ch05 - CHAPTER 5 USING FINANCIAL STATEMENT INFORMATION E55...

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CHAPTER 5 USING FINANCIAL STATEMENT INFORMATION E5–5 a. Current Ratio = Current Assets ÷ Current Liabilities 2004: $6,304 ÷ $2,242 = 2.81 2005: $5,239 ÷ $1,942 = 2.70 2006: $5,029 ÷ $2,272 = 2.21 b. Gross Profit as a % of Sales = Gross Profit ÷ Net Sales 2004: $6,381 ÷ $16,267 = .39 2005: $5,869 ÷ $16,023 = .37 2006: $5,649 ÷ $15,943 = .35 c. Inventory Turnover = Cost of Goods Sold ÷ Average Inventory 2005: $10,154 ÷ [($1,814 + $1,696) ÷ 2] = 5.79 2006: $10,294 ÷ [($1,696 + $1,796) ÷ 2] = 5.90 Average Days Supply of Inventory = 365 ÷ Inventory Turnover 2005: 365 ÷ 5.79 = 63 days 2006: 365 ÷ 5.90 = 62 days d. Over the three-year period, solvency has deteriorated, as has the profitability per sale. Inventory turnover has improved slightly, reducing the average shelf time of the inventory by one day. E5–10 Transaction Quick Ratio Current Ratio Debt/Equity Ratio (1) + (2) N E N E + (3) (4) + a (5) + + b (6) + + ___________________ a Wage Expense would be closed into Retained Earnings at the end of the accounting period as part of the closing process. Thus, recording wage expense would decrease stockholders' equity, and thereby increase the debt/equity ratio. b This transaction would increase both Sales and Cost of Goods Sold. Both of these accounts would be closed into Retained Earnings as part of the closing process. Since the sales price exceeds the cost of the inventory, the net effect of this transaction would be to increase Retained Earnings. Thus, total stockholders' equity would increase, and thereby decrease the debt/equity ratio. E5–11 a. Debt/Equity Ratio = Total Liabilities ÷ Total Stockholders' Equity = ($130,000 + $150,000) ÷ $200,000 1
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= 1.40 b. The maximum debt that Montvale can have outstanding is 1.5 times its total stockholders' equity. This means that the total debt Montvale can have outstanding is $300,000 (1.5
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ch05 - CHAPTER 5 USING FINANCIAL STATEMENT INFORMATION E55...

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