Chapter 15: 8RQ (page 835)
Briefly describe the ratios that can be used to evaluate a company’s ability to paycurrent liabilities.
Working capital,
Current ratio,
Quick ratio
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Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.
Requirements
1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better?
2. Under what condition would the reclassification of the receivables be ethical? Unethical?
Computing EPS and P/E ratio
Requirements
1. Compute earnings per share (EPS) for 2018 for Accel’s. Round to the nearest cent.
2. Compute Accel’s Companies’ price/earnings ratio for 2018. The market price per
share of Accel’s stock is $12.50.
3. What do these results mean when evaluating Accel’s Companies’ profitability?
Big Beautiful Photo Shop has asked you to determine whether the company’s ability to pay current liabilities and total liabilities improved or deteriorated during 2018. To answer this question, you gather the following data:
2018 | 2017 | |
Cash | \(58,000 | \)47,000 |
Short-term Investments | 34,000 | 0 |
Net Accounts Receivable | 140,000 | 124,000 |
Merchandise Inventory | 217,000 | 272,000 |
Total Assets | 530,000 | 565,000 |
Total Current Liabilities | 288,000 | 205,000 |
Long-term Notes Payable | 40,000 | 50,000 |
Income from Operations | 165,000 | 158,000 |
Interest Expense | 55,000 | 41,000 |
Compute the following ratios for 2018 and 2017, and evaluate the company’s ability to pay its current liabilities and total liabilities:
a. Current ratio
b. Cash ratio
c. Acid-test ratio
d. Debt ratio
e. Debt to equity ratio
Traditional Mills’s balance sheet appears as follows (amounts in thousands):
Use the following ratio data to complete Traditional Mills’s balance sheet.
Current ratio is 0.72.
2. Acid-test ratio is 0.36.
Match the different parts of the annual report with the appropriate description.
1..Includes the income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows | a. Notes to financial statements |
2. Attests to the fairness of the presentation of the financial statements. | b. Report of independent registered public accounting firm |
3. Includes a summary of significant accounting policies and explanations of specific items on the financial statements. | c. Management’s discussion and analysis of financial condition and results of operations (MD&A) |
4. Is written by the company to help investors understand the results of operations and the financial condition of the company. | d. Financial statements |
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