Practice Problems

Site: Saylor Academy
Course: BUS103: Introduction to Financial Accounting
Book: Practice Problems
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Date: Tuesday, October 4, 2022, 2:24 AM

Description

Complete these practice problems. Check your answers after you finish.

Demonstration Problems

Demonstration problem A Comparative financial statements of Kellogg Company for 2003 and 2002 follow:

Kellogg Company
Comparative income statements
Fore the years ended 2003 December 31, and 2002
(USD millions)

 

2003

2002

Net revenues

$6,954.7

$6,984.2

Cost of goods sold

3,327.0

3,325.1

Gross margin

$3,627.7

$3,659.1

Operating expense

2,551.4

2,585.7

Nonoperating expense (interest)

137.5

118.8

Income before income taxes

$ 938.8

$ 954.6

Income taxes

280.0

198.4

Net earnings

$ 658.8

$ 756.2

 

Kellogg Company
Comparative Balance sheets
2003 December 31, and 2002

 

(USD millions)

Assets

2003

2002

Cash and temporary investments

$ 204.4

$ 150.6

Accounts receivable, net

685.3

678.5

Inventories

443.8

503.8

Other current assets

273.3

236.3

Property, net

2,526.90

2,640.90

Other assets

762.6

589.6

Total assets

$4,896.3

$4,808.7

Liabilities and stockholders' equity

Current liabilities

$2,492.6

$1,587.8

Long-term liabilities

1,506.20

2,407.70

 

 

 

Common stock

103.8

103.8

Capital in excess of par value

102

104.5

Retained earnings

1,501.00

1,317.20

Treasury stock

-374

-380.9

Currency translation adjustment

-435.3

-331.4

Total liabilities and stockholders' equity

$4,896.3

$4,808.7

  1. Prepare comparative common-size income statements for 2003 and 2002.
  2. Perform a horizontal analysis of the comparative balance sheets.

Demonstration problem B The balance sheet and supplementary data for Xerox Corporation follow:

Xerox corporation
Balance sheet with IOFS on an equity basis
2003 December 31
(USD millions)

Assets

2003

Cash

$1,741

Accounts receivable, net

2,281

Finance receivables, net

5,097

Inventories

1,932

Deferred taxes and other current assets

1,971

Total current assets

$13,022

Finance receivables due after one year, net

7,957

Land, buildings, and equipment, net

2,495

Investments in affiliates, at equity

1,362

Goodwill

1,578

Other assets

3,061

Total assets

$ 29,475

Liabilities and stockholders' equity

 

Short-term debt and current portion of long-term debt

$2,693

Accounts payable

1,033

Accrued compensation and benefit costs

662

Unearned income

250

Other current liabilities

1,630

Total current liabilities

$6,268

Long-term debt

15,404

Liabilities for post-retirement medical benefits

1,197

Deferred taxes and other liabilities

1,876

Discontinued policyholders' deposits and other operations liabilities

670

Deferred ESOP benefits

-221

Minorities' interests in equity of subsidiaries

141

Preferred stock

647

Common shareholders' equity (108.1 million)

3,493

Total liabilities and shareholders' equity

$29,475

 

  • Cost of goods sold, USD 6,197.
  • Net sales, USD 18,701.
  • Inventory, January 1, USD 2,290.
  • Net interest expense, USD 1,031.
  • Net income before interest and taxes, USD 647.
  • Net accounts receivable on January 1, USD 2,633.
  • Total assets on January 1, USD 28,531.

Compute the following ratios:

  1. Current ratio.
  2. Acid-test ratio.
  3. Accounts receivable turnover.
  4. Inventory turnover.
  5. Total assets turnover.
  6. Equity ratio.
  7. Times interest earned ratio.


Source: James Don Edwards and Roger H. Hermanson, https://s3.amazonaws.com/saylordotorg-resources/wwwresources/site/wp-content/uploads/2012/10/Accounting-Principles-Vol.-1.pdf
Creative Commons License This work is licensed under a Creative Commons Attribution 3.0 License.

