Mastery Problem: Financial Statement Analysis

Liquidity and Solvency Measures

Your friend, another accountant, has bet you that with your knowledge of accounting and just the computations for common analytical measures, you can figure out many aspects of a company's financial statements. You take the bet!

Match each computation to one of the liquidity and solvency measures in the table. (Hint: Begin by looking for simple computations and identifying the amounts in those computations. Look for other measures that use those amounts.)

Liquidity and Solvency Measures		Computations
Working capital		$3,093,000 – $900,000
Current ratio		$3,093,000 ÷ $900,000
Quick ratio		$1,866,000 ÷ $900,000
Accounts receivable turnover		$8,260,000 ÷ [($714,000 + $740,000) ÷ 2]
Number  of days' sales in receivables		[($714,000 + $740,000) ÷ 2] ÷ ($8,260,000 ÷ 365)
Inventory turnover		$4,100,000 ÷ [($1,072,000 + $1,100,000) ÷ 2]
Number of days' sales in inventory		[($1,072,000 + $1,100,000) ÷ 2] ÷ ($4,100,000 ÷ 365)
Ratio of fixed assets to long-term liabilities		$2,690,000 ÷ $1,690,000
Ratio of liabilities to stockholders' equity		$2,590,000 ÷ $4,017,000
Times interest earned		($976,800 + $127,000) ÷ $127,000

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Balance Sheet

Use the following balance sheet form to enter amounts you identify from the computations on the Liquidity and Solvency Measures part. You will identify other amounts for the balance sheet on the Profitability Measures part. If you have a choice of two amounts, assume the first amount in the ratio is for the end of the year. Compute any missing amounts.

Balance Sheet December 31, 20Y6
Assets
Current assets:
Cash	$823,000
Marketable securities
Accounts receivable (net)
Inventory
Prepaid expenses
Total current assets	$3,093,000
Long-term investments	824000
Property, plant, and equipment (net)	2,690,000
Total assets	$6,607,000
Liabilities
Current liabilities	$900,000
Long-term liabilities	1,690,000
Total liabilities	$2,590,000
Stockholders' Equity
Preferred stock, $10 par	$
Common stock, $5 par	1,250,000
Retained earnings
Total stockholders' equity	$4,017,000
Total liabilities and stockholders' equity	$6,607,000

Answer rating: 100% (QA)

Mastery Problem Financial Statement Analysis Liquidity and solvency Measures w1 Working capital Current assets Current liabilities 3093000 900000 w2 C... View the full answer