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Prepare a comparative balance sheet of Gilmour Company showing the dollar change and the percent
change for each item. (Round percentages to 2 decimal places, e.g. 2.25%. If $ or % change
are in decrease, enter amounts or percentages using either a negative sign preceding the
number e.g. -45, -2.25% or parentheses e.g. (45), (2.25)%.)
Assets
Cash
GILMOUR COMPANY
Comparative Balance Sheet
December 31, 2013 and 2012
December 31
Increase or (Decrease)
2013
2012
$ Change
% Change
$
$ 180,000
$ 275,000
Accounts receivable (net)
219,500
155,300
6.58
Short-term investments
269,300
149,600
1,059,600
979,300
24,750
24,750
2,585,200
9.88
%
$-95,000
-34.55%
5.58
64,200
41.34%
8.07
5.38
119,700
80.01%
31.74
35.19
80,300
8.20%
0.74
0.89
0
0.00%
1,949,400
77.45
70.04
635,800
32.62%
( 750,100 )
(29.97)
(26.95)
-250,400
33.38%
$
3,337,850
$
2,783,250
100
Accounts payable
$ 50,020
$ 74,100
Accrued expenses
170,400
199,400
5.11
Bonds payable
450,500
189,600
2,100,000
Inventories
Prepaid expenses
Fixed assets
Accumulated depreciation
Total
( 1,000,500 )
5.39
$
100
%
554,600
19.93%
2.66
%
-24,080
-32.50%
7.16
-29,000
-14.54%
13.50
6.81
260,900 137.61%
1,769,300
62.91
63.57
330,700
18.69%
566,930
550,850
16.98
19.79
16,080
2.92%
$
3,337,850
$
2,783,250
554,600
19.93%
Liabilities and
Stockholders’ Equity
Capital stock
Retained earnings
Total
$
1.50
$
100
100
%
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Answer each of the questions in the following unrelated situations.
(a) The current ratio of a company is 5:1 and its acid-test ratio is 1:1. If the inventories and prepaid
items amount to $492,400, what is the amount of current liabilities?
Current Liabilities
$
123100
(b) A company had an average inventory last year of $209,000 and its inventory turnover was 5. If
sales volume and unit cost remain the same this year as last and inventory turnover is 9 this year,
what will average inventory have to be during the current year? (Round answer to 0 decimal
places, e.g. 125.)
Average Inventory
$
116111
(c) A company has current assets of $88,790 (of which $37,160 is inventory and prepaid items) and
current liabilities of $37,160. What is the current ratio? What is the acid-test ratio? If the company
borrows $13,870 cash from a bank on a 120-day loan, what will its current ratio be? What will the
acid-test ratio be? (Round answers to 2 decimal places, e.g. 2.50.)
Current Ratio
2.39
:1
Acid Test Ratio
1.39
:1
New Current Ratio
2.01
:1
New Acid Test Ratio
1.28
:1
(d) A company has current assets of $605,100 and current liabilities of $239,000. The board of
directors declares a cash dividend of $191,200. What is the current ratio after the declaration but
before payment? What is the current ratio after the payment of the dividend? (Round answers to 2
decimal places, e.g. 2.50.)
Current ratio after the declaration but before
payment
1.41
:1
Current ratio after the payment of the dividend
1.71
:1, Corrected answer 1.73:1
New Answer - Current ratio after the payment of the dividend 1.73:1
Presented below are comparative balance sheets for the Gilmour Company.
GILMOUR COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2013 AND 2012
December 31
2013
2012
$180,200
$275,700
220,400
154,300
Assets
Cash
Accounts receivable (net)
Short-term investments
Inventories
Prepaid expenses
Fixed assets
Accumulated depreciation
270,100
149,400
1,061,000
980,700
24,140
24,140
2,585,600
1,949,300
(1,000,900 )
(750,100 )
$3,340,540
$2,783,440
Accounts payable
$50,700
$75,180
Accrued expenses
169,500
200,500
Bonds payable
450,100
190,600
2,100,000
1,770,300
570,240
546,860
$3,340,540
$2,783,440
Liabilities and Stockholders’ Equity
Capital stock
Retained earnings
(a)
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Prepare a comparative balance sheet of Gilmour Company showing the percent each item is of
the total assets or total liabilities and stockholders’ equity. (Round percentages to 2 decimal
places, e.g. 2.25%. For accumulated depreciation, enter percentages using either a
negative sign preceding the number e.g. -2.25% or parentheses e.g. (2.25)%.)
Assets
Cash
GILMOUR COMPANY
Comparative Balance Sheet
December 31, 2013 and 2012
December 31
2013
$ 180,200
5.39
Accounts receivable (net)
220,400
Short-term investments
270,100
Inventories
Prepaid expenses
Fixed assets
1,061,000
24,140
2,585,600
$ 275,700
9.91
6.60
154,300
5.54
8.09
149,400
5.37
31.76
980,700
35.23
0.72
77.40
%
2012
24,140
1,949,300
0.87
70.03
%
(
)
1,000,900
-29.96
$
3,340,540
100
Accounts payable
$ 50,700
1.52
Accrued expenses
169,500
Bonds payable
Accumulated depreciation
Total
( 750,100 )
-26.95
%
$
2,783,440
100
%
%
$ 75,180
2.70
%
5.07
200,500
7.20
450,100
13.47
190,600
6.85
2,100,000
62.86
1,770,300
63.60
570,240
17.07
546,860
19.65
Liabilities and Stockholders’
Equity
Capital stock
Retained earnings
Total
$
3,340,540
100
%
$
2,783,440
100
%
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(b)
Prepare a comparative balance sheet of Gilmour Company showing the dollar change and the
percent change for each item. (Round percentages to 2 decimal places, e.g. 2.25%. If $ or
% change are in decrease, enter amounts or percentages using either a negative sign
preceding the number e.g. -45, -2.25% or parentheses e.g. (45), (2.25)%.)
