Chapter 13, Problem 5AP

1)

To determine

Complete the comparing across time analysis of Company S’s comparative financial statement.

Explanation of Solution

Comparison of across time analysis of financial statements: In this method of analysis of financial statements, the amount of each current year item of the financial statement is compared with the previous year amount. The amount of each item increased or decreased in the current financial statements, and its respective percentage can be computed by taking the earlier statement as the base.

Comparing across time analysis of financial statements of Corporation S:

Corporation S
Comparative Income Statement
Year Ended Year 2
Particulars	Year 2	Year 1	Increase (decrease)
	Amount (A)	Amount (B)	Amount (C) $\left(\text{C=A-B}\right)$	Percent (D) $\left(\text{D=C÷B}\right)$
Sales revenue	$ 453,000	$ 447,000	$6,000	1.34%
Cost of goods sold	($ 250,000)	($ 241,000)	($9,000)	3.73%
Gross profit	$ 203,000	$ 206,000	($3,000)	-1.46%
Operating expenses (Including interest on bonds)	($ 167,000)	($ 168,000)	($1,000)	-0.60%
Pre-tax Income	$ 36,000	$ 38,000	($2,000)	-5.26%
Income tax expense	($ 10,800)	($ 11,400)	($600)	-5.26%
Net income	$ 25,200	$ 26,600	($1,400)	-5.26%

Table (1)

Corporation S
Comparative Balance Sheet
As on  Year 2
Particulars	Year 2	Year 1	Increase (decrease)
	Amount (A)	Amount (B)	Amount (C) $\left(\text{C=A-B}\right)$	Percent (D) $\left(\text{D=C÷B}\right)$
Cash	$ 6,800	$ 3,900	$2,900	74.36%
Accounts receivable (net)	$ 42,000	$ 29,000	$13,000	44.83%
Merchandise Inventory	$ 25,000	$ 18,000	$7,000	38.89%
Prepaid expenses	$ 200	$ 100	$100	100.00%
Property and equipment (net)	$ 130,000	$ 120,000	$10,000	8.33%
Total assets	$ 204,000	$ 171,000	$33,000	19.30%
Accounts payable	$ 17,000	$ 18,000	($1,000)	-5.56%
Income taxes payable	$ 1,000	$ 1,000	$0	0.00%
Bonds payable (Interest rate: 10%)	$ 70,000	$ 50,000	$20,000	40.00%
Common stock($10 par value)	$ 100,000	$ 100,000	$0	0.00%
Retained earnings	$ 16,000	$ 2,000	$14,000	700.00%
Total liabilities and  equity	$ 204,000	$ 171,000	$33,000	19.30%

Table (2)

2)

To determine

Determine the amount of current ratio changed from Year 1 to Year 2.

Explanation of Solution

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

$\text{Current ratio}\text{=}\frac{\text{Current}\text{Assets}}{\text{Current}\text{Liabilities}}$

Current ratio for Year 2:

$\begin{array}{c}\text{Current ratio}\text{=}\frac{\text{Current}\text{Assets}}{\text{Current}\text{Liabilities}}\\ =\frac{\left(\$6,800+\$42,000+\$25,000+200\right)}{\left(\$17,000+\$1,000\right)}\\ =\frac{\$74,000}{\$18,000}\\ =4.11\text{times}\end{array}$

Current ratio for Year 1:

$\begin{array}{c}\text{Current ratio}\text{=}\frac{\text{Current}\text{Assets}}{\text{Current}\text{Liabilities}}\\ =\frac{\left(\$3,900+\$29,000+\$18,000+\$100\right)}{\left(\$18,000+\$1,000\right)}\\ =\frac{\$51,000}{\$19,000}\\ =2.68\text{times}\end{array}$

The current ratio is increased by 1.43 $\left(4.11-2.68\right)$ times at the end of Year 2.

Note: Current assets include Cash, Accounts receivable (net), Merchandise inventory and prepaid expenses. Current liabilities include Accounts payable and Income taxes payable.