CHAPTER 21-1
1. Prepare a balance sheet for Miss Muffins’ Bakery for December 31, 2012. The company assets are: cash, $1,985; accounts receivable, $4,219; merchandise inventory, $2,512. The liabilities are: accounts payable, $3,483; wages payable, $1,696. The owner’s capital is $3,537.
2. Expand the balance sheet for Exercise 1 to include figures for 2011. The company assets are: cash, $1,762; accounts receivable, $3,785; merchandise inventory, $2,036. The liabilities are: accounts payable, $3,631; wages payable, $1,421. The owner’s capital is $2,531.
3. Prepare the balance sheet for O’Dell’s Nursery for December 31, 2012. The company assets are: cash, $8,917; accounts receivable, $7,521; merchandise inventory, $17,826. The liabilities are: accounts payable, $10,215; wages payable, $3,716. The owner’s capital is $20,333.
4. Expand the balance sheet for Exercise 3 for 2011. The company assets are: cash, $12,842; accounts receivable, $5,836; merchandise inventory, $18,917. The liabilities are: accounts payable, $8,968; wages payable, $2,582. The owner’s capital is $26,045.
5. Complete the vertical analyses on the comparative balance sheet for Miss Muffins’ Bakery for 2012. (Use parentheses to indicate decreases.) Use Exercise 1.
6. Use Exercises 1 and 2 to complete the vertical analyses on the comparative balance sheet for Miss Muffins’ Bakery for 2011
7. Complete the vertical analyses on the comparative balance sheet for O’Dell’s Nursery for 2012.
8. Complete the vertical analyses on the comparative balance sheet for O’Dell’s Nursery for 2011.
9. Use Exercises 1 and 2 to complete the horizontal analyses showing differences in dollar amounts and percents on the comparative balance sheet for Miss Muffins’ Bakery.
10. Complete the horizontal analyses showing differences in dollar amounts and percent increases (decreases) on the comparative balance sheet for O’Dell’s Nursery
11. To find the percent of total debt compared to total assets, divide the total liabilities by the total assets and write in percent form. Find the total debt to total assets for Miss Muffins’ Bakery for 2012. Use Exercise 1.
12. Use the formula in Exercise 11 to find the percent of total debt compared to total assets for Miss Muffins’ Bakery for 2011. Use Exercise 2.
CHAPTER 21-2
1. Complete the income statement for Sitha Ros’s Oriental Groceries for the years 2011 and 2012. Sitha Ros’s Oriental GroceriesIncome Statement for the Years Ending June 30, 2011 and 2012
Net sales Cost of goods sold 82,157 72,894
Gross profit
$97,384 $92,196
2011 2012
Operating expenses 4,783 3,951
Net income
2. Complete the portion for July 31, 2010, of the income statement shown for Miss Muffins’ Bakery using the given information: gross sales, $32,596; returns and allowances, $296; cost of beginning inventory, $16,872; cost of purchases, $33,596; cost of ending inventory, $21,843; total operating expenses, $1,894. Compute net sales, cost of goods sold, gross profit, and net income.
3. Use the information recorded for Miss Muffins’ Bakery for the month ending July 31, 2011, to extend the income statement for Exercise 2: gross sales, $35,403; returns and allowances, $342; cost of beginning inventory, $17,403; cost of purchases, $27,983; cost of ending inventory, $22,583; total operating expenses, $3,053. Compute net sales, cost of goods sold, gross profit, and net income
4. Extend the income statement for Sitha Ros’s Oriental Groceries to include a vertical analysis for 2011 and for 2012.
Sitha Ros’s Oriental Groceries
Income Statement for Years Ending
June 30, 2011 and 2012
Percent of Percent of
2012 Net Sales 2011 Net Sales
Net sales
Cost of goods sold
Gross profit
Operating expenses
Net income
5. Extend the income statement for Miss Muffins’ Bakery to include a vertical analysis for 2010 and 2011
Miss Muffins’ Bakery
Vertical Analysis of Income Statement for the Months Ending
July 31, 2010 and July 31, 2011
Percent of Percent of
2011 Net Sales 2010 Net Sales
Gross sales
Returns and allowances
Net sales
Cost of beginning inventory
Cost of purchases
Cost of ending inventory
Cost of goods sold
Gross profit
Total operating expenses
Net income
6. Extend the income statements for Sitha Ros’s Oriental Groceries to include the amounts of increase or decrease and the percents of
increase or decrease for a horizontal analysis.
