The Horizon Company is listed on the New York Stock Exchange. The market value of its common stock was quoted at $18 per share at both December 31, 2007 and December 31, 2006. Horizon€™s balance sheets at December 31, 2007 and December 31, 2006, and statements of income and retained earnings for the years then ended are as follows:

Additional facts are as follows:
a. €œSelling, general and administrative expenses€ for 2007 included a usual but infrequently occurring charge of $9,000.
b. €œOther, net€ for 2007 included an extraordinary item (charge) of $10,000. If the extraordinary item (charge) had not occurred, income taxes for 2007 would have been $11,600, instead of $8,600.
c. €œAdjustment required for correction of an error€ was a result of a change from an accounting principle that is not generally accepted to one that is generally accepted.
d. Horizon Company has a simple capital structure and has disclosed earnings per common share for net income in the Notes to the Financial Statements.

Required
1. Determine from the preceding additional facts whether or not the presentation of those facts in the Horizon Company statements of income and retained earnings is appropriate. If the presentation is appropriate, discuss the theoretical rationale for the presentation. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. Do not discuss disclosure requirements for the notes to the financial statements.
2. Describe the general significance of the following financial analysis tools:
(a) Quick (acid-test) ratio,
(b) Inventory turnover, and
(c) Return on stockholders€™ equity.
3. Based on the Horizon Company balance sheets, statements of income and retained earnings, and additional facts, describe how to determine each of the above financial analysis tools (for the year 2007only).

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Balanc December 31 2007 2006 Cash Marketable securities, at market Accounts receivable, net of allowance for doubtful accounts Inventories at lower of cost or market $ 3,500 13,000 105,000 126,000 $ 3,600 95,000 154,000 2.5002.400 $266,000 308,000 29.000 34.000 5590.000 5608.000 expenses Total current assets $250,000 311,000 Property, plant and equipment, net of accumulated depreciation Other assets Total Assets Liabilities Curren liabilities Notes payable Accounts payable and accrued expenses Income taxes payable Payments due within one year on long-term debt $ 15,000 74,500 $ 5,000 62,500 1,000 6.500 $ 75,000 169.000 74,000 9,000 7,500 $98,000 180.000 Total current liabilities Long-term debt Deferred income taxes Other liabilities Common stock, par value $1.00 per share authorized 20,000 shares; issued and outstanding 10,000 shares Additional paid-in capital Retained earnings Accumulated other comprehensive income 10,000 110,000 134,000 142,000 Unrealized increase in value of marketable securities Total stockholders' equity 263.000 255.000 S608,000 Total Liabilities and Stockholders Equity Statement of Income and Retained Earnings Year Ended December 31 2007 $600,000 2006 Net Costs and expenses $500,000 Cost of goods sold Selling, ge Other, net 480,00O 74,200 400,000 68,000 6,000 474,000 26,000 neral and administrative expenses Total costs and 571,200O $ 28,800 8,600 $ 20,200 141,000 Income before income taxes Income Retained earnings at beginning of period, as previously reported Adjustment required for correction of an error Retained earnings at beginning of period, as restated Dividends on common stock Retained earnings at end of period 132,000 (.000 (6.000) $126,000 S134,000