Deitz J.E., Southam J.L. Contemporary Business Mathematics for Colleges
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THE BOTTOM LINE
Summary of chapter learning objectives:
Learning Objective
19.2
Analyze income statements, comparing items and
periods.
Example
2. A modified income statement for The Ski Chalet for the years 2008
and 2007 is shown. Compute the percents for 2008 and the percents
of difference between 2008 and 2007.
394 Part 5 Business Applications
19.3
Compute commonly used business operating ratios.
Using the Balance Sheet and Income Statement for 2008 from
The Bottom Line problems 1 and 2, compute the following ratios:
3. Acid test
4. Average inventory
5. Net income to net sales
6. Rate of return on investment
Answers: 2. 2008 percent: 101.43%; 1.43%; 100%; 15.18%; 45.13%; 60.31%; 18.46%; 41.85%; 58.15%;
22.67%; 6.36%; 3.32%; 4.10%; 1.62%; 1.28%; 39.35%; 18.80%; 3.11%; 15.69%. Difference percent: 16.34%;
264.36%; 20.22%; 22.63%; 16.09%; 10.73%; 21.62%; 6.53%; 32.48%; 21.78%; 0.98%; 26.07%; 25.00%;
53.40%; 211.97%; 4.10%; 208.59%; 24.18%; 337.14% 3. 3.61 4. $218,500 5. 15.7% 6. 29.9%
THE SKI CHALET
Income Statement for the Years Ended
December 31, 2008 and 2007
2008 2008 2007 2007 Difference
Amount Percent Amount Percent Amount Percent
Revenue from sales:
Sales $ 988,900 $ 850,000 104.81% $138,900
Less returns 13,900 39,000 4.81% (25,100)
NET SALES $ 975,000 $ 811,000 100.00% $164,000
Cost of goods sold:
Inventory, January 1 $ 148,000 $ 152,000 18.74% $ (4,000)
Purchases 440,000 379,000 46.73% 61,000
Available for sale $ 588,000 $ 531,000 65.47% $ 57,000
Inventory, December 31 180,000 148,000 18.25% 32,000
Cost of goods sold $ 408,000 $ 383,000 47.23% $ 25,000
Gross profit on sales $(408,000) $(383,000) 52.77% $ (25,000)
Operating expenses:
Salary and benefits $ 221,000 $ 225,000 27.74% $ (4,000)
Rent and utilities 62,000 61,400 7.57% 600
Advertising 32,400 25,700 3.17% 6,700
Depreciation 40,000 32,000 3.95% 8,000
Equipment and supplies 15,800 10,300 1.27% 5,500
Administrative 12,500 14,200 1.75% (1,700)
Total operating expense $ 383,700 $ 368,600 45.45% $ 15,100
Income before tax $ 183,300 $ 59,400 7.32% $123,900
Income tax 30,300 24,400 3.01% 5,900
NET INCOME $ 153,000 $ 35,000 4.32% $118,000
Chapter 19 Financial Statements 395
SELF-CHECK
Review Problems for Chapter 19
1 Quality Construction Company, Inc., had total assets of $620,000 and total liabilities of $335,000 on Decem-
ber 31, 2008. On December 31, 2009, Quality Construction has total assets of $712,000 and total liabilities
of $330,000.
a. What was the amount of the owners’ equity as of December 31, 2008?
b. What is the amount of the owners’ equity as of December 31, 2009?
c. Calculate the percent of increase or decrease in total assets, total liabilities, and owners’ equity. (Round to
two decimal places.)
2 Quality Construction Company, Inc., had net sales of $460,250 and cost of merchandise sold of $320,600.
Compute the gross profit amount and the percent of gross profit based on net sales.
3 The comparative income statement of Benson Electronics, Inc., showed sales of $425,000 in 2007 and
$494,450 in 2008. Compute the percent of change in sales. (Round answer to one decimal place.)
4 Calculate the percent of increase or decrease for each of the following balance sheet items. If any percent
cannot be calculated, give a brief explanation. (Answers correct to two decimal places.)