7. Extend the income statement for Miss Muffins’ Bakery to include the amounts of increase or decrease and the percents of increase or
decrease for a horizontal analysis.
Miss Muffins’ Bakery
Horizontal Analysis of Income Statement for the Months Ending
July 31, 2010 and July 31, 2011
Increase
(Decrease)
2011 2010 Amount Percent
Gross sales
Returns and allowances
Net sales
Cost of beginning inventory
Cost of purchases
Cost of ending inventory
Cost of goods sold
Gross profit
Total operating expenses
Net income
CHAPTER 21-3
1. What is the current ratio for Denmark, Inc., which has current assets of $148,947 and current liabilities of $103,537?
2. Find the operating ratio for Chaney’s Pharmacy if the annual cost of goods sold is $315,842, the operating expenses are $62,917, and net sales are $597,064.
3. Find the gross profit margin ratio if The Premier Eatery had net sales of $392,054 and its cost of goods sold was $179,515.
4. Proud Larry’s Grill reported net sales of $289,512 and had average total assets of $145,753. Find its asset turnover ratio.
5. Find the current ratio for George’s business and the current ratio for José’s business, given the following information:
George José
Current assets $28,000 $840,000
Current liabilities 7,000 819,000
Working capital $21,000 $21,000
6. Find the acid-test ratio for Carley’s business if the balance sheet shows the following amounts: cash, $32,981; receivables, $12,045; marketable securities, $0; current liabilities, $22,178.
7. Find the operating ratio for Sol’s Dry Goods if the income statement for the month shows net sales, $15,500; cost of goods sold, $7,500; gross profit, $8,000; operating expenses, $3,500; net income, $4,500. Express results to the nearest tenth of a percent.
8. Find the gross profit margin ratio for Sol’s Dry Goods in Exercise 7 to the nearest tenth of a percent
EXERCISES SET A
1. Complete the following balance sheet for Fawcett’s Plumbing Supplies.
Fawcett’s Plumbing Supplies
Balance Sheet
March 31, 2011
Assets
Current assets
Cash $1,724.00
Office supplies 173.00
Accounts receivable 9,374.00
Total current assets
Plant and equipment
Equipment 12,187.00
Total plant and equipment 12,187.00
Total assets
Liabilities
Current liabilities
Accounts payable $2,174.00
Wages payable 674.00
Property and taxes payable 250.00
Total current liabilities
Total liabilities
Owner’s equity
D. W. Fawcett, capital 20,360.00
Total liabilities and owner’s equity
2. Complete the vertical analysis and horizontal analysis of the comparative balance sheet for Seymour’s Videos, Inc. Express percents to
the nearest tenth of a percent.
Seymour’s Videos, Inc.
Comparative Balance Sheet
December 31, 2010 and 2011
Increase Percent of
(decrease) total assets
2011 2010 Amount Percent 2011 2010
Assets
Current assets
Cash $2,374 $2,184
Accounts receivable 5,374 4,286
Merchandise inventory 15,589 16,107
Total assets
Liabilities
Current liabilities
Accou nts payable $7,384 $6,118
Wages payable 1,024 964
Total liabilities
Owner’s equity
James Seymour, capital 14,929 15,495
Total liabilities and owner’s equity
3. Complete the following income statement and vertical analysis.
Marten’s Family Store
Income Statement
For Year Ending December 31, 2011
Percent of
net sales
Revenue:
Gross sales $238,923
Sales returns and allowances 13,815
Net sales
Cost of goods sold:
Beginning inventory, January 1, 2011 25,814
Purchases 109,838
Ending inventory, December 31, 2011 23,423
Cost of goods sold
Gross profit from sales
Operating expenses:
Salary 42,523
Rent 8,640
Utilities 1,484
Insurance 2,842
Fees 860
Depreciation 1,920
Miscellaneous 3,420
Total operating expenses 61,689
Net income
4. Complete the following horizontal analysis of a comparative income statement.
Alonzo’s Auto Parts
Comparative Income Statement
For years ending June 30, 2011 and 2012
Increase (decrease)
2012 2011 Amount Percent
Revenue:
Gross sales $291,707 $275,873
Sales returns and allowances 5,895 6,821
Net sales
Cost of goods sold:
Beginning inventory, July 1 35,892 32,587
Purchases 157,213 146,999
Ending inventory, June 30 32,516 30,013
Cost of goods sold
Gross profit from sales
Operating expenses:
Salary 42,000 40,000
Insurance 3,800 3,800
Utilities 1,986 2,097
Rent 3,600 3,300
Depreciation 4,000 4,500
Total operating expenses
Net income
5.Current assets Current liabilities
$1,231,704 $784,184
6. Current assets Current liabilities
$174,316 $125,342
7. Stevens Gift Shop: cash, $2,345; accounts receivable, $5,450; government securities, $4,500; accounts payable, $6,748; notes payable, $7,457. Find the acid-test ratio. Round to the nearest hundredth.
8. Find the acid-test ratio for Edna Nunez and Company if the balance sheet shows cash, $23,500; marketable securities, $0; receivables, $12,300; current liabilities, $27,800. Round to the nearest hundredth.
9. Find the operating ratio and gross profit margin ratio for the following income statement:
Corner Grocery
Income Statement
For the Month Ending June 30, 2011
Net sales $25,000
Cost of goods sold $18,750
Gross profit $6,250
Operating expenses $3,750
Net income $2,500
10. Find the operating ratio for A to Z Sales if the income statement for the month shows net sales, $173,200; cost of goods sold, $138,400; gross profit, $34,800; operating expenses, $16,300; net income, $18,500. Express answer to the nearest tenth of a percent.
11. Find the gross profit margin ratio for the business in Exercise 10 to the nearest tenth of a percent.
12. Find the operating ratio and the gross profit margin ratio for Molene Internet Store if the month’s income statement shows net sales, $285,832; cost of goods sold, $198,530; gross profit, $87,302; operating expenses, $36,593; net income, $50,709. Round to the nearest tenth.
EXERCISES SET B
1. Complete the following balance sheet for Rooter Company.
Rooter Company
Balance Sheet
June 30, 2012
Assets
Current assets
Cash $2,350.00
Supplies 175.00
Accounts receivable 8,956.00
Total current assets
Plant and equipment
Equipment 11,375.00
Total plant and equipment 11,375.00
Total assets
Liabilities
Current liabilities
Accounts payable $1,940.00
Wages payable 855.00
Rent payable 775.00
Total current liabilities
Total liabilities
Owner’s equity
Wilson Rooter, capital 19,286.00
Total liabilities and owner’s equity
2. Complete the vertical analysis and the horizontal analysis of the comparative balance sheet for Miller’s Model Ships. Express percents
to the nearest tenth of a percent.
Miller’s Model Ships
Comparative Balance Sheet
December 31, 2010 and 2011
Increase Percent of
(decrease) total assets
2011 2010 Amount Percent 2011 2010
Assets
Current assets
Cash $2,176 $1,948
Accounts receivable 2,789 1,742
Merchandise inventory 4,985 5,450
Total assets
Liabilities
Current liabilities
Accounts payable $901 $872
Wages payable 1,342 1,224
Insurance payable 690 680
Total liabilities
Owner’s equity
Kathy Miller, capital 7,017 6,364
Total liabilities and owner’s equity
3. Complete the following income statement and vertical analysis. Express percents to the nearest tenth of a percent
Serpa’s Gifts
Income Statement
For Year Ending December 31, 2010
Percent of
net sales
Revenue:
Gross sales $148,645
Sales returns and allowances 8,892
Net sales
Cost of goods sold:
Beginning inventory, January 1, 2010 12,100
Purchases 47,800
Ending inventory, December 31, 2010 11,950
Cost of goods sold
Gross profit from sales
Operating expenses:
Salary 25,500
Rent 4,500
Utilities 1,445
Insurance 2,100
Fees 225
Depreciation 1,240
Miscellaneous 750
Total operating expenses
Net income
4. Complete the following horizontal analysis of a comparative income statement. Express percents to the nearest tenth of a percent.
