Chapter 9 Exercise 3 • Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

Chapter 9 Exercise 3

 Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?
Suppose Thornton is using FIFO for inventory valuation and Edison is using LIFO. Comment on the comparability of information between these two companies.
If all short-term notes payable are due on July 11 at 8 a.m., comment on each company’s ability to settle its obligation in a timely manner.

Chapter 9 Exercise 4

 Computation and evaluation of activity ratios. The following data relate to Alaska Products Inc.:

The company is planning to borrow $300,000 via a 90-day bank loan to cover short-term operating needs.

Compute the accounts-receivable and inventory-turnover ratios for 20X5. Alaska rounds all calculations to two decimal places.
Study the ratios from part (a) and comment on the company’s ability to repay a bank loan in 90 days.
Suppose that Alaska’s major line of business involves the processing and distribution of fresh and frozen fish throughout the United States. Do you have any concerns about the company’s inventory-turnover ratio? Briefly discuss.

Chapter 9 Problem 1

Horizontal and vertical analysis. The following financial statements pertain to Waterloo Corporation:

WATERLOO CORPORATION Comparative Balance Sheets December 31,20X5 and 20X4
	20X5	20X4
Assets
Current Assets
Cash	$ 11,250	$ 12,500
Accounts Receivable (net)	18,500	25,000
Inventories	38,500	35,000
Prepaid Expense	__3,750	__3,750
Total Current Assets	$ 72,000	$ 76,250
Property, Plant, and Equipment
Buildings (net)	$ 102,750	$ 101,250
Equipment (net)	28,500	30,000
Vehicles (net)	32,000	40,000
Total Property, Plant, and Equipment	$ 163,250	$ 171,250
Trademarks (net)	__$ 14,750	__$ 2,500
Total assets	$ 250,000	$ 250,000
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable	$ 49,000	$ 70,000
Notes Payable	13,500	40,000
Federal Taxes Payable	__2,500	__25,000
Total Current Liabilities	$ 65,000	$ 135,000
Long-Term Debt	__$ 50,000	__$ 25,000
Total Liabilities	$ 115,000	$ 160,000
Stockholders’ Equity
Common Stock, $10 par	$ 25,000	$ 25,000
Retained Earnings	__110,000	__65,000
Total Stockholders’ Equity	$ 135,000	$ 90,000
Total Liabilities and Stockholders’ Equity	$ 250,000	$ 250,000

WATERLOO CORPORATION Comparative Income Statements For the Years Ending December 31, 20X5 and 20X4
	20X5	20X4
Net Sales	$ 550,000	$500,000
Cost of Goods Sold	__330,000	__250,000
Gross Profit	$ 220,000	$250,000
Operating Expense	__132,500	__100,000
Income Before Interest and Taxes	$ 87,500	$150,000
Interest Expense	__12,500	__3,000
Income Before Taxes	$ 75,000	$147,000
Income Tax Expense	__30,000	__58,800
Net Income	$ 45,000	$ 88,200

Instructions

Prepare a horizontal analysis of the balance sheet, showing dollar and percentage changes. Round all calculations in parts (a) and (b) to two decimal places.
Prepare a vertical analysis of the income statement by relating each item to net sales.
Briefly comment on the results of your analysis.

Chapter 9 Problem 2

Ratio computation. The financial statements of the Lone Pine Company follow.

LONE PINE COMPANY Comparative Balance Sheets December 31, 20X2 and 20X1 ($000 Omitted)
	20X2	20X1
Assets
Current Assets
Cash and Short-Term Investments	$ 400	$ 600
Accounts Receivable (net)	3,000	2,400
Inventories	__2,000	__2,200
Total Current Assets	$5,400	$5,200
Property, Plant, and Equipment
Land	$1,700	$ 600
Buildings and Equipment (net)	__1,500	__1,000
Total Property, Plant, and Equipment	$3,200	$1,600
Total Assets	$8,600	$6,800
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts Payable	$1,800	$1,700
Notes Payable	__1,100	__1,900
Total Current Liabilities	$2,900	$3,600
Long-Term Liabilities
Bonds Payable	4,100	2,100
Total Liabilities	$7,000	$5,700
Stockholders’ Equity
Common Stock	$ 200	$ 200
Retained Earnings	__1,400	__900
Total Stockholders’ Equity	$1,600	$1,100
Total Liabilities and Stockholders’ Equity	$8,600	$6,800

LONE PINE COMPANY Statement of Income and Retained Earnings For the Year Ending December 31,20X2 ($000 Omitted)
Net Sales*		$36,000
Less: Cost of Goods Sold	$20,000
Selling Expense	6,000
Administrative Expense	4,000
Interest Expense	400
Income Tax Expense	__2,000	_32,400
Net Income	$ 3,600
Retained Earnings, Jan. 1	___900
	$ 4,500
Cash Dividends Declared and Paid	__3,100
Retained Earnings, Dec. 31		$ 1,400
*All sales are on account.

Instructions
Compute the following items for Lone Pine Company for 20X2, rounding all calculations to two decimal places when necessary:

Chapter 9 Problem 3

Financial statement construction via ratios. Incomplete financial statements of Lock Box Inc. are presented as follows:

LOCK BOX INC. Income Statement For the Year Ending December 31, 20X3
Sales	$ ?
Cost of Goods Sold	?
Gross Profit	$ 15,000,000
Operating Expenses and Interest	?
Income Before Taxes	$ ?
Income taxes, 40%	?
Net income	$ ?

LOCK BOX INC. Balance Sheet December 31, 20X3
Assets
Cash	$ ?
Accounts Receivable	?
Inventory	?
Property, Plant, and Equipment	___8,000,000
Total assets	$ 24,000,000
Liabilities and Stockholders’ Equity
Accounts Payable	$ ?
Notes Payable: Short-Term	600,000
Bonds Payable	4,600,000
Common Stock	2,000,000
Retained Earnings	?
Total Liabilities and Stockholders’ Equity	$ 24,000,000

Further information is the following:

Cost of goods sold is 60% of sales. All sales are on account.
The company’s beginning inventory is $5 million; inventory-turnover ratio is 4.
The debt-to-total-assets ratio is 70%.
The profit margin on sales is 6%.
The firm’s accounts-receivable-turnover ratio is 5. Receivables increased by $400,000 during the year.

Instructions
Using the preceding data, complete the income statement and the balance sheet.