Chapter 2

# Chapter 2 - CHAPTER 2 CHAPTER 2 BRIEF EXERCISE 2-4 Working...

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CHAPTER 2 CHAPTER 2 BRIEF EXERCISE 2-4 Working Capital = Current Assets – Current Liabilities Working Capital: \$80,000 – \$60,000 = \$20,000 Current Ratio = Current Assets/Current Liabilities Current Ratio: \$80,000/\$60,000 = 1.33 to 1 BRIEF EXERCISE 2-6 Profit Margin = Net Income/Sales = (\$100,000 – \$60,000 – \$15,000 – \$10,000)/\$100,000 = \$15,000**/\$100,000* = 15% Sales \$100,000* – Cost of goods sold 60,000 = Gross profit \$ 40,000 – Total operating expenses 15,000 = Income before income taxes \$ 25,000 – Income tax expense 10,000 = Net income \$ 15,000 ** BRIEF EXERCISE 2-7 Ending retained earnings = \$200,000 + \$80,000 – \$50,000 = \$230,000* Retained earnings, beginning balance \$200,000 Add: Net income for the year 80,000 \$280,000 Less: Dividends paid (50,000 ) Retained earnings, ending balance  \$230,000 * 1

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CHAPTER 2 EXERCISE 2-4 1. Current Ratio = Current Assets/Current Liabilities December 31, 2009: Current Ratio = (\$6,000 + \$10,000 + \$8,000)/(\$7,000 + \$1,000 + \$4,000) = \$24,000/\$12,000 = 2.0 to 1 December 31, 2010: Current Ratio = (\$3,000 + \$15,000 + \$12,000)/(\$12,000 + \$2,000 + \$6,000) = \$30,000/\$20,000 = 1.5 to 1 2. Baldwin’s current ratio decreased from 2.0 at the end of 2009 to 1.5 at the end of 2010. In general, the higher the current ratio, the more liquid the company. 3. Cash decreased by 50%, from \$6,000 to \$3,000, and accounts receivable increased by 50%, from \$10,000 to \$15,000. Inventory also increased by 50%, from \$8,000 to \$12,000. Not only did Baldwin’s current ratio decrease, but its current assets are also less liquid at the end of the year, with more invested in receivables and inventory and less in cash. EXERCISE 2-7
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## This note was uploaded on 04/14/2011 for the course ACCT 2101 taught by Professor Christianwurst during the Spring '08 term at Temple.

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Chapter 2 - CHAPTER 2 CHAPTER 2 BRIEF EXERCISE 2-4 Working...

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