Problem 1

Horizontal Analysis

Required:
Calculate the trend percentages for sales, advertising expense and office salaries expen
Use 2021 as the base year. Round to the nearest percent.

2023 Percentage 2022

Sales 140,000 373.33% 60,000
Advertising Expense 7,000 311.11% 3,300
Office Salaries Expense 22,400 497.78% 9,000
ense and office salaries expense.

Percentage 2021 Percentage

160% 37,500 100%
146.67% 2,250 100%
200% 4,500 100%
Problem 2
Common-Size Statement of Comprehensive Income

Required:

Amounts
Net Sales 180,000
Cost of Goods Sold 99,000
Gross Profit 81,000
Operating Expenses:
Distribution Costs 43,200
General and Administrative Expenses 16,200 59,400
Profit before Income Taxes 21,600
Provision for Income Taxes 7,560
Profit 14,040
 Percent
100.0%
55.0%
45.0%

24.0%
9.0% 33.0%
12.0%
4.2%
7.8%
Problem 3
Measuring the Ability to Pay Current Liabilities

Required: Calculate the working capital, current ratio and quick ratio.

Current Assets:
Cash 13,250
Accounts Receivable 33,000
Merchandise Inventory 40,000
Prepaid Expenses 9,950
Total Current Assets 96,200

Current Liabilities:
Accounts Payable 25,200
Accrued Payables 1,800
Notes Payable 10,000
Total Current Liabilities 37,000
Working Capital (Current Assets - Current Liabilities) 59,200

Current Ratio:
Current Assets 96,200
Divide by: Current Liabilities 37,000
Current Ratio 2.6 or 2.6:1

Quick Ratio:
Quick Assets 46,250
Divide by: Current Liabilities 37,000
Quick Ratio 1.25 or 1.25:1

Cash 13,250
Accounts Receivable 33,000
Total Quick Assets 46,250
Problem 4
Measuring the Ability to Sell Inventory and Collect Receivables

Required:

1. Calculate inventory turnover, account receivable turnover, and average age of receivables.

Inventory Turnover
Cost of Goods Sold
Divide by: Average Merchandise Inventory
Inventory Turnover

Account Receivable Turnover

Net Credit Sales
Divide by: Average Net Accounts Receivable
Accounts Receivable Turnover

Average Age of Receivables

365 days
Divide by: Accounts Receivable Turnover
Average Age of Receivables

2. The entity is doing well in managing both inventory and receivables efficiently. It sells its invent
collects receivables frequently, and has a low average age for receivables, all indicating effective
management.
nd average age of receivables.

2,480,000
310,000 (245,000+375,000/2)
8.00 times

4,100,000
273,500 (250,000+297,000/2)
14.99 times

365 days
14.99 times
24.35 days

vables efficiently. It sells its inventory quickly,

receivables, all indicating effective
Problem 5
Liquidity Ratios

Required:
1. Working Capital
Current Assets
Cash 130,000
Trading Investments 60,000
Accounts Receivable 214,000
Merchandise Inventory 186,000
Total Current Assets 590,000

Current Liabilities 240,000

Working Capital (Current Assets - Current Liabilities) 350,000

2. Current Ratio
Current Assets 590,000
Divided by: Current Liabilities 240,000
Current Ratio 2.46

3. Quick Ratio
Quick Assets 404,000
Divided by: Current Liabilities 240,000
Quick Ratio 1.68

Cash 130,000
Trading Investment 60,000
Accounts Receivable 214,000
Total Quick Assets 404,000

4. Inventory Turnover
Cost of Goods Sold 3,000,000
Divided by: Average Merchandise Inventory 219,000
Inventory Turnover 13.70

5. Account Receivable Turnover

Net Credit Sales 5,000,000
Divided by: Average Net Accounts Receivable 185,000
Accounts Receivable Turnover 27.03
6. Average Age of Receivables
365 days 365
Divided by: Accounts Receivable Turnover 27.03
Average Age of Receivables 13.50
or 2.46:1

or 1.68:1

(252,000+186,000/2)
times

(156,000+214,000/2)
times
days
times
days
Problem 6
Solvency Ratios

Using these data, calculate:

1. Times Interest Earned Ratio = Profit before Interest Expense and Income Taxes/ Annual Inter
2. Debt Ratio = Total Liabilities / Total Assets
3. Equity Ratio = Total Equity / Total Assets

1. Time Interest Earned Ratio

Solution:
Profit Before Interest Expense and Income Taxes
Divide by: Annual Interest Expense

2. Debt Ratio
Solution:
Total Liabilities
Divide by: Total Assets
Debt to Total Assets Ratio

3. Equity Ratio
Solution:
Total Equity
Divide by: Total Assets
e and Income Taxes/ Annual Interest Expense

900000 x 35% = 315,000

1,315,000 (900,000 + 315,000 + 100,000)
100,000
13.15 Times

2,048,000
6,400,000 (2,048,000 + 4,352,000)
0.32 or 32%

4,352,000
6,400,000 (2,048,000 + 4,352,000)
0.68 or 68%
Problem 7
Profitability Ratios
Dec. 31, 2023
Total Assets 180,000
Total Equity 144,000

Calculate the following ratios:

1. Return on Total Assets

Profit + Interest Expense 25,750
Divided by: Average Total Assets 160,000
Return on Total Assets 0.1609

2. Return on Ordinary Equity

Profit - Preference Dividends 17,600
Divided by: Average Ordinary Equity 128,000
Return on Ordinary Equity 0.1375
 Jan. 1, 2023 Average
140,000 160,000
112,000 128,000

(20,000 + 5,750)

or 16.09%

(20,000 - 2,400)

or 13.75%
Problem 8
Profitability Ratios

Calculate the following ratios relating to the Bobadilla share:

1. Basic Earnings per Ordinary Share

Profit - Preference Share
Divide by: Average Number of Ordinary Shares Outstanding
Basic Earnings Per Ordinary Share

2. Price-Earnings Ratio
Market Price Per Ordinary Share
Divide by: Basic Earnings Per Share
Price-Earnings Ratio

3. Dividend Yield on Ordinary Share

Cash Dividends Per Ordinary Share
Divide by: Market Price Per Ordinary Share
Dividend Yield
 683,000 (743,000-60,000)
1,200,000 (1,100,000 shs. + 1,300,000 shs. / 2)
0.57

15
0.57
26.354319 or 26.4:1

0.4769 (620,000/1,300,000 shs.)

15
0.0318 or 3.2%
Problem 9
Ratios to Evaluate the Use of Leverage

Required:

Ballada Hardware
1. Return on Total Assets
Profit + Interest Expense 220,000
Divide by: Average Total Assets 1,420,000
Return on Total Assets 0.1549

2. Return on Ordinary Equity

Profit Preference Dividends 156,000
Divide by: Average Ordinary Equity 740,000
Return on Ordinary Equity 0.2108

Del Mundo Building Supply

1. Return on Total Assets
Profit + Interest Expense 47,500
Divide by: Average Total Assets 265,000
Return on Total Assets 0.1792

2. Return on Ordinary Equity

Profit Preference Dividends 37,500
Divide by: Average Ordinary Equity 162,500
Return on Ordinary Equity 0.2308
 (156,000 + 64,000)
(1,340,000 + 1,500,000 / 2)
or 15.49%

(650,000 + 830,000 / 2)
or 21.08%

(37,500 + 10,000)
(250,000 + 280,000 / 2)
or 17.9%

(150,000 + 175,000 / 2)
or 23.1%