Item 2009
2008 P
ercent of Increase/Decrease
a. Cash $35,000 $30,000
b. Supplies 1,200 1,600
c. Notes Receivable 2,000 1,000
d. Merchandise Inventory 16,500 16,500
e. Accounts Receivable 1,000 1,500
5 Selected figures from the Balance Sheet and the Income Statement of Multimedia, Inc., follow. Use the data
to calculate the ratios listed. (Give answers accurate to two decimal places.)
From the Balance Sheet From the Income Statement
Cash $210,734 Net Sales $244,750
Accounts Receivable $138,126 Cost of Merchandise Sold $190,000
Merchandise Inventory: Net Income $26,406
End of this year $184,500
End of last year $178,300
Total Current Assets $533,360
Total Current Liabilities $324,152
Total Stockholders’ Equity $149,000
a. Working capital ratio
b. Acid test ratio
c. Inventory turnover
d. Rate of return on investment
e. Net income as a percent of sales
f. Ratio of accounts receivable to net sales
Answers to the Self-Check can be found in Appendix B at the back of the text.
Notes
396 Part 5 Business Applications
Chapter 19 Financial Statements 397
Assignment 19.1: Balance Sheet Analysis
Name
Date Score
A (50 points) Solve the following balance sheet problems. (points for correct answers as marked)
1.
In the following balance sheet, find the percent for each 2008 and 2007 item. Then find the amount and
percent of change. Round percents to two decimal places. (1/2 point for each correct answer)
Milwaukee Manufacturing Corporation
Balance Sheet
As of December 31,
2008 and 2007
2008 2008 2007 2007 Increase/Decrease
Amount Percent Amount Percent Amount Percent
ASSETS
Current assets:
Cash $ 850,000
11.81% $ 750,000 11.37% $100,000 13.33%
Accounts receivable 1,300,000 18.06% 1,050,000 15.92% 250,000 23.81%
Inventory 780,000 10.83% 650,500 9.86% 129,500 19.91%
Total current assets $2,930,000 40.69% $2,450,500 37.14% $479,500 19.57%
Fixed assets:
Machinery $1,020,000
14.17% $ 970,000 14.70% $ 50,000 5.15%
(Less depreciation) 360,000 5.00% 295,800 4.48% 64,200 21.70%
Machinery net $ 660,000 9.17% $ 674,200 10.22% $ (14,200) 2.11%
Building 3,110,000 43.19% 3,000,000 45.47% 110,000 3.67%
Land parcel holdings 500,000 6.94% 472,800 7.17% 27,200 5.75%
Total fixed assets $4,270,000 59.31% $4,147,000 62.86% $123,000 2.97%
TOTAL ASSETS $7,200,000 100.00% $6,597,500 100.00% $602,500 9.13%
LIABILITIES
Current liabilities:
Accounts payable $ 38,000
0.53% $ 62,000 0.94% $ (24,000) 38.71%
Accrued payroll 110,030 1.53% 87,500 1.33% 22,530 25.75%
Payroll taxes payable 23,600 0.33% 19,600 0.30% 4,000 20.41%
Total current liabilities $ 171,630 2.38% $ 169,100 2.56% $ 2,530 1.50%
Long-term liabilities:
Mortgages payable $1,750,300
24.31% $1,574,100 23.86% $176,200 11.19%
Notes payable long term 180,000 2.50% 210,000 3.18% (30,000) 14.29%
Total long-term liabilities $1,930,300 26.81% $1,784,100 27.04% 146,200 8.19%
Total liabilities $2,101,930 29.19% $1,953,200 29.61% $148,730 7.61%
Shareholders’ equity:
Common stock $4,500,000 62.50% $4,070,800 61.70% $429,200 10.54%
Preferred stock 450,000 6.25% 440,000 6.67% 10,000 2.27%
Retained earnings 148,070 2.06% 133,500 2.02% 14,570 10.91%
Total shareholders’ equity $5,098,070 70.81% $4,644,300 70.39% $453,770 9.77%
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY $7,200,000 100.00% $6,597,500 100.00% $602,500 9.13%
2. Milwaukee Manufacturing Corporation’s bookkeeper overlooked the fact that, in 2008, $15,000 cash had
been paid to employees but not deducted from the cash account. Assume that the balance sheet in problem 1
was adjusted to reflect the correction. (1 point for each correct answer)
a. What would be the adjusted amount for 2008 cash?
b. What would be the adjusted amount for 2008 accrued payroll?
