,000
$361,000 / 2 = $180, 500
$832,000 (net credit sales) / $180,000 (average accounts receivable) = 4.61
Inventory turnover ratio for Alaska Products, Inc. 20X5:
20X5 = $70,000 and 20X4 = $50,000
$70,000 + $50,000 = $120,000
$120,000 / 2 = $60,000
$530,000 (cost of goods sold) / $60,000 (average inventory) = 8.83
Problem 3 – Profitability ratios, trading on the equity.
A.
Profit Margin on sales ratio for Digital Relay.
$130,000 (net income) / $1,750,000 (net sales) = 0.0742 (7.42%)
Return on equity ratio for Digital Relay.
$130,000(net income) / $500,000(average common equity) = 0.26 (26%)
Return on assets ratio for Digital Relay.
($130,000 (net income) + $120,000 (interest expense)) / $1,200,000 (average assets) = 0.2083 (20.8%)
Digital Relay has a positive financial leverage because both the ROE and the ROA ratios are at least equal. In this case, Digital relay is able to show that they know how to manage their debts accretive to the shareholders’ best interest.
Problem 4 – Horizontal analysis.
A.
Mary Lynn Corporation
Horizontal Analysis
20X1 and 20X2
Increase or (Decrease)
20X2
20X1
Amount
Percent
Current Assets
86,000
80,000
6,000
7.50%
Property, Plant, and Equipment (net)
99,000
90,000
9,000
10%
Intangibles
25,000
50,000
(25,000)
(50%)
Current Liabilities
40,800
48,000
(7,200)
(15%)
Long-Term Liabilities
153,000
160,000
(7,000)
(4.38%)
Stockholders’ Equity
16,200
12,000
4,200
35%
Net Sales
500,000
500,000
0
0%
Cost of Goods Sold
322,500
350,000
(27,500)
(7.86%)
Operating Expenses
93,500
85,000
8,500
10%
Dollar change = Amount of the item in comparison – Amount of the item in the base year
$86,000 – $80,000 = $6,000
$99,000 – $90,000 = $9,000
$25,000 – $50,000 = ($25,000)
$40,800 – $48,000 = ($7,200)
$153,000 – $160,000 = ($7,000)
$16,200 – $12,000 = $4,200
$500,000 – $500,000 = $0
$322,500 – $350,000 = ($27,500)
$93,500 – $85,000 = $8,500
Percentage change = Dollar change / amount of the item in the base year * 100.
$6,000 / $80,000 * 100 = 7.50%
$9,000 / $90,000 * 100 = 10%
($25,000) / $50,000 * 100 = (50%)
($7,200) / $48,000 * 100 = (15%)
($7,000) / $160,000 * 100 = (4.38%)
$4,200 / $12,000 * 100 = 35%
$0 / $500,000 * 100 = 0%
($27,500) / $350,000 * 100 = (7.86%)
$8,500 / $85,000 * 100 = 10%
Based on the results of my work the company did decrease in some areas that helps the company. Most of those areas were the liabilities, which increases their assets. Unfortunately, on the net sales, it did not increase but it also did not decrease. I believe the company is handling its assets and equity very well and an investor would be interested in this company.
Problem 5 – Vertical analysis.
A.
Mary Lynn Corporation
Vertical Analysis
20X1 and 20X2
20X2
20X1
Amount
Percent
Amount
Percent
Assets:
Current Assets
86,000
40.95%
80,000
38.10%
Property, Plant, and Equipment (net)
99,000
47.14%
80,000
38.10%
Intangibles
25,000
11.90%
50,000
23.81%
Total assets
210,000
100%
210,000
100%
Liabilities:
Current Liabilities
40,800
19.43%
48,000
22.86%
Long-Term Liabilities
153,000
72.86%
150,000
71.43%
Stockholders’ Equity
16,200
7.71%
12,000
5.71%
Total liabilities and stockholders’ equity
210,000
100%
210,000
100%
Net Sales
500,000
100%
500,000
100%
Cost of Goods Sold
322,500
64.50%
350,000
70%
Operating Expenses
93,500
18.70%
85,000
17%
Assets Calculations: Percentage change = Dollar change / total assets for the year * 100
20X2 20X1
$86,000 / $210,000 * 100 = 40.95 $80,000 / $210,000 * 100 = 38.10
$99,000 / $210,000 * 100 = 47.14 $80,000 / $210,000 * 100 = 38.10
$25,000 / $210,000 * 100 = 11.90 $50,000 / $210,000 * 100 = 23.81
Liabilities Calculations: Percentage change = Dollar change / total liabilities for the year *100
20X2 20X1
$40,800 / $210,000 * 100 = 19.43 $48,000 / $210,000 * 100 = 22.86
$153,000 / $210,000 * 100 = 72.86 $150,000 / $210,000 * 100 = 71.43
$16,200 / $210,000 * 100 = 7.71 $12,000 / $210,000 * 100 = 5.71
Cost of goods sold and operating expense calculations = Dollar change / total net sales for the year * 100
20X2 20X1
$322,500 / $500,000 * 100 = 64.50 $350,500 / 500,000 * 100 = 70
$93,500 / $500,000 * 100 = 18.70 $85,000 / 500,000 * 100 = 17
Current assets and Property, Plant, and Equipment have increased in 20X2.
Current Liabilities have decreased in 20X2 with the exception of long-term liabilities, which has raised an additional $3,000 for the year. Cost of goods sold in 20X2 has lowered but the operating expenses has raised.
Problem 6 – Ratio computation.
a) ($400 (cash & short-term investments) +$ 3,000 (AR)) / $3,900 (current liabilities) = 0.87
b) $6,400 (current assets) / $3,900 (current liabilities) = 1.64
c) 20X2 = $3,000 and 20X1 = $2,300
$3,000 + $2,300 = …show more content…
$5,300
$5,300 / 2 = $2,650
20,000 (cost of goods sold) / 2,650 (average inventory) = 7.55
d) 20X2 = $3,000 and 20X1 = $2,400
$3,000 + $2,400 = $5,400
$5,400 / 2 = $2,700
$36,000 (net credit sales) / $2,700 (average net AR) = 13.33
e) 20X2 = $9,600 and 201 = $6,800
$9,600 + $6,800 = $16,400
$16,400 / 2 = $8,200
$3,600 (net income) / $8,200 (average assets) = 43.90
f) $3,600 (net income) / $36,000 (net sales) = 0.10
g) 20X2 = $1,600 and 20X1 = $ 1,100
$1,600 + $1,100 = $2,700
$2,700 / 2 = $1,350
$3,600 (net income) / $1,350 (average common stockholder’s equity) = 2.67
h) $8,000 (total liabilities) / $9,600 (total assets) =
0.83
i) $3,600 + $2,000 + 400 = $6,000
$6,000 (net income before income and interest expense) / $400 (interest expense) = 15 times
References
Wainwright, S. (Ed.). (2012). Principles of Accounting: Volume I. San Diego, CA: Bridgepoint Education, Inc.