## . Do you have any concerns about the inventory turnover ratio. Discuss briefly.

Down below, I have calculated the current ratio rates of the 3 companies, which is current assets divided by current liabilities. And I’ve also calculated the quick ratio, which is cash plus accounts receivable, divided by current liabilities. Next part of the question, suppose Thornton is using FIFO for inventory valuation, and Edison is using LIFO. Comment on the comparability of information between these 2 companies. My comment is Thornton’s larger inventory balance is composed of current prices, whereas Edison’s inventory is composed of older, lower priced inventory. Edison’s use of LIFO lowers the current ratio so that inventory is not at a current price. The use of FIFO or LIFO does not affect the [INAUDIBLE] ratio, since inventory is not used in the calculation. The next part, if all short term notes are due on July 11 at 8:00 am, comment on each company’s ability to settle its obligation in a timely manner. And I stated that Edison has sufficient cash to meet the obligation. However, Stagg does not have enough cash on hand and would now have to liquidate short term investments. On the other hand, Thornton does not have enough cash or short term investments to meet the obligation. OK.

# Chapter 9 Exercise 4

Let’s look at the accounts receivable turnover, which I calculated as 5.2. We know that formula is to take net credit sales divided by average accounts receivable. So net credit sales is 832,000. And then we have to get the average of accounts receivable, so we add 180,000 to the 140,000. Divide that by 2 to get 160. So that’s how you do the calculation Inventory turnover is cost of goods sold divided by average inventory. So we’ll take the 440,000 cost of goods sold and divide that by the average of 70,000 inventory and 50,000– or 60,000– and we get 7.33. Now they want us to look at these ratios and comment on the ability to repay the bank loan in 90 days. I looked at these, and my comment is, the current cash position of the company is low, and collection of accounts receivable would help but would not generate sufficient cash to repay the loan. The company should consider longer-term financing in order pay current debts and generate sufficient cash for operating needs. Next part, they say, suppose that the company’s major line involves processing and distribution of fresh and frozen fish throughout the United States. Do you have any concerns about the inventory turnover ratio. Discuss briefly. Well, the inventory ratio is 7.33, which equates to about every 50 days. So hopefully, their inventory is frozen fish and not fresh fish. Because if it is fresh fish, we’re in deep trouble. Thank you all.

# Chapter 9 Problem 1

Chapter 9, Problem 1
. They’ve given us comparative balance sheets for a company ending in 20X4 and 20X5. And they want us to perform a horizontal analysis, which is comparing each account in a horizontal manner, meaning one year compared to the last year. Let’s take a look at cash. We notice that the 20X5 balance is \$11,250, and the ‘X4 was \$12,500. So it did go down. Now, to do the comparative analysis, you notice I have a minus 10%. The calculations is, go to the current year, \$11,250, minus the previous year, \$12,500. And notice you’re going to get a negative number. Then, divide that by the previous year, \$12,500. That calculation is, again, \$11,250 minus \$12,500. That result divided by \$12,500 gives us a minus 10%. So if you do it in that correct order, you’ll come up with a minus or a positive number that’s correct. And put that formula in the one cell where I have minus 10%. We’ll have to take that down to get the answers for the rest of the problem. Take a look at the next part. They give us a income statement for two years. And now this time, they want us to prepare a vertical analysis. And this is, as it’s stated, vertical, where we compare each account to one account, usually net sales. So let’s look at 2005. You’ll see net sales is \$550,000 plus in goods sold, it should have 30%. If you look over in my 2005 ratios, I’ve labeled that as 60%. So what I’m doing for that number– \$330,000– I’m dividing that by \$550,000 to get 60%. And I did that with each number. I’d take the gross profit of \$220,000 and I’d divide that by the base number of \$550,000. I get 40%. And I did that to the remainder of the accounts. And I replicated that and did it for 20X4. OK, thank you very much.

