Intermediate Accounting
9th Edition
ISBN: 9781259722660
Author: J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher: McGraw-Hill Education
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Question
Chapter 3, Problem 3.17E
(1) (a)
To determine
Ratio analysis
Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.
To Determine: (a)
(1) (a)
Expert Solution
Answer to Problem 3.17E
Determine the current ratio of Corporation BB’s.
Hence, the current ratio is 1.437.
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. Current assets of the company include cash, accounts receivable, and inventory. The only current liability of the bank is accounts payable.
Formula:
(1) (b)
To determine
the acid test ratio of Corporation BB’s
(1) (b)
Expert Solution
Answer to Problem 3.17E
Hence, the Acid test ratio is 0.64.
Explanation of Solution
Acid test ratio
Acid test ratio is a ratio which is likely to be modifying the current ratioto consider only the current assets which are ready to pay current liabilities. Acid test ratio is calculated by excluding the inventories, prepaid expenses, restricted cash and
Formula:
(1) (c)
To determine
the debt to equity ratio of corporation BB’s
(1) (c)
Expert Solution
Answer to Problem 3.17E
Hence, the debt to equity ratio is 2.09.
Explanation of Solution
Debt equity ratio
Debt equity ratio is a financial ratio indicating relative proportion of shareholders’ equity and total liabilities (i.e. current and long term liabilities).
Formula:
(1) (d)
To determine
the times interest earned ratio of corporation BB’s
(1) (d)
Expert Solution
Answer to Problem 3.17E
Hence, the times interest earned ratio 17.38 times.
Explanation of Solution
Times interest earned ratio
Times interest earnedratio quantifies the number of times the earnings before interest and taxes the business pay for the interest expense. Use the following formula to calculate times-interest-earned ratio:
Formula:
(2)
To determine
To assess: Corporation BB’s liquidity and solvency relative to its industry.
(2)
Expert Solution
Answer to Problem 3.17E
Comparison of corporation BB’s liquidity and solvency relative to its industry
- Current ratio is higher than the industry average.
- Acid test ratio is also higher than the industry average.
- Debt to equity ratio is significantly higher than the industry average because company assets are primarily financed with liabilities instead of equity.
- Times interest earned ratio is also significantly higher than the industry average.
Corporation BB’s seems to be little capable of meeting the interest obligations on its debt.
Explanation of Solution
Liquidity ratio measures the short-term capacity of a company to pay its maturing obligations and to meet unanticipated requirements for cash. Liquidity ratios are current ratio,
Solvency ratio
Solvency ratio measures the capacity of a company to sustain over a long period of time. Solvency ratios are debt to assets ratio, time interest earned ratio, and debt to equity ratio, and more.
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Students have asked these similar questions
Problem 11-5A Calculate and analyze ratios (LO11-6)
Cyberdyne Systems and Virtucon are competitors focusing on the latest technologies. Selected financial data is provided below. (Round your answers to 1 decimal place. Enter your answers in millions (i.e., $10,100,000 should be entered as 10.1).)
($ in millions)
Cyberdyne
Virtucon
Net sales
$
43,905
$
7,084
Net income
10,537
1,488
Operating cash flows
15,465
1,600
Total assets, beginning
62,905
16,584
Total assets, ending
64,905
16,284
Required:
1. Calculate the return on assets for both companies.
2. Calculate the cash return on assets for both companies.
3. Calculate the cash flow to sales ratio and the asset turnover ratio for both companies.
4. Which company has the more favorable ratios?
multiple choice
Cyberdyne Systems
Virtucon
P4.5 (LO 2, 3, 4, 5) (Unusual or Infrequent Items) Presented below is a combined single-step income and retained earnings statement for Nerwin Company for 2020.
(000 omitted)
Net sales revenue
$640,000
Costs and expenses
Cost of goods sold
$500,000
Selling, general, and administrative expenses
66,000
Other, net
17,000
583,000
Income before income tax
57,000
Income tax
19,400
Net income
37,600
Retained earnings at beginning of period, as previously reported
141,000
Adjustment required for correction of error
(7,000)
Retained earnings at beginning of period, as restated
134,000
Dividends on common stock
(12,200)
Retained earnings at end of period
$159,400
Additional facts are as follows.
1. “Selling, general, and administrative expenses” for 2020 included a charge of $8,500,000…
E10.18 (LO 5), AN Suppose the following financial data were reported by 3M Company for 2021 and 2022 (dollars in millions).
