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Demonstration Problem

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

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Demonstration Problem

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  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

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