$95,030
$835,000
1
Learning Objective
Score for A (50)
B (50 points) Solve the following balance sheet problems. (points for correct answers as marked)
3.
In the following balance sheet, find the percent for each 2008 and 2007 item. Then find the amount and
percent of change. Round percents to one decimal place. Note that totals will sometimes be different from
individual amounts because of rounding. (1/2 point for each correct answer)
Stardoe Coffee Corporation
Balance Sheet
As of December 31,
2008 and 2007
2008 2008 2007 2007 Increase/Decrease
Amount Percent Amount Percent Amount Percent
ASSETS
Current assets:
Cash $ 7,800,778
43.23% $ 6,872,000 41.79% $ 928,778 13.52%
Accounts receivable 1,307,777 7.25% 1,278,444 7.77% 29,333 2.29%
Inventory 427,888 2.37% 350,000 2.13% 77,888 22.25%
Total current assets $ 9,536,443 52.85% $ 8,500,444 51.69% $1,035,999 12.19%
Fixed assets:
Machinery $ 1,737,130
9.63% $ 1,680,727 10.22% $ 56,403 3.36%
(Less depreciation) –785,222 –4.35% –690,455 –4.20% –94,767 –13.73%
Machinery net $ 951,908 5.28% $ 990,272 6.02% $ (38,364) –3.87%
Buildings 4,770,385 26.44% 4,168,020 25.35% 602,365 14.45%
Land parcel holdings 2,786,444 15.44% 2,786,400 16.94% 44 0.00%
Total fixed assets $ 8,508,737 47.15% $ 7,944,692 48.31% $ 564,045 7.10%
TOTAL ASSETS $18,045,180 100.00% $16,445,136 100.00% $1,600,044 9.73%
LIABILITIES
Current liabilities:
Accounts payable $ 3,728,415 20.66% $ 4,073,888 24.77% $ (345,473) –8.48%
Accrued payroll 2,853,888 15.82% 2,278,222 13.85% 575,666 25.27%
Payroll taxes payable 768,415 4.26% 694,732 4.22% 73,683 10.61%
Total current liabilities $ 7,350,718 40.74% $ 7,046,842 42.85% $ 303,876 4.31%
Long-term liabilities:
Mortgages payable $ 3,780,050 20.95% $ 3,740,777 22.75% $ 39,273 1.05%
Note payable long term 1,283,888 7.11% 978,285 5.95% 305,603 31.24%
Total long-term liabilities $ 5,063,938 28.06% $ 4,719,062 28.70% 344,876 7.31%
Total liabilities $12,414,656 68.80% $11,765,904 71.55% $ 648,752 5.51%
Shareholders’ equity:
Common stock $ 4,745,742 26.30% $ 4,078,222 24.80% $ 667,520 16.37%
Preferred stock 502,000 2.78% 461,628 2.81% 40,372 8.75%
Retained earnings 382,782 2.12% 139,382 0.85% 243,400 174.63%
Total shareholders’ equity $ 5,630,524 31.20% $ 4,679,232 28.45% $ 951,292 20.33%
TOTAL LIABILITIES AND
SHAREHOLDERS’ EQUITY $18,045,180 100.00% $16,445,136 100.00% $1,600,044 9.73%
4. Show what changes would have been made in the cash and preferred stock amount in 2008 if Stardoe