Designer Crafts
Comparative Income Statement
For Years Ending December 31, 2011 and 2012
Increase (decrease)
2012 2011 Amount Percent
Revenue:
Gross sales $239,873 $236,941
Sales returns and allowances 12,815 13,895
Net sales
Cost of goods sold:
Beginning inventory, January 1 27,814 25,887
Purchases 123,213 112,604
Ending inventory, December 31 24,482 23,838
Cost of goods sold
Gross profit from sales
Operating expenses:
Salary 44,772 42,640
Insurance 3,006 2,863
Utilities 1,597 1,521
Rent 3,600 3,600
Depreciation 4,100 3,400
Total operating expenses
Net income
5. $32,194 $38,714
Current assets Current liabilities
6. $724,987 $334,169
Current assets Current liabilities
7. Find the acid-test ratio for Central Office Supply: cash, $5,745; accounts receivable, $12,496; accounts payable, $10,475. Round to the nearest hundredth.
8. Find the acid-test ratio for Jefferson’s Photo if the balance sheet shows cash, $6,700; marketable securities, $0; receivables, $12,756; current liabilities, $18,345.
9. Find the operating ratio for M. Ng’s Grocery if the income statement for the month shows net sales, $23,500; cost of goods sold, $16,435; gross profit, $7,065; operating expenses, $3,100; net income, $3,965. Round to the nearest tenth of a percent.
10. Find the gross profit margin ratio for the business in Exercise 9 to the nearest tenth of a percent
Practice Test
1. Complete the horizontal analysis of the following comparative balance sheet. Express percents to the nearest tenth of a percent.
FINANCIAL STATEMENTS 765
O’Toole’s Hardware Store
Comparative Balance Sheet
December 31, 2011 and 2012
Increase (Decrease)
2012 2011 Amount Percent
Assets
Current assets
Cash $7,318 $5,283
Accounts receivable 3,147 3,008
Merchandise inventory 63,594 60,187
Total current assets
Plant and equipment
Building 36,561 37,531
Equipment 8,256 4,386
Total plant and equipment
Total assets
Liabilities
Current liabilities
Acco unts payable $5,174 $4,563
Wages payable 780 624
Total current liabilities
Long-term liabilities
Mortgage note payable 34,917 36,510
Total long-term liabilities
Total liabilities
Owner’s Equity
James O’Toole, capital 78,005 68,698
Total liabilities and owner’s equity
2. Find the current ratio to the nearest hundredth for 2012 for O’Toole’s Hardware Store.
3. Find the acid-test ratio to the nearest hundredth for 2012 for O’Toole’s Hardware Store.
4. Find the current ratio to the nearest hundredth for 2011 for O’Toole’s Hardware Store.
5. Find the acid-test ratio to the nearest hundredth for 2011 for O’Toole’s Hardware Store.
6. Complete the horizontal analysis of the following comparative income statement.
Mile Wide Woolens, Inc.
Comparative Income Statement
For Years Ending December 31, 2010 and 2011
Increase (decrease)
