Fil 240 Topic 3
FINANCIAL STATEMENT ANALYSIS/RATIOS: PROB’S & DETAILED SOLUTIONS
(copyright © 2012 Joseph W. Trefzger)
This problem set covers all of our ratio analysis situations, with a general increase in degree of difficulty as we progress. Be sure that you have mastered the easier problems before moving ahead, because the more difficult examples tend to expand on the ideas presented in the easier ones. The last four problems are comprehensive, involving the interpretation of financial ratios that you compute or are given.
1. Compute Addison Amalgamated Airways’ current ratio and quick ratio, based on its most recent balance sheet:
Cash $ 700,000 Accounts Payable $ 1,200,000 Marketable Securities 950,000 Notes Payable 2,500,000 Accounts Receivable 1,250,000 Long-Term Debt 1,600,000 Inventory 3,400,000 Common Stock 4,250,000 Net Fixed Assets 6,550,000 Retained Earnings 3,300,000 Total Assets $12,850,000 Total Claims $12,850,000
Type: Computing liquidity ratios. In computing the current and quick ratios, we try to see whether the commitments the firm had made, as of the moment when the most recent balance sheet “snapshot” was taken, would lead to more money coming in over the subsequent year than would be paid out over the subsequent year (and by a sufficient margin). So these ratios offer insights into whether the company is “liquid” in terms of expecting to have enough money to pay its bills that will come due over the reasonably short term. An extreme interpretation of these two “snapshot”-based ratios would be as measures of the firm’s ability to pay the bills it has already agreed to pay, if it goes out of business today and never incurs another receivable or payable. A less extreme way to think about any balance sheet-based ratio is that the most recent “snapshot” figure is (unless we know it is not) a good representation of the company’s ongoing
(copyright © 2012 Joseph W. Trefzger)
This problem set covers all of our ratio analysis situations, with a general increase in degree of difficulty as we progress. Be sure that you have mastered the easier problems before moving ahead, because the more difficult examples tend to expand on the ideas presented in the easier ones. The last four problems are comprehensive, involving the interpretation of financial ratios that you compute or are given.
1. Compute Addison Amalgamated Airways’ current ratio and quick ratio, based on its most recent balance sheet:
Cash $ 700,000 Accounts Payable $ 1,200,000 Marketable Securities 950,000 Notes Payable 2,500,000 Accounts Receivable 1,250,000 Long-Term Debt 1,600,000 Inventory 3,400,000 Common Stock 4,250,000 Net Fixed Assets 6,550,000 Retained Earnings 3,300,000 Total Assets $12,850,000 Total Claims $12,850,000
Type: Computing liquidity ratios. In computing the current and quick ratios, we try to see whether the commitments the firm had made, as of the moment when the most recent balance sheet “snapshot” was taken, would lead to more money coming in over the subsequent year than would be paid out over the subsequent year (and by a sufficient margin). So these ratios offer insights into whether the company is “liquid” in terms of expecting to have enough money to pay its bills that will come due over the reasonably short term. An extreme interpretation of these two “snapshot”-based ratios would be as measures of the firm’s ability to pay the bills it has already agreed to pay, if it goes out of business today and never incurs another receivable or payable. A less extreme way to think about any balance sheet-based ratio is that the most recent “snapshot” figure is (unless we know it is not) a good representation of the company’s ongoing