Coffee Corporation had sold an additional $6,000 in preferred stock. (1/2 point for each correct answer)
Amount Percent
Cash
Preferred stock
Score for B (50)
5.91%$1,102,000
45.06%$8,400,778
398 Part 5 Business Applications
Assignment 19.1 Continued
398 Part 5 Business Applications
Chapter 19 Financial Statements 399
Assignment 19.2: Income Statement Analysis
Name
Date Score
A (50 points) Solve the following income statement problems. (points for correct answers as marked)
1. In the following income statement, find the percent for each 2008 and 2007 item. Then find the amount
and percent of change. Round percents to two decimal places. (1/2 point for each correct answer)
Georgia Textiles
Income Statement
F
or the
Years Ended December 31, 2008 and 2007
2008 2008 2007 2007 Increase/Decrease
Amount Percent Amount Percent Amount Percent
Revenue from sales:
Sales $920,000 $827,000
Less returns 35,000 30,000
NET SALES $885,000 $797,000
Cost of goods sold:
Inventory, January 1 $210,000 $197,000
Purchases 460,000 395,000
Available for sale $670,000 $592,000
Inventory, December 31 240,000 210,000
Cost of goods sold $430,000 $382,000
Gross profit $455,000 $415,000
Operating expenses:
Wages $132,600 $120,000
Rent 84,000 80,000
Advertising 18,000 20,000
Insurance 4,500 4,200
Depreciation 3,600 3,100
Equipment rental 1,200 1,400
Administrative 7,000 5,200
Miscellaneous 3,200 2,100
Total operating expenses $254,100 $236,000
Income before tax $200,900 $179,000
Income tax 32,000 28,000
NET INCOME $168,900 $151,000
2. Assume that the ending inventory was $220,000 in 2008. Compute the following items. (2 points for each
correct answer)
2008 Gross profit amount 2008 Gross profit percent
2008 NET INCOME amount 2008 NET INCOME percent
Score for A (50)
16.82%$148,900
49.15%$435,000
11.85%$ 17,90018.95%19.08%
14.29%$ 4,0003.51%3.62%
12.23%$ 21,90022.46%22.70%
7.67%$ 18,10029.61%28.71%
52.38%$ 1,1000.26%0.36%
34.62%$ 1,8000.65%0.79%
214.29%
$ (200)0.18%0.14%
16.13%$ 5000.39%0.41%
7.14%$ 3000.53%0.51%
210.00%
$ (2,000)2.51%2.03%
5.00%$ 4,00010.04%9.49%
10.50%$ 12,60015.06%14.98%
9.64%$ 40,00052.07%51.41%
12.57%$ 48,00047.93%48.59%
14.29%$ 30,00026.35%27.12%
13.18%$ 78,00074.28%75.71%
16.46%$ 65,00049.56%51.98%
6.60%$ 13,00024.72%23.73%
11.04%$ 88,000100.00%100.00%
16.67%$ 5,0003.76%3.95%
11.25%$ 93,000103.76%103.95%
2
Learning Objective
B (100 points) Solve the following income statement problems. (points for correct answers as marked)
3.