3M CompanyBalance Sheets (partial)
2022
2021
Current assets
Cash and cash equivalents
$ 3,040
$1,849
Accounts receivable, net
3,250
3,195
Inventories
2,639
3,013
Other current assets
1,866
1,541
Total current assets
$10,795
$9,598
Current liabilities
$ 4,897
$5,839
Instructions
Calculate the current ratio and working capital for 3M for 2021 and 2022.
Suppose that at the end of 2022, 3M management used $300 million cash to pay off $300 million of accounts payable. How would its current ratio and working capital have changed?
Chapter 3 Solutions
Intermediate Accounting
Ch. 3 - Prob. 3.1QCh. 3 - Prob. 3.2QCh. 3 - Define current assets and list the typical asset...Ch. 3 - Prob. 3.4QCh. 3 - Prob. 3.5QCh. 3 - Prob. 3.6QCh. 3 - Describe the common characteristics of assets...Ch. 3 - Prob. 3.8QCh. 3 - Prob. 3.9QCh. 3 - Define the terms paid-in-capital and retained...
Ch. 3 - Disclosure notes are an integral part of the...Ch. 3 - A summary of the companys significant accounting...Ch. 3 - Define a subsequent event.Ch. 3 - Prob. 3.14QCh. 3 - Prob. 3.15QCh. 3 - Prob. 3.16QCh. 3 - Prob. 3.17QCh. 3 - Show the calculation of the following solvency...Ch. 3 - Prob. 3.19QCh. 3 - Prob. 3.20QCh. 3 - (Based on Appendix 3) Segment reporting...Ch. 3 - Prob. 3.22QCh. 3 - Prob. 3.23QCh. 3 - Current versus long-term classification LO32,...Ch. 3 - Balance sheet classification LO32, LO33 The trial...Ch. 3 - Prob. 3.3BECh. 3 - Balance sheet classification LO32, LO33 Refer to...Ch. 3 - Balance sheet classification LO32, LO33 The...Ch. 3 - Balance sheet classification LO32, LO33 You have...Ch. 3 - Balance sheet preparation; missing elements LO32,...Ch. 3 - Financial statement disclosures LO34 For each of...Ch. 3 - Calculating ratios LO38 Refer to the trial...Ch. 3 - Prob. 3.10BECh. 3 - Calculating ratios; solving for unknowns LO38 The...Ch. 3 - Balance sheet; missing elements LO32, LO33, LO38...Ch. 3 - Balance sheet classification LO32, LO33 The...Ch. 3 - Balance sheet classification LO32, LO33 The...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Balance sheet; Current versus long-term...Ch. 3 - Prob. 3.7ECh. 3 - Prob. 3.8ECh. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Financial statement disclosures LO34 The...Ch. 3 - Prob. 3.11ECh. 3 - Prob. 3.12ECh. 3 - Prob. 3.13ECh. 3 - FASB codification research LO32, LO34 Access the...Ch. 3 - Prob. 3.15ECh. 3 - Prob. 3.16ECh. 3 - Prob. 3.17ECh. 3 - Calculating ratios; solve for unknowns LO38 The...Ch. 3 - Prob. 3.19ECh. 3 - Effect of management decisions on ratios LO38...Ch. 3 - Prob. 3.21ECh. 3 - Prob. 3.22ECh. 3 - Balance sheet preparation LO32, LO33 Presented...Ch. 3 - Balance sheet preparation; missing elements LO32,...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Balance sheet preparation LO32, LO33 The...Ch. 3 - Prob. 3.6PCh. 3 - Balance sheet preparation; errors LO32, LO33 The...Ch. 3 - Balance sheet; errors; missing amounts LO32, LO33...Ch. 3 - Balance sheet preparation LO32 , LO33 Presented...Ch. 3 - Prob. 3.10PCh. 3 - Communication Case 31 Current versus long-term...Ch. 3 - Analysis Case 32 Current versus long- term...Ch. 3 - Prob. 3.4BYPCh. 3 - Judgment Case 35 Balance sheet; errors LO32...Ch. 3 - Prob. 3.6BYPCh. 3 - Real World Case 37 Balance sheet and significant...Ch. 3 - Judgment Case 38 Post fiscal year-end e vents ...Ch. 3 - Prob. 3.9BYPCh. 3 - Prob. 3.10BYPCh. 3 - Prob. 3.11BYPCh. 3 - Analysis Case 314 Balance sheet information LO32...Ch. 3 - Prob. 3.15BYPCh. 3 - Ethics Case 316 Segment reporting Appendix 3 You...Ch. 3 - Prob. 1CCTC
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