1) Preparing Common-Size Income Statements by Using Base Period Horizontal Analysis

Hernandez, Inc. provided the following income statements for its first three years of operation:

	Year 1		Year 2		Year 3
Net sales	$1,000,000		$1,100,000		$1,250,000
Less: Cost of goods sold	(700,000)		(750,000)		(810,000)
Gross margin	$ 300,000		$ 350,000		$ 440,000
Less:
Operating expenses	(200,000)		(243,000)		(310,000)
Income taxes	(40,000)		(41,000)		(52,000)
Net income	$ 60,000		$ 66,000		$ 78,000

Prepare common-size income statements by using year 1 as the base period. (Note: Round answers to the nearest whole percentage.)

Hernandez, Inc.

Income Statements

Years of Operation

Year 1 Dollars

Year 1 Percent

Year 2 Dollars

Year 2 Percent

Year 3 Dollars

Year 3 Percent

Net sales

$1,000,000

?

%

$1,100,000

?

%

$1,250,000

?

%

Less: Cost of goods sold

(700,000)

?

(750,000)

?

(810,000)

?

Gross margin

$ 300,000

?

%

$ 350,000

?

%

$ 440,000

?

%

Less:

Operating expenses

(200,000)

?

(243,000)

?

(310,000)

?

Income taxes

(40,000)

?

(41,000)

?

(52,000)

?

Net income

$ 60,000

?

%

$ 66,000

?

%

$ 78,000

?

%

2.

Preparing Income Statements by Using Net Sales as the Base: Vertical Analysis

Hernandez, Inc. provided the following income statements for its first 3 years of operation:

	Year 1		Year 2		Year 3
Net sales	$1,000,000		$1,100,000		$1,250,000
Less: Cost of goods sold	(700,000)		(750,000)		(810,000)
Gross margin	$ 300,000		$ 350,000		$ 440,000
Less:
Operating expenses	(200,000)		(240,000)		(310,000)
Income taxes	(40,000)		(44,000)		(52,000)
Net income	$ 60,000		$ 66,000		$ 78,000

Required:

Prepare common-size income statements by using net sales as the base. (Note: Round answers to the nearest whole percentage.)

Hernandez, Inc.

Income Statements

Years of Operation

Year 1 Dollars

Year 1 Percent

Year 2 Dollars

Year 2 Percent

Year 3 Dollars

Year 3 Percent

Net sales

$1,000,000

?

%

$1,100,000

?

%

$1,250,000

?

%

Less: Cost of goods sold

(700,000)

?

(750,000)

?

(810,000)

?

Gross margin

$ 300,000

?

%

$ 350,000

?

%

$ 440,000

?

%

Less:

Operating expenses

(200,000)

?

(240,000)

?

(310,000)

?

Income taxes

(40,000)

?

(44,000)

?

(52,000)

?

Net income

$ 60,000

?

%

$ 66,000

?

%

$ 78,000

?

%

3.

Calculating the Current Ratio and the Quick (or Acid-Test) Ratio

The Gridiron Company has current assets equal to $3,800,000. Of these, $1,200,000 is cash, $1,800,000 is accounts receivable, $500,000 is inventory, and the remainder is marketable securities. Current liabilities total $2,043,000.

Required:

Note: Round answers to two decimal places.

1. Calculate the current ratio. $ _________________

2. Calculate the quick ratio (acid-test ratio). $ _________________

4.

Calculate the Average Accounts Receivable, the Accounts Receivable Turnover Ratio, and the Accounts Receivable Turnover in Days

Last year, Dogwood Company had net sales of $9,527,000 and cost of goods sold of $4,812,000. Dogwood had the following balances:

	January 1	December 31
Accounts receivable	$725,000	$775,000
Inventories	450,000	425,000

Required:

Note: Round answers to one decimal place. Assume 365 days per year.

1. Calculate the average accounts receivable. $ _________________

2. Calculate the accounts receivable turnover ratio. _________________ times

3. Calculate the accounts receivable turnover in days. _________________ days

5.

Calculating the Average Inventory, the Inventory Turnover Ratio, and the Inventory Turnover in Days

Last year, Laurel, Inc. had net sales of $9,375,000 and cost of goods sold of $4,590,000. Laurel had the following balances:

	January 1	December 31
Accounts receivable	$725,000	$775,000
Inventories	450,000	425,000

Required:

Note: Round answers to one decimal place. Assume 365 days per year.

1. Calculate the average inventory. $ _________________

2. Calculate the inventory turnover ratio. _________________ times

3. Calculate the inventory turnover in days. _________________ days

4. Conceptual Connection: Based on these ratios, does Laurel appear to be performing well or poorly?

The input in the box below will not be graded, but may be reviewed and considered by your instructor.

????????????

6.

