1 / 41

Demonstration Problem

Accounting What the Numbers Mean 9e. Demonstration Problem. Chapter 3 – Problem 12 (parts a-e) Calculate Profitability and Liquidity Measures. Problem Definition.

altessa
Download Presentation

Demonstration Problem

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Accounting What the Numbers Mean 9e Demonstration Problem Chapter 3 – Problem 12 (parts a-e) Calculate Profitability and Liquidity Measures

  2. Problem Definition • Presented below are the comparative balance sheets of Hames, Inc., at December 31, 2011, and 2010. Sales for the year ended December 31, 2011, totaled $580,000. Hames, Inc. Balance Sheets December 31, 2011 and 20010 Assets 2011 2010 Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,000 $ 19,000 Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,000 72,000 Merchandise inventory. . . . . . . . . . . . . . . . . . . . . . . . . . 103,000 99,000 Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . $202,000 $190,000 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 40,000 Plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000 110,000 Less: accumulated depreciation. . . . . . . . . . . . . . . . (65,000) (60,000) Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $312,000 $280,000

  3. Problem Definition Hames, Inc. Balance Sheets December 31, 2011 and 2010 Liabilities 2011 2010 Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,000 $ 17,000 Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,000 48,000 Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 20,000 18,000 Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . $ 94,000 $ 83,000 Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000 30,000 Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $116,000$113,000

  4. Problem Definition Hames, Inc. Balance Sheets December 31, 2011 and 2010 Owners’ Equity 2011 2010 Common stock, no par, 100,000 shares authorized, 40,000 and 25,000 shares issued, respectively. . . . . . $ 74,000 $ 59,000 Retained earnings: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 108,000 85,000 Net income for the year . . . . . . . . . . . . . . . . . . . . . . . 34,000 28,000 Dividends for the year . . . . . . . . . . . . . . . . . . . . . . . . (20,000) (5,000) Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . $122,000$108,000 Total owners’ equity. . . . . . . . . . . . . . . . . . . $196,000$167,000 Total liabilities and owners’ equity . . . . . . . . . . . . . . . . $312,000 $280,000

  5. Problem Definition • Calculate ROI for 2011. • Calculate ROE for 2011. • Calculate working capital at December 31, 2011. • Calculate the current ratio at December 31, 2011. e. Calculate the acid-test ratio at December 31, 2011.

  6. Problem Solution ROI = Margin * Turnover

  7. Problem Solution Margin = Net income / Sales ROI = Margin * Turnover

  8. Problem Solution Margin = Net income / Sales = $34,000 / $580,000 ROI = Margin * Turnover

  9. Problem Solution Margin = Net income / Sales = $34,000 / $580,000 = 5.86% ROI = Margin * Turnover

  10. Problem Solution Margin = Net income / Sales = $34,000 / $580,000 = 5.86% Turnover = Sales / Average Total Assets ROI = Margin * Turnover

  11. Problem Solution Margin = Net income / Sales = $34,000 / $580,000 = 5.86% Turnover = Sales / Average Total Assets = $580,000 / ($280,000 + $312,000) / 2 ) ROI = Margin * Turnover

  12. Problem Solution Margin = Net income / Sales = $34,000 / $580,000 = 5.86% Turnover = Sales / Average Total Assets = $580,000 / ($280,000 + $312,000) / 2 ) = 1.959 ROI = Margin * Turnover

  13. Problem Solution Margin = Net income / Sales = $34,000 / $580,000 = 5.86% Turnover = Sales / Average Total Assets = $580,000 / ($280,000 + $312,000) / 2 ) = 1.959 ROI = 5.86% Margin * 1.959 Turnover ROI = Margin * Turnover

  14. Problem Solution Margin = Net income / Sales = $34,000 / $580,000 = 5.86% Turnover = Sales / Average Total Assets = $580,000 / ($280,000 + $312,000) / 2 ) = 1.959 ROI = 5.86% Margin * 1.959 Turnover =11.5% ROI = Margin * Turnover

  15. Problem Definition • Calculate ROI for 2011. • Calculate ROE for 2011. • Calculate working capital at December 31, 2011. • Calculate the current ratio at December 31, 2011. e. Calculate the acid-test ratio at December 31, 2011.

