Demonstration Problem Chapter 3 – Problem 18 (parts a-e) Calculate Profitability and Liquidity Measures Accounting What the Numbers Mean 10e

Demonstration Problem

Chapter 3 – Problem 18 (parts a-e)

Calculate Profitability and Liquidity Measures

AccountingWhat the Numbers Mean 10e

Problem Definition• Presented here are the comparative balance sheets of Hames, Inc., at

December 31, 2014, and 2013. Sales for the year ended December 31, 2014, totaled $870,000.

HAMES, INC.Balance Sheets

December 31, 2014 and 2013Assets 2014

2013

Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 31,500 $ 28,500Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 117,000 108,000Merchandise inventory. . . . . . . . . . . . . . . . . . . . . . . . . . 154,500 148,500

Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . $303,000 $285,000Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000 60,000Plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 187,500 165,000

Less: accumulated depreciation. . . . . . . . . . . . . . . . (97,500) (90,000)Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $468,000 $420,000

Problem Definition


December 31, 2014 and 2013

Liabilities 2014 2013

Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,000 $ 25,500Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,000 72,000Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 30,000 27,000

Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . $141,000 $124,500Long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000 45,000Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,000 $169,500

Problem Definition


December 31, 2014 and 2013

Stockholders’ Equity 2014 2013

Common stock, no par, 100,000 shares authorized, 40,000 and 25,000 shares issued, respectively. . . . . . $111,000 $ 88,500Retained earnings: Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,000 127,500 Net income for the year . . . . . . . . . . . . . . . . . . . . . . . 51,000 42,000 Dividends for the year . . . . . . . . . . . . . . . . . . . . . . . . (30,000) (7,500) Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . $183,000 $162,000 Total stockholders’ equity. . . .. . . . . . . . . . . . . $294,000

$250,500Total liabilities and stockholders’ equity . . . . . . . . . . . . . $468,000 $420,000

a. Calculate ROI for 2014.b. Calculate ROE for 2014.c. Calculate working capital at December 31,

2014. d. Calculate the current ratio at December

31, 2014.e. Calculate the acid-test ratio at December

31, 2014.

Problem Definition

Problem Solution

ROI = Margin * Turnover

Problem Solution

Margin = Net income / Sales


Problem Solution


= $51,000 / $870,000


Problem Solution


= $51,000 / $870,000

= 5.86%


Problem Solution


= $51,000 / $870,000

= 5.86%

Turnover = Sales / Average Total Assets


Problem Solution


= $51,000 / $870,000

= 5.86%

Turnover = Sales / Average Total Assets

= $870,000 / (($420,000 + $468,000) / 2 )


Problem Solution

Margin = Net income / Sales = $51,000 / $870,000= 5.86%

Turnover = Sales / Average Total Assets = $870,000 / (($420,000 + $468,000) / 2 )

= 1.959


Problem Solution



= 1.959ROI = 5.86% Margin * 1.959 Turnover


Problem Solution



= 1.959ROI = 5.86% Margin * 1.959 Turnover = 11.5%





31, 2014.

Problem Definition

Problem Solution

ROE = Net income / Average stockholders’ equity

Problem Solution

Net income = $51,000


Problem Solution


Average stockholders’ equity =

($250,500 + $294,000) / 2


Problem Solution


Average stockholders’ equity = ($250,500 + $294,000) / 2 = $272,250


Problem Solution



ROE = $51,000 / $272,250


Problem Solution



ROE = $51,000 / $272,250 = 18.7%


a. Calculate ROI for 2014.b. Calculate ROE for 2014.c. Calculate working capital at December

31, 2014. d. Calculate the current ratio at December


31, 2014.

Problem Definition

Problem Solution

Working capital = Current assets - Current liabilities

Problem Solution

Current assets = $303,000


Problem Solution


Current liabilities = $141,000


Problem Solution



Working capital = $303,000 - $141,000


Problem Solution



Working capital = $303,000 - $141,000 = $162,000





31, 2014.

Problem Definition

Problem Solution

Current ratio = Current assets / Current liabilities

Problem Solution



Problem Solution




Problem Solution



Current ratio = $303,000 / $141,000


Problem Solution



Current ratio = $303,000 / $141,000 = 2.15




31, 2014.e. Calculate the acid-test ratio at

December 31, 2014.

Problem Definition

Problem Solution

Acid-test ratio =

(Cash + Accounts receivable) / Current liabilities

Problem Solution

Cash + Accounts receivable = $31,500 + $117,000 =

Acid-test ratio =


Problem Solution

Cash + Accounts receivable = $31,500 + $117,000 = $148,500

Acid-test ratio =


Problem Solution



Acid-test ratio =


Problem Solution



Acid-test ratio = $148,500 / $141,000

Acid-test ratio =


Problem Solution



Acid-test ratio = $148,500 / $141,000 = 1.05

Acid-test ratio =


AccountingWhat the Numbers Mean 10e

David H. MarshallWayne W. McManus

Daniel F. Viele

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.

Documents

Demonstration Problem Chapter 3 – Problem 18 (parts a-e) Calculate Profitability and Liquidity Measures Accounting What the Numbers Mean 10e