Calculating the Debt Ratio and the Debt-to-Equity Ratio

Ernst Company's balance sheet shows total liabilities of $32,785,300, total stockholders' equity of $9,517,000, and total assets of $42,302,300.

Required:

1. Calculate the debt ratio for Ernst Company. Round the percentage to two decimal places. _________________ %

2. Calculate the debt-to-equity ratio for Ernst Company. Round to two decimal places. _________________

7.

Calculating the Average Total Assets and the Return on Assets

The income statement, statement of retained earnings, and balance sheet for Somerville Company are as follows. Also, assume a tax rate of 33%.

Somerville Company Income Statement For the Year Ended December 31, 2014
	Amount		Percent
Net sales	$8,281,989		100.0%
Less: Cost of goods sold	(5,383,293)		65.0
Gross margin	$2,898,696		35.0
Less: Operating expenses	(1,323,368)		16.0
Operating income	$1,575,328		19.0
Less: Interest expense	(50,000)		0.6
Net income before taxes	$1,525,328		18.4
Less: Taxes (33%)*	(503,358)		6.1
Net income	$1,021,970		12.3
* Includes both state and federal taxes.

Somerville Company Statement of Retained Earnings For the Year Ended December 31, 2014
Balance, beginning of period	$1,979,155
Net income	$1,021,970
Total	$3,001,125
Less: Preferred dividends	(80,000)
Dividends to common stockholders	(201,887)
Balance, end of period	$2,719,238

Somerville Company Comparative Balance Sheets At December 31, 2013 and 2014
	2013	2014	2014
Assets
Current assets:
Cash	$2,875,000	$2,580,000	$2,580,000
Marketable securities	800,000	700,000	700,000
Accounts receivable (net)	939,776	690,000	690,000
Inventories	490,000	260,000	260,000
Other	93,000	74,261	74,261
Total current assets	$5,197,776	$4,304,261	$4,304,261
Property and equipment:
Land	$1,575,000	$1,067,315	$1,067,315
Building and equipment (net)	1,348,800	1,150,000	1,150,000
Total long-term assets	$2,923,800	$2,217,315	$2,217,315
Total assets	$8,121,576	$6,521,576	$6,521,576
Liabilities and stockholders' equity
Current liabilities:
Notes payable, short term	$1,170,127	$ 543,641	$ 543,641
Accounts payable	191,711	101,500	101,500
Current maturity of long-term debt	3,000	2,000	2,000
Accrued payables	200,000	57,780	57,780
Total current liabilities	$1,564,838	$ 704,921	$ 704,921
Long-term liabilities:
Bonds payable, 10%	500,000	500,000	500,000
Total liabilities	$2,064,838	$1,204,921	$1,204,921
Stockholders' equity:
Preferred stock, $25 par, 8%	$1,000,000	$1,000,000	$1,000,000
Common stock, $1.50 par	337,500	337,500	337,500
Additional paid-in capital*	2,000,000	2,000,000	2,000,000
Retained earnings	2,719,238	1,979,155	1,979,155
Total equity	$6,056,738	$5,316,655	$5,316,655
Total liabilities and stockholders' equity

1) Preparing CommonSize Income Statements by Using Base Period Horizontal Analysis Hernandez, Inc. provided the following income statements for its first three years of operation: Net sales Year 1 Year 2 Year 3 $1,000,000 $1,100,000 $1,250,000 Less: Cost of goods sold (700,000) (750,000) (810,000) Gross margin $ 300,000 $ 350,000 $ 440,000 (200,000) (243,000) (310,000) Income taxes (40,000) (41,000) (52,000) Net income $ 60,000 $ 66,000 $ 78,000 Less: Operating expenses Prepare commonsize income statements by using year 1 as the base period. (Note: Round answers to the nearest whole percentage.) Hernandez, Inc. Income Statements Years of Operation Year 1 Dollars Year 1 Percent Net sales $1,000,000 ? Less: Cost of goods sold (700,000) ? Gross margin $ 300,000 ? Operating expenses (200,000) Income taxes Year 2 Dollars % Year 2 Percent $1,100,000 ? (750,000) ? $ 350,000 ? ? (243,000) (40,000) ? Net income $ 60,000 ? Year 3 Dollars $1,250,000 ? (810,000) ? $ 440,000 ? ? (310,000) ? (41,000) % % Year 3 Percent ? (52,000) ? $ 66,000 ? $ 78,000 ? % % % Less: % % % 2. Preparing Income Statements by Using Net Sales as the Base: Vertical Analysis Hernandez, Inc. provided the following income statements for its first 3 years of operation: Net sales Year 1 Year 2 $1,000,000 $1,100,000 Less: Cost of goods sold (700,000) (750,000) Gross margin $ 300,000 $ 350,000 (200,000) (240,000) Income taxes (40,000) (44,000) Net income $ 60,000 $ 66,000 Less: Operating expenses Required