Solution to demonstration problems


a. 

Kellogg Company
Common-size comparative income statements
For the year ended 2003 December 31, and 2002

 

Per cent

 

2003

2002

Net revenues

100.00 %

100.00%

Cost of goods sold

47.84

47.61

Gross margin

52.16

52.39

Operating expenses

36.69

37.02

Nonoperating expense (interest)

1.98

1.70

Income before income taxes

13.49 %*

13.67 %

Income taxes

4.03

2.84

Net earnings

9.46 %*

10.83%

*Difference due to rounding.


b.

Kellogg company
Comparative balance sheets
2003 December 31, and 2002
(USD millions)

 

 

Increase or Decrease

 

2003

2002

2003 amount

2002 per cent

Assets

Cash and temporary investments;

$204.4

$150.6

$53.8

0.3572

Accounts receivable, net

685.3

678.5

6.8

1

Inventories

443.8

503.8

(60)

(11.91)

Other current assets

273.3

236.3

37

15.66

Property, net

2526.9

2640.9

(114)

(4.32)

Other assets

762.9

589.6

164

27.4

Total assets

$4,896.3

$4,808.7

$87.6

0.0182

Liabilities and stockholders' equity

Current liabilities

$2,492.6

$1,587.8

$904.8

0.5698

Long-term liabilities

1506.2

2407.7

(901.5)

(37.44)

Common stock

103.8

103.8

0

0

Capital in excess of par value

102

104.5

(2.5)

(2.39)

Retained earnings

1501

1317.2

183.8

13.95

Treasury stock

(374

(380.9

6.9

(1.81)

Currency translation adjustment

(435.3)

(331.4)

(103.9)

31.35

Total liabilities and stockholders' equity

$4,896.3

$4,808.7

$87.6

0.0182

 

Solution to demonstration problem B

  1. Current ratio:
    \frac{\text { Currentassets }}{\text { Current liabilities }}=\frac{\text { USD 13,022,000,000 }}{\text { USD 6,268,000,000 }}=2.08: 1
  2. Acid-test ratio:
  3. \frac{\text { Quick assets }}{\text { Current liabilities }}=\frac{\text { USD } 9,119,000,000}{\text { USD } 6,268,000,000}=1.45: 1
  4. Accounts receivable turnover:

\dfrac{\text { Net sales }}{\text { Average net accounts receivable }}=\dfrac{\operatorname{USD} 18,701,000,000}{\operatorname{USD} 2,457,000,000}=\text{7.61 time}

  1. Inventory turnover:
    \frac{\text { Net sales }}{\text { Average total assets }}=\frac{ USD 18,701,000,000}{ USD 29,003,000,000}=.64 \text { time }
  2. Total assets turnover:
    \frac{\text { Stockholders 'equity }}{\text { Total assets }}=\frac{\text { USD } 4,140,000,000}{\text { USD } 29,475,000,000}=14.05 \text { per cent }
  3. Equity ratio:
    \dfrac{\text { Income before interest also taxes }}{\text { Interest expense }}=\dfrac{\text{USD 647,000,000}}{\text{USD 1,031,000,000}}=.63 \text { time}
  4. Times interest earned ratio:
    \frac{\text { Income before interest also taxes }}{\text { Interest expense }}=\frac{\operatorname{USD} 647,000,000}{\operatorname{USD} 1,031,000,000}=.63 \text { time }

Self-test

True-false

Indicate whether each of the following statements is true or false.

1. An objective of financial statement analysis is to provide information about the company's past performance and current financial position.

2. Vertical analysis helps detect changes in a company's performance over several periods and highlights trends.

3. Common-size statements provide information about changes in dollar amounts relative to the previous periods.

4. Liquidity ratios show a company's capacity to pay maturing current liabilities.

5. A company that is quite profitable may find it difficult to pay its accounts payable.

6. Financial statement analysts must be sure that comparable data are used among companies to make the comparisons valid.