In the following income statement, find the percent for each 2008 and 2007 item, then find the amount
and percent of change. Round percents (no decimal places). (84 points, 1 point for each correct answer)
Baldwin Field Enterprises
Income Statement
F
or the Years Ended December 31, 2008 and 2007
2008 2008 2007 2007 Difference
Amount Percent Amount Percent Amount Percent
Revenue from sales:
Sales $ 87,000 $ 74,800
Less returns 2,000 1,800
NET SALES $ 85,000 $ 73,000
Cost of goods sold:
Inventory, January 1 $ 22,000 17,500
Purchases 38,000 35,000
Available for sale $ 60,000 52,500
Inventory, December 31 24,100 22,000
Cost of goods sold $ 35,900 30,500
Gross profit $ 49,100 $ 42,500
Operating expenses:
Salary $ 11,200 10,900
Rent 7,500 6,000
Advertising 1,400 1,200
Delivery 450 380
Depreciation 650 600
Equipment rental 350 420
Administrative 1,900 1,700
Miscellaneous 190 220
Total operating expenses $ 23,640 $ 21,420
Income before tax $ 25,460 21,080
Income tax 2,200 2,000
NET INCOME $ 23,260 $ 19,080
4. Assume that the beginning inventory was $18,000 in 2007 and $20,500 in 2008 and that the rent was
$6,400 in 2007 and $8,800 in 2008. Compute the following amounts and percents to reflect the revised
beginning inventory and rent numbers. (8 points for each correct row)
2008 2008 2007 2007 Difference
Amount Percent Amount Percent Amount Percent
Gross profit
NET INCOME
Score for B (100)
41%$ 6,78023%$16,68028%$23,460
25%$10,10055%$40,50060%$50,600
22%$ 4,18026%27%
10%$ 2003%3%
21%$ 4,38029%30%
10%$ 2,22029%28%
214%
$ (30)0%0%
12%$ 2002%2%
217%
$ (70)1%0%
8%$ 501%1%
18%$ 701%1%
17%$ 2002%2%
25%$ 1,5008%9%
3%$ 30015%13%
16%$ 6,60058%58%
18%$ 5,40042%42%
10%$ 2,10030%28%
14%$ 7,50072%71%
9%$ 3,00048%45%
26%$ 4,50024%26%
16%$ 12,000100%100%
11%$ 2002%2%
16%$ 12,200102%102%
400 Part 5 Business Applications
Assignment 19.2 Continued
400 Part 5 Business Applications
Assignment 19.3: Financial Statement Ratios
Name
Date Score
A (26 points) Solve the following financial statement ratio problems. (1/2 point for each correct answer)
1. Alice Anderson was considering investing in a business. She used the following statement in analyzing the
Dover Clock Shop. Compute the net changes in the balance sheet and income statement. Round to one
decimal place.
Dover Clock Shop
Comparative Balance Sheet
As of December 31,
2008 and 2007
2008 2007 Increase/Decrease
Amount Amount Amount Percent
ASSETS
Current assets:
Cash $110,000 $104,600
Accounts receivable 135,000 115,900
Merchandise inventory 185,000 145,000
Total current assets $430,000 $365,500
Fixed assets:
Building improvements $ 45,000 $ 48,500
Equipment 145,000 132,000
Total fixed assets $190,000 $180,500
TOTAL ASSETS $620,000 $546,000
LIABILITIES
Current liabilities:
Salaries payable $ 33,000 $ 28,200
Accounts payable 120,000 112,900
Total current liabilities $153,000 $141,100
Long-term liabilities:
Note payable $100,000 $120,000
Total liabilities $253,000 $261,100
Owner’s equity:
J. C. Dover, capital 367,000 284,900
TOTAL LIABILITIES AND
OWNER’S EQUITY $620,000 $546,000
13.6%$ 74,000
28.8%82,100
23.1%
$ (8,100)
216.7%
$(20,000)
8.4%$ 11,900
6.3%7,100
17.0%$ 4,800
13.6%$ 74,000
5.3%$ 9,500
9.8%13,000
27.2%
$ (3,500)
17.6%$ 64,500
27.6%40,000
16.5%19,100
5.2%$ 5,400
1
Learning Objectives
2 3
Chapter 19 Financial Statements 401
Dover Clock Shop
Comparative Income Statement
F
or the Years Ended December 31, 2008 and 2007
Difference
2008 2007 Amount Percent
NET SALES $780,000 $835,000
Cost of goods sold:
Merchandise inventory, January 1 $145,000 $138,000
Purchases 585,000 620,000
Merchandise available for sale $730,000 $758,000
Merchandise inventory, December 31 185,000 145,000
Cost of goods sold $545,000 $613,000
Gross profit on sales $235,000 $222,000
Expenses:
Selling $ 82,000 $ 78,600
Other 29,200 30,200
Total expenses $111,200 $108,800
NET INCOME $123,800 $113,200
B (24 points) Solve the following problems. (2 points for each correct answer)
2. Provide the following information for Alice Anderson’s consideration. When the ratio is less than 1, give
the ratio to three decimal places; otherwise, round to one decimal place.