  16. Problem Solution ROE = Net income / Average owners’ equity

  17. Problem Solution Net income = $34,000 ROE = Net income / Average owners’ equity

  18. Problem Solution Net income = $34,000 Average owners’ equity = ($167,000 + $196,000) / 2 ) ROE = Net income / Average owners’ equity

  19. Problem Solution Net income = $34,000 Average owners’ equity = ($167,000 + $196,000) / 2 ) = $181,500 ROE = Net income / Average owners’ equity

  20. Problem Solution Net income = $34,000 Average owners’ equity = ($167,000 + $196,000) / 2 ) = $181,500 ROE = $34,000 / $181,500 ROE = Net income / Average owners’ equity

  21. Problem Solution Net income = $34,000 Average owners’ equity = ($167,000 + $196,000) / 2 ) = $181,500 ROE = $34,000 / $181,500 = 18.7% ROE = Net income / Average owners’ equity

  22. Problem Definition • Calculate ROI for 2011. • Calculate ROE for 2011. • Calculate working capital at December 31, 2011. • Calculate the current ratio at December 31, 2011. e. Calculate the acid-test ratio at December 31, 2011.

  23. Problem Solution Working capital = Current assets - Current liabilities

  24. Problem Solution Current assets = $202,000 Working capital = Current assets - Current liabilities

  25. Problem Solution Current assets = $202,000 Current liabilities = $94,000 Working capital = Current assets - Current liabilities

  26. Problem Solution Current assets = $202,000 Current liabilities = $94,000 Working capital = $202,000 - $94,000 Working capital = Current assets - Current liabilities

  27. Problem Solution Current assets = $202,000 Current liabilities = $94,000 Working capital = $202,000 - $94,000 = $108,000 Working capital = Current assets - Current liabilities

  28. Problem Definition • Calculate ROI for 2011. • Calculate ROE for 2011. • Calculate working capital at December 31, 2011. • Calculate the current ratio at December 31, 2011. e. Calculate the acid-test ratio at December 31, 2011.

  29. Problem Solution Current ratio = Current assets / Current liabilities

  30. Problem Solution Current assets = $202,000 Current ratio = Current assets / Current liabilities

  31. Problem Solution Current assets = $202,000 Current liabilities = $94,000 Current ratio = Current assets / Current liabilities

  32. Problem Solution Current assets = $202,000 Current liabilities = $94,000 Current ratio = $202,000 / $94,000 Current ratio = Current assets / Current liabilities

  33. Problem Solution Current assets = $202,000 Current liabilities = $94,000 Current ratio = $202,000 / $94,000 = 2.15 Current ratio = Current assets / Current liabilities

  34. Problem Definition • Calculate ROI for 2011. • Calculate ROE for 2011. • Calculate working capital at December 31, 2011. • Calculate the current ratio at December 31, 2011. e.Calculate the acid-test ratio at December 31, 2011.

  35. Problem Solution Acid-test ratio = (Cash + Accounts receivable) / Current liabilities

  36. Problem Solution Cash + Accounts receivable = $21,000 + $78,000 = Acid-test ratio = (Cash + Accounts receivable) / Current liabilities

  37. Problem Solution Cash + Accounts receivable = $21,000 + $78,000 = $99,000 Acid-test ratio = (Cash + Accounts receivable) / Current liabilities

  38. Problem Solution Cash + Accounts receivable = $21,000 + $78,000 = $99,000 Current liabilities = $94,000 Acid-test ratio = (Cash + Accounts receivable) / Current liabilities

  39. Problem Solution Cash + Accounts receivable = $21,000 + $78,000 = $99,000 Current liabilities = $94,000 Acid-test ratio = $99,000 / $94,000 Acid-test ratio = (Cash + Accounts receivable) / Current liabilities

  40. Problem Solution Cash + Accounts receivable = $21,000 + $78,000 = $99,000 Current liabilities = $94,000 Acid-test ratio = $99,000 / $94,000 = 1.05 Acid-test ratio = (Cash + Accounts receivable) / Current liabilities

  41. Accounting What the Numbers Mean 9e You should now have a better understandingof 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

More Related