Requireda. Compute t he following amounts and ratios at the beginning o f the year:1. Current ratio.2. Acid-test ratio (quick ratio).b. Indicate the effect o f each transaction listed above on the current ratio and the acid-testratio (quick ratio). Give the effect in terms o f increase, decrease, o r none. Part a is done as anexample b elow t o show the format used.Effect onC urrentR atioincreaseAcid-Test Ratio(Quick Ratio)increasePaid a cash dividend previously declaredPROBLEM 14-13. Common-Size Financial Statements [LO 1 ,2]the Bao Corporation are given below.The financial statements forBao C orporationComparative Balance SheetsDecember 31, 2 012 a nd 2 0112 012AssetsC urrent assets:CashAccounts receivable n etI nventoryPrepaid expensesTotal current assetsProperty a nd e quipment:LandBuildings and e quipment, n etTotal p roperty a nd e quipmentTotal assets$1,9009,10011,30056022,8602011$1,3007,3009,10025017,95086,00048,600134,600$157,46086,00052,000138,000$155,950$ 17,6001,62054019,760$ 21,0004,43022025,6505,30034,40059,4605,30035,000__ Â§5,95011,00019,00030,00068,00098,000$157,46011,000_ 19,00030,000_ 60,000__9 0,000$155,950Liabilities a nd Stockholder’s E quityC urrent l iabilities:Accounts payableAccrued expensesNotes payable, short t ermTotal current liabilitiesLong-term liabilities:Bonds payableNotes payableTotal liabilitiesStockholder’s equity:C ommon stockA dditional p aid-in capitalTotal paid-in capitalRetained earningsTotal stockholder’s e quityTotal l iabilities a nd stockholder’s e quity5 53Bao CorporationComparative I ncome S tatementFor t he Year Ended December 3 1,2012 a nd 20112 012SalesC ost o f g oods s oldGross m arginO perating e xpenses:S elling e xpensesA dministrative e xpensesT otal o perating e xpensesI ncome f rom o perationsI nterest e xpenseI ncome b efore taxesLess i ncome taxesN et i ncome2011$130,000_ 67,00Q_.@,QPO$111,000__ 6LOOO-.iQ,OQQ24,50020,000_lLL60Q34,60015,400___ 4,70010,700_ _1 )Â§O$ 6,:42 Q~,5Q9_~~LOOO21,000__ 5,60015,400_ 6L 16Q$_9,-2~gnRequireda. Present t he balance sheet w ith each account balance as a percent o f t otal assets.b. Present t he i ncome statement w ith each balance as a percent o f sales.c. C omment on t he results o f any significant findings.d. W hat types o f issues does the company seem t o be facing?e. W hat suggestions d o you have for t he Bao Corporation?PROBLEM 14-14. Horizontal Analysis [LO 1 ,2) Refer t o t he financial data for Bao Corporationin Problem 14-13. Using these financial statements, c omplete t he f ollowing steps.Requireda.b.c.d.Prepare a h orizontal analysis f or t he balance sheet.Prepare a h orizontal analysis f or the income statement.C omment o n t he results o f any significant findings.W hat types o f issues does the company seem t o be facing?e. What suggestions d o you have for t he Bao Corporation?PROBLEM 14-15. Comprehensive Ratio Analysis [LO 5 ,6,7] Refer t o t he financial data for theBao Corporation in Problem 14-13.You have j ust been hired as a loan officer at the Sussex Bank.Yoursupervisor has given you a file c ontaining a request from Bao Corporation f or a $30,000 five-yearloan. Use t he financial statements for the Bao Corporation t o answer t he questions that follow.Lui Chun, w ho j ust a year ago was appointed president o f Bao Corporation, informs you thata lthough the company has had some problems in the past, i t is t urning things around, as evidencedb y the 17 percent increase in sales and the improved earnings results between last year and this year.Ms. Chun feels that, w ith her leadership and the improved technology (which will come from the equipment t hat the $30,000 will allow t he company t o purchase), profits will be even stronger in the future.W anting t o succeed in your first assignment, you decide t o g ather all t he necessary information for a c omplete analysis. You d etermine t hat t he f ollowing ratios are typical for the industry in which Bao C orporation operates;5 54C urrent r atioA cid-test ( quick) r atioA ccounts r eceivable t urnoverI nventory t urnoverR eturn o n assetsD ebt-to-equity r atioT imes i nterest e arned2.6 t o 11.2 t o 18.5 t imes6.2 t imes12.1%0.68 t o 16.8R equireda. Compute each o f the above ratios for Bao Corporation.b. Summarize the results o f these ratios.c. Based on this analysis, would you recommend that the loan be approved?PROBLEM 1 4-16. I nterpretation o f F inancial Ratios (LO 6, 7 ] Jordan l i is interested in purchasing the stock o f Mendella, a company that sells concrete mixtures t o t he construction industry. Before purchasing the stock,Jordan would like t o learn as much as possible about the company.However, all she has t o g o on is t he current year’s (Year 3) annual report, which contains no comparative data other than the summary o f t he ratios given below.Year 3C urrent ratioAcid test (quick ratio)Accounts receivable t urnoverI nventory t urnoverReturn o n t otal assetsReturn o n c ommon s tockholder’s e quityP rice-earnings r atioEarnings per shareYear 2Year 12.6:10.9:19.2 times6 .2 t imes14.5%17.2%14.5$1.522.4:11.0:110.3 t imes7.8 times13 .1%15 . 1%17 .2$1 .512.2:11.1 :111.5 times8.1 t imes11.3%12.90/017.8$1.54Jordan w ould like answers t o a n umber o f questions about the trend o f events for Mendella overthe past three years. She has t he following questions:184.108.40.206.5.Is it becoming easier for the company t o pay its bills as t hey come due?Are customers paying their accounts as well as they were in Year 1?Is t he level o f inventory increasing, decreasing, or remaining constant?Is t he market price o f t he company’s stock going up or down?Is t he company employing financial leverage t o the advantage o f the common stockholders?R equiredAnswer each o f Jordan’s questions using the data given above. In each case, explain how youarrived at your answer.PROBLEM 1 4-17. Effects o fTransactions o n F inancial Ratios (LO 5 ,6,7] l isted in the righthand column below are certain financial ratios. To t he l eft o f each ratio is a business transactionor event relating t o t he operating activit ies o f Candice, Inc., an e xporter o f ceramic tile.Business T ransaction o r E ventR atio1 . The c ompany declared a cash dividend.2. The c ompany sold i nventory o n a ccount.3. The company’s n et i ncome decreased b y5 p ercent b etween last year and this year.Long-term d ebt r emained unchanged.4 . A p reviously declared cash d ividend was paid.s. Obsolete i nventory t otaling $60,000 wasw ritten o ff a t a loss.6 . The c ompany sold i nventory f or cash a t a p rofit.7. The c ompany issued c ommon stock f or cash.8 . The c ompany paid $7,000 o n a ccounts payable.9 . The c ompany purchased i nventory o n c redit terms.1 0. The market price o f t he c ompany’s c ommonstock increased f rom $24.50 t o $37.20. Earningsper share remained unchanged.C urrent ratioAcid-test ratio (quick ratio)Times interest earnedCurrent ratioI nventory t urnover r atioD ebt-to-equity r atioEarnings per shareCurrent ratioAcid test (quick ratio)P rice-earnings r atioR equiredIndicate t he impact o f t he transaction on the corresponding ratio (increase, decrease,or no effect).5 55
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