Ch. 13 Demonstration Brief Exercise and Exercise solutions

# Accounting: Tools for Business Decision Making

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BRIEF EXERCISE 13-4 Horizontal analysis: Increase or (Decrease) Dec. 31, 2007 Dec. 31, 2006 Amount Percentag e * Accounts receivable Inventory Total assets \$ 520,000 \$ 780,000 \$3,220,000 \$ 400,000 \$ 600,000 \$2,800,000 \$120,00 0 \$180,00 0 \$420,00 0 30% 30% 15% * \$120,000 \$400,000 = .30 \$180,000 \$600,000 = .30 \$420,000 \$2,800,000 = .15 BRIEF EXERCISE 13-12 (a) Inventory turnover ratio = Cost of goods sold Average inventory 2007 2006 \$4,590,000* \$970,000 + \$1,020,000 2 = 4.6 times \$4,528,000** \$837,000 + \$970,000 2 = 5.0 times Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold \$ 970,000 4,640,000 5,610,000 1,020,000 \$4,590,000 * \$ 837,000 4,661,000 5,498,000 970,000 \$4,528,000 **

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(b) Days in inventory 365 4.6 = 79.3 days 365 5.0 = 73 days Management should be concerned with the fact that inventory moved slower in 2007 than it did in 2006. The decrease in the inventory turnover ratio could be because of poor pricing decisions or because the company is stuck with obsolete inventory. SOLUTIONS TO EXERCISES EXERCISE 13-4 POSEIDON CORPORATION Condensed Income Statement For the Years Ended December 31 2007 2006 Amount Percent Amount Percent Sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses
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