2008 2007
a. Working capital ratio
b. Acid test ratio
c. Ratio of accounts receivable to net sales
d. Inventory turnover
e. Ratio of net income to net sales
f. Rate of return on investment
$123,800 4 $367,000 5 0.337 5 33.7%; $113,200 4 $284,900 5 0.397 5 39.7%
39.70%33.70%
$123,800 4 $780,000 5 0.159 5 15.9%; $113,200 4 $835,000 5 0.136 5 13.6%
13.60%15.90%
($138,000 1 $145,000) 4 2 5 $141,500; $613,000 4 $141,500 5 4.3
($145,000 1 $185,000) 4 2 5 $165,000; $545,000 4 $165,000 5 3.3
4.3 times3.3 times
$135,000 4 $780,000 5 0.173; $115,900 4 $835,000 5 0.139
0.139:10.173:1
$245,000 4 $153,000 5 1.6; $220,500 4 $141,100 5 1.6
1.6:11.6:1
$430,000 4 $153,000 5 2.8; $365,500 4 $141,100 5 2.6
2.6:12.8:1
9.4%$ 10,600
2.2%$ 2,400
23.3%
(1,000)
4.3%$ 3,400
5.9%$ 13,000
211.1%
$(68,000)
27.6%40,000
23.7%
$(28,000)
25.6%
(35,000)
5.1%$ 7,000
26.6%
$(55,000)
402 Part 5 Business Applications
Assignment 19.3 Continued
402 Part 5 Business Applications
Score for A (26)
Score for B (24)
Grandfather Clock Shop
Comparative Balance Sheet
As of December 31,
2008 and 2007
2008 2007 Increase/Decrease
Amount Percent Amount Percent Amount Percent
ASSETS
Current assets:
Cash $ 25,000 18.2% $ 16,000 14.7%
Accounts receivable 12,000 8.8% 8,000 7.3%
Merchandise inventory 46,000 33.6% 31,000 28.4%
Total current assets $ 83,000 60.6% $ 55,000 50.5%
Fixed assets:
Store fixtures $ 39,000 28.5% $ 43,000 39.4%
Office equipment 15,000 10.9% 11,000 10.1%
Total fixed assets $ 54,000 39.4% $ 54,000 49.5%
TOTAL ASSETS $137,000 100.0% $109,000 100.0%
LIABILITIES
Current liabilities:
Sales tax payable $ 4,500 3.3% $ 5,500 5.0%
Accounts payable 9,500 6.9% 6,000 5.5%
Total current liabilities $ 14,000 10.2% $ 11,500 10.6%
Long-term liabilities:
Note payable $ 30,000 21.9% $ 38,000 34.9%
Total liabilities $ 44,000 32.1% $ 49,500 45.4%
Owner’s equity
R. A. Banner, capital $ 93,000 67.9% $ 59,500 54.6%
TOTAL LIABILITIES AND
OWNER’S EQUITY $137,000 100.0% $109,000 100.0%
25.7%$28,000
56.3%$33,500
211.1%
$ (5,500)
221.1%
$ (8,000)
21.7%$ 2,500
58.3%3,500
218.2%
$ (1,000)
25.7%$28,000
0.0%$0
36.4%4,000
29.3%
$ (4,000)
50.9%$28,000
48.4%15,000
50.0%4,000
56.3%$ 9,000
Chapter 19 Financial Statements 403
Assignment 19.3 Continued
C (26 points) Solve the following problems. (1/2 point for each correct answer)
3.
Alice Anderson was offered a second business. She received the following statements for 2008 and 2007.
Complete calculations for a comparative balance sheet and a comparative income statement for the
Grandfather Clock Shop, showing the amount and percent of change.