Assets
GILMOUR COMPANY
Comparative Balance Sheet
December 31, 2013 and 2012
December 31
Increase or (Decrease)
2013
2012
$ Change
% Change
$
Cash
$
180,200
$
275,700
-95,500
-34.64%
Accounts
receivable
(net)
220,400
154,300
66,100
42.84%
Short-term
investments
270,100
149,400
120,700
80.79%
Inventories
1,061,00
0
980,700
80,300
8.19%
24,140
24,140
0
0.00%
2,585,60
0
1,949,30
0
636,300
32.64%
-250,800
33.44%
Prepaid
expenses
Fixed assets
(
1,000,90
)
0
$
3,340,54
0
$
2,783,44
0
Accounts
payable
$ 50,700
$ 75,180
Accrued
expenses
169,500
200,500
Accumulated
depreciation
Total
(
750,100)
$
%
20.01%
%
-24,480
-32.56%
%
-31,000
-15.46%
557,100
Liabilities
and
Stockholders
’ Equity
Bonds
payable
$
450,100
190,600
259,500
136.15%
2,100,00
0
1,770,30
0
329,700
18.62%
Retained
earnings
570,240
546,860
23,380
4.28%
Total
$
3,340,54
0
$
2,783,44
0
Capital stock
$
557,100
20.01%
%
Robbins Company is a wholesale distributor of professional equipment and supplies. The
company’s sales have averaged about $900,000 annually for the 3-year period 2011-2013. The
firm’s total assets at the end of 2013 amounted to $850,000.
The president of Robbins Company has asked the controller to prepare a report that summarizes
the financial aspects of the company’s operations for the past 3 years. This report will be
presented to the board of directors at their next meeting.
In addition to comparative financial statements, the controller has decided to present a number
of relevant financial ratios which can assist in the identification and interpretation of trends. At
the request of the controller, the accounting staff has calculated the following ratios for the 3year period 2011–2013.
2011
2012
2013
Current ratio
1.80
1.89
1.96
Acid-test (quick) ratio
1.04
0.99
0.87
Accounts receivable turnover
8.75
7.71
6.42
Inventory turnover
4.91
4.32
3.72
Total debt to total assets
51.0 %
46.0 %
41.0 %
Long-term debt to total assets
31.0 %
27.0 %
24.0 %
Sales to fixed assets (fixed asset turnover)
1.58
1.69
1.79
Sales as a percent of 2011 sales
1.00
1.03
1.05
Gross margin percentage
36.0 %
35.1 %
34.6 %
6.9 %
7.0 %
7.2 %
Net income to sales
Return on total assets
Return on stockholders’ equity
7.7 %
7.7 %
7.8 %
13.6 %
13.1 %
12.7 %
In preparation of the report, the controller has decided first to examine the financial ratios
independent of any other data to determine if the ratios themselves reveal any significant trends
over the 3-year period.
The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios
provided, identify and explain the contributing factor(s) for this apparently divergent trend.
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In terms of the ratios provided, what conclusion(s) can be drawn regarding the company’s use
of financial leverage during the 2011–2013 period?
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Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net
investment in plant and equipment?
Howser Inc. is a manufacturer of electronic components and accessories with total assets of
$20,000,000. Selected financial ratios for Howser and the industry averages for firms of similar
size are presented below.
2013
Industry
Average
Howser
2011
2012
2013
Current ratio
2.09
2.27
2.51
2.24
Quick ratio
1.15
1.12
1.19
1.22
Inventory turnover
2.40
2.18
2.02
3.50
Net sales to stockholders’ equity
2.75
2.80
2.95
2.85
Net income to stockholders’ equity
0.14
0.15
0.17
0.11
Total liabilities to stockholders’ equity
1.41
1.37
1.44
0.95
Howser is being reviewed by several entities whose interests vary, and the company’s financial
ratios are a part of the data being considered. Each of the parties listed below must recommend
an action based on its evaluation of Howser’s financial position.
Citizens National Bank. The bank is processing Howser’s application for a new 5-year term note.
Citizens National has been Howser’s banker for several years but must reevaluate the company’s
financial position for each major transaction.
Charleston Company. Charleston is a new supplier to Howser and must decide on the appropriate
credit terms to extend to the company.
Shannon Financial. A brokerage firm specializing in the stock of electronics firms that are sold
over-the-counter, Shannon Financial must decide if it will include Howser in a new fund being
established for sale to Shannon Financial’s clients.
Working Capital Management Committee. This is a committee of Howser’s management
personnel chaired by the chief operating officer. The committee is charged with the responsibility
of periodically reviewing the company’s working capital position, comparing actual data against
budgets, and recommending changes in strategy as needed.
Describe the analytical use of each of the six ratios presented above.
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For each of the four entities described above, identify two financial ratios, that would be most
valuable as a basis for its decision regarding Howser.
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Discuss what the financial ratios presented in the question reveal about Howser. Support your
answer by citing specific ratio levels and trends as well as the interrelationships between these
ratios.