# Chapter 9 Problem 2

The problem gives us a balance sheet for 20X2 and 20X1 And let me make a note here, you notice in yellow I have the common stock par value at \$1. The par value was not in the original problem, but you need that to calculate the ratio dividend PIT payout rate. So I’ve added \$1, and I’ve also added the line right below it– number of shares 200. You need that in order to calculate that ratio. All right, down below we have also an income statement that they’ve given us. And they want us to complete 3, 4, 5, 6, 7, 8, 9– about 10 ratios. And you notice, I have listed to the right how to calculate it each ratio, and then I’ll get in to each one. But what I suggest when you’re doing this problem, since the numbers change for each section, depending upon the time of day you take the course, I would calculate these ratios using the base numbers I have here in the Excel sheet. Make sure you get the same number I do that you see on the screen. Then I would change the numbers if you have to change and submit your answers. I think that’s probably the best way to ensure getting the correct answer. OK. That’s all I have. Thank you.

# Chapter 9 Problem 3

This problem gives us an income statement with only one number and several question marks, and we have to determine the question marks. They only give us gross profit of 15 million. Then they give us a balance sheet with several numbers in it and several question marks also. Now, in addition, they give us about seven bits of information down below here– Cost of goods sold percent of sales 60%, Beginning inventory 5 million, Inventory turnover ratio is 4, debt-to-total-assets ratio is 70%, Profit margin on sales 6%, Accounts receivable turnover ratio of 5, and Receivables increased 400,000. And we’ll use those to determine these missing numbers. Let’s start with the income statement. First of all, they stated that cost of goods sold equals 60% of sales. So if that’s true, then gross profit has to be 40% of sales. So I divided gross profit by 0.4 in order to determine total sales, which is 37,000– excuse me, 37,500,000. Cost of goods sold is the difference between sales and gross profit, or 60% of sales. So therefore, cost of goods sold is 22,500,000. Now, they tell us that the profit margin on sales equals 6%. So I multiplied sales by 6% to calculate net income, which is \$2,250,000. Now, income taxes are 40%, so therefore net income is 60% of income before taxes. So I divided net income by 0.6 in order to ascertain income before taxes. Now, income taxes is the difference between net income and income before taxes, or 40% of income [INAUDIBLE] before taxes. So that comes out to be 1,500,000. Now, the remaining number is operating expenses and interest. Operating expenses is the difference between gross profit and income before taxes. So that number is \$11,250,000. OK. So there’s the income statement. Let’s look at the balance sheet. First one we’re going to attack is the debtto-asset ratio equals 70%. And the debt-to-asset ratio is total debt over total assets. And they’ve given us total assets of 24,000,000. So if 0.7 equals x over 24,000,000, and I multiply both sides by 24,000,000, Therefore, the total debt equals 16,800,000. Therefore, accounts payable equals 11,600,000, And retained earnings would equal 5,200,000. OK. We have three numbers left. And we have some ratios for accounts receivable and inventory, and then we’re going to plug cash. Let’s look at the accounts receivable first. They give us accounts receivable turnover ratio of 5, and that’s net credit sales over average net accounts. So 5 equals credit sales over average net accounts. So I don’t know the credit sales, but if I divide 5 into the 37,500,000, I will get 7,500,000, which equals the average accounts receivable. However, I don’t want the average. I want the ending balance of accounts receivable. And they say accounts receivable increased by 400,000. So if I have the average at 7,500,000 and increased by 400,000, I can take one half of 400,000 and determine the ending balance of 7,700,000. OK. Let’s look at inventory. They give us the inventory turnover ratio of 4, and that’s cost of goods sold over average inventory. So 4 equals cost of goods sold, 22,500,000, divided by x. So x equals 5,625,000. That’s the average inventory. They give us the beginning inventory of 5,000,000 and the average of 5,625,000, so the ending has to be \$6,250,000. All right. The last number we have is cash, and that’s just the plug. We add up total assets and determine what cash would be, and that number is 2,050,000. OK. So there’s the balance sheet and the income statement. That didn’t take too long. Pretty easy when we know the right approach, isn’t it? I hope that by reviewing this with you, you can follow my directions and calculate this with the changed numbers. OK. That’s all I have. Thank you very much.