2011 2010 Amount Percent
Revenue
Gross sales $219,827 $205,852
Sales returns and allowances 8,512 7,983
Net sales
Cost of goods sold
Beginning inventory, January 1 42,816 40,512
Purchases 97,523 94,812
Ending inventory, December 31 43,182 42,521
Cost of goods sold
Gross profit from sales
Operating expenses
Salary 28,940 27,000
Insurance 800 750
Utilities 1,700 1,580
Rent 3,600 3,000
Depreciation 2,000 2,400
Total operating expenses
Net income
7. Find the operating ratio for Mile Wide for 2010 and 2011.
8. Find the gross profit margin ratio for Mile Wide for 2010 and 2011.
9. Find the asset turnover ratio for Mile Wide for 2010 if its average total assets were $126,432.
10. Find the asset turnover ratio for Mile Wide for 2011 if its average total assets were $138,057.
Critical thinking
1. Use the formulas in the How To box: Prepare a Balance Sheet (p. 727) to explain the formula: and equipment = total liabilities + total owner’s equity. Total current assets + total plant
2. Explain how the formula Gross profit = net sales – cost of goods sold can be rearranged to find net sales.
3. If you have the formula: and the net profit is $25,982 and operating expenses are $150,986, write an equation to find gross profit. Net profit = gross profit – operating expenses,
4. Explain how the formula can be rearranged to find the amount of the item. Percent of net sales = amount of item net sales
5. Compare the formula in step 3 of the How To box: Prepare a Horizontal Analysis of a Comparative Income Statement (p. 741) with the formula you would use to find the percent of sales tax if you know the amount of tax and the amount (price) of the item.
6. How do the two formulas in Exercise 5 compare to the basic percentage formula ?P = RB
7. Explain why the same formula can be used to calculate an increase or a decrease. P = RB
8. If a current ratio for a company equals 1, what is the relationship of the current assets to the current liabilities?
9. If the current ratio is less than 1, what is the relationship of the current assets to the current liabilities?
10. If a company has an acid-test ratio that is greater than 1, what is the relationship of the quick current assets to current liabilities?
Challenge Problem
Cedar-Crest Greeting Card Company ended the year 2010 with assets that totaled $120,000. The assets for 2011 increased to $580,000. What was the rate of growth for Cedar-Crest?
Case studies
Charles Royston was checking the year-end balances for his wood furniture manufacturing and retail business and was concerned about the numbers. From what he remembered, his debts and accounts receivable were higher than the previous year. Rather than get worked up over nothing, he
decided he would gather the information and make a comparison. For December 31, 2011, the business had current assets of: $1,844 cash, $11,807 accounts receivable, and $9,628 inventory. Plant
and equipment totaled $158,700. Current liabilities were: accounts payable $13,446; wages payable
$650; and property and taxes payable $4,124. Long-term debt totaled $92,800 and owner’s equity
$70,959. By comparison, for December 31, 2010, the business had current assets of: $3,278 cash;
$6,954 accounts receivable; $17,417 inventory. Plant and equipment totaled $144,500. Current liabilities were: accounts payable $9,250; wages payable $1,110; property and taxes payable $3,650.
Long-term debt totaled $75,800; and owner’s equity $82,339.
1. Construct a comparative balance sheet for Contemporary Wood Furniture for year-end 2010 and 2011, including a vertical and horizontal analysis of the comparative balance sheet. Express percents to the nearest tenth of a percent.
2. Calculate the current ratio and the total debt to total assets ratio for 2010 and 2011
3. Overall, what does your analysis mean? Is Charles correct to be concerned about these numbers? Explain.
Jessica and David are student interns at Balanced Books Bookkeeping. They have taken several
business math and accounting classes and are now applying what they have learned to real-life situations. They enjoy their internship, but they are sometimes surprised by the assignments they are
given. Luckily, they work together, so they share the assignments and learn from each other. Their
most recent assignment is to take a listing of accounts provided by one of Balanced Books’ clients
and turn them into a balance sheet and income statement. David suggests that their client might appreciate it if they also performed a vertical analysis of each statement. Jessica suggests that they
should also compute the current ratio and the acid-test ratio.
1. Create the financial statements for December 31, 2011, depict them in vertical format, and
compute the current and acid test ratios.
Account title Amount Account title Amount
Cash $4,000 Accounts payable $3,500
Depreciation 2,000 Merchandise inventory 15,000
Carlton, equity 34,500 Accounts receivable 6,000
Cost of goods sold 85,000 Net sales 120,000
Rent expense 15,000 Insurance payable 500
Wages payable 1,500 Equipment 15,000
Utilities 6,500 Wages 8,000
Miscellaneous expenses 1,500