Multiple-choice

Select the best answer for each of the following questions.

The following data were abstracted from the 2007 December 31, balance sheet of Andrews Company (use for the first two questions questions):

Cash

$136,000

Marketable securities

64,000

Accounts and notes receivable, net

184,000

Merchandise inventory

244,000

Prepaid expenses

12,000

Accounts and notes payable, short-term

256,000

Accrued liabilities

64,000

Bonds payable, long-term

400,000


1. The current ratio is:

a.  1:2.

b.  2:1.

c.  1.2:1.

d.  3:1.

2. The acid-test ratio is:

a.  1:2.

b.  2:1.

c.  1.2:1.

d.  3:1.


Benson Company shows the following data on its 2011 financial statements (use for the rest of the questions ):

Accounts receivable, January 1

$720,000

Accounts receivable, December 31

960,000

Merchandise inventory, January 1

900,000

Merchandise inventory, December 31

1,020,000

Gross sales

4,800,000

Sales returns and allowances

180,000

Net sales

4,620,000

Cost of goods sold

3,360,000

Income before interest and taxes

720,000

Interest on bonds

192,000

Net income

384,000

 

3. The accounts receivable turnover is:

a.  5.5 times per year.

b.  5.714 times per year.

c.  5 times per year.

d.  6.667 times per year. 


4. The inventory turnover is:

a.  5 times per year.

b.  4.8125 times per year.

c.  3.5 times per year.

d.  4 times per year.


5. The times interest earned ratio is:

a.  4.75 times per year.

b.  3.75 times per year.

c.  2 times per year.

d.  3 times per year.

Check your answers on the next page. 


Self-test - Answers

True-false

1. True. Financial statement analysis consists of applying analytical tools and techniques to financial statements and other relevant data to obtain useful information.

2. False. Horizontal analysis provides useful information about the changes in a company's performance over several periods by analyzing comparative financial statements of the same company for two or more successive periods.

3. False. Common-size statements show only percentage figures, such as percentages of total assets and percentages of net sales.

4. True. Liquidity ratios such as the current ratio and acid-test ratio indicate a company's short-term debt-paying ability.

5. True. The accrual net income shown on the income statement is not cash basis income and does not indicate cash flows.

6. True. Analysts must use comparable data when making comparisons of items for different periods or different companies.


Multiple-choice

1. b.  Current assets: text { USD } 136,000 + text { USD } 64,000+ text { USD } 184,000+ text { USD } 244,000 + text { USD } 12,000= text { USD } 640,000

Current liabilities: \text { USD } 256,000 +  \text { USD } 64,000 = \text { USD } 320,000
Current ratio: \frac{ \text { USD } 640,000}{ \text { USD } 320,000} = 2:1

2. c.
Quick assets:

\text { USD } 136,000 + \text { USD }64,000 + \text { USD }184,000 = \text { USD }384,000

Current liabilities:

 256,000+ \text { USD } 64,000= \text { USD } 320,000

Acid-test ratio: \frac{\text { USD }384,000}{\text { USD }320,000}=1.2:1

3. a. Net sales: \text { USD } 4,620,000

Average accounts receivable: \frac{ \text { USD } 720,000+\text { USD }9 60,000}{2}= \text { USD } 840,000

Accounts receivable turnover: \frac{ \text { USD } 4,620,000}{ \text { USD } 840,000}=5.5

4. c. Cost of goods sold: \text { USD } 3,360,000

Average inventory: \frac{ \text { USD } 900,000+  \text { USD } 1,020,000}{2}= \text { USD } 960,000

Inventory turnover:  \frac{ \text { USD } 3,360,000}{ \text { USD } 960,000}=3.5

5. b.  Income before interest and taxes, \text { USD } 720,000

Interest on bonds, 192,000

Times interest earned ratio: \text { USD } 720,000/ \text { USD } 192,000=3.75 \text {times}