Solutions Guide: This is meant as a solutions guide. Please try reworking the
questions and reword the answers (especially essay type parts) so as to
guarantee that your answer is an original. Do not submit as your own.
Week One Assignment Intermediate Accounting
1 Calculating ratios: solve the unknown
The current asset section of the Excalibur Tire Company’s balance sheet consists of cash,
marketable securities, accounts receivable, and inventories. The December 31, 2011
balance sheet revealed the following:
Inventories 840,000
Total Assets 2,800,000
Current ratio 2.25
Acid –test ratio 1.2
Debt to equity 1.8
Required:
Determine the following 2011 balance sheet items:
1.
Current assets
2.
Shareholder’s equity
3.
Noncurrent assets
4.
Long-term liabilities
1. Acid-test ratio = Quick assets ÷ Current liabilities =
Quick assets = Current assets - Inventories
Quick assets = Current assets - $840,000
1.20
Current assets ÷ Current liabilities =
Current assets - $840,000 ÷ Current liabilities =
$840,000 ÷ Current liabilities =
Current liabilities = $800,000
Current assets ÷ $800,000 = 2.25
Current assets = $1,800,000
2.25
1.20
1.05
2. Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1.8
Total liabilities + Shareholders' equity = Total assets
Total liabilities + Shareholders' equity = $2,800,000
Let x equal shareholders' equity
1.8 x + x = $2,800,000
x = $1,000,000 = Shareholders' equity
3. Noncurrent assets = Total assets - Current assets
Noncurrent assets = $2,800,000 – 1,800,000 = $1,000,000
4. Long-term liabilities = Total assets - Current liabilities - Shareholders'
equity Long-term liabilities = $2,800,000 - 800,000 - 1,000,000 =
$1,000,000
2 Effect of management decisions on ratios
Most decisions made by management impact the ratios analysts use to evaluate
performance. Indicate (by letter) whether each of the actions listed below will
immediately increase (I), decrease (D), or have no effect (N) on the ratios shown.
Assume each ratio is less than 1.0 before the action is taken.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
Current
Action
Ratio
Issuance of long-term bonds
I
Issuance of short-term notes
I
Payment of accounts payable
D
Purchase of inventory on account
I
Purchase of inventory for cash
N
Purchase of equipment with a 4-year note
N
Retirement of bonds
D
Sale of common stock
I
Write-off of obsolete inventory
D
Purchase of short-term investment for cash
N
Decision to refinance on a long-term basis
some currently maturing debt
I
Acid-test
Debt to
Ratio
Equity Ratio
I
I
I
I
D
D
D
I
D
N
N
I
D
D
I
D
N
I
N
N
I
3 Balance Sheet Errors
You recently joined the internal auditing department of Marcus Clothing Corporation. As
one of your firs assignments you are examining a balance sheet prepared by a staff
account.
In the course of your examination you uncover the following information pertaining to
the balance sheet:
N
1.
The company rents it facilities. The land that appears in the statement is being
held for future sale.
2.
The note receivable is due in 2013. The balance of 53,000 includes 3,000 of
accrued interest. The next interest payment is due in July 2012.
3.
The note payable is due in installments of 20,000 per year. Interest on both the
notes and bonds is payable annually.
4.
The company’s investments consist of marketable equity securities of other
corporations. Management does not intend to liquidate any investments in the coming
year.
Required:
Identify and explain the deficiencies in the statement prepared by the company’s
accountant. Include in your answer items that require additional disclosure, either on the
face of the statement or in a note.
DEFICIENCIES:
1. Accounts receivable - if material, the allowance for uncollectible
accounts should be disclosed.
2. Note receivable - only the interest receivable of $3,000 should be
classified as a current asset. The $50,000 note receivable should be
classified in the noncurrent Investments category.
3. Inventories - the method used to cost inventory should be disclosed
in a note.
4. Investments - should be classified in the noncurrent Investments
category. Also, disclosures include information about the types of
investments and the accounting method used to value the
investments.
5. Prepaid expenses - in the absence of information to the contrary,
should be classified as a current asset.
6. Land - should be classified in the noncurrent Investments category.
7. Equipment, net - should be classified in the Property, plant, and
equipment category. Original cost should be disclosed along with
the accumulated depreciation to arrive at the net amount. Also, the
method used to compute depreciation should be disclosed in a note.
8. Patent - should be classified in the Intangible assets category of
noncurrent assets.
9. Note payable - $20,000, the next installment, should be classified as
a current liability as current maturities of long-term debt. Also, note
disclosure is required for the note and bonds payable that provides
information such as payment terms, interest rates, and collateral
pledged as security for the debt.
10. Interest payable - should be classified as a current liability.
11. Common stock - the par value, if any, and the number of shares
authorized, issued and outstanding should be disclosed.