# Financial Statements (CH 21 9th Edition Business Mathematics by Cheryl Cleaves, Margie Hobbs, Jeffrey Noble keys solutions)

December 14, 2020

CHAPTER 21-1

1. Prepare a balance sheet for Miss Muffins’ Bakery for December 31, 2012. The company assets are: cash, \$1,985; accounts receivable, \$4,219; merchandise inventory, \$2,512. The liabilities are: accounts payable, \$3,483; wages payable, \$1,696. The owner’s capital is \$3,537.

2. Expand the balance sheet for Exercise 1 to include figures for 2011. The company assets are: cash, \$1,762; accounts receivable, \$3,785; merchandise inventory, \$2,036. The liabilities are: accounts payable, \$3,631; wages payable, \$1,421. The owner’s capital is \$2,531.

3. Prepare the balance sheet for O’Dell’s Nursery for December 31, 2012. The company assets are: cash, \$8,917; accounts receivable, \$7,521; merchandise inventory, \$17,826. The liabilities are: accounts payable, \$10,215; wages payable, \$3,716. The owner’s capital is \$20,333.

4. Expand the balance sheet for Exercise 3 for 2011. The company assets are: cash, \$12,842; accounts receivable, \$5,836; merchandise inventory, \$18,917. The liabilities are: accounts payable, \$8,968; wages payable, \$2,582. The owner’s capital is \$26,045.

5. Complete the vertical analyses on the comparative balance sheet for Miss Muffins’ Bakery for 2012. (Use parentheses to indicate decreases.) Use Exercise 1.

6. Use Exercises 1 and 2 to complete the vertical analyses on the comparative balance sheet for Miss Muffins’ Bakery for 2011

7. Complete the vertical analyses on the comparative balance sheet for O’Dell’s Nursery for 2012.

8. Complete the vertical analyses on the comparative balance sheet for O’Dell’s Nursery for 2011.

9. Use Exercises 1 and 2 to complete the horizontal analyses showing differences in dollar amounts and percents on the comparative balance sheet for Miss Muffins’ Bakery.

10. Complete the horizontal analyses showing differences in dollar amounts and percent increases (decreases) on the comparative balance sheet for O’Dell’s Nursery

11. To find the percent of total debt compared to total assets, divide the total liabilities by the total assets and write in percent form. Find the total debt to total assets for Miss Muffins’ Bakery for 2012. Use Exercise 1.

12. Use the formula in Exercise 11 to find the percent of total debt compared to total assets for Miss Muffins’ Bakery for 2011. Use Exercise 2.

CHAPTER 21-2

1. Complete the income statement for Sitha Ros’s Oriental Groceries for the years 2011 and 2012. Sitha Ros’s Oriental GroceriesIncome Statement for the Years Ending June 30, 2011 and 2012

Net sales Cost of goods sold 82,157 72,894

Gross profit

\$97,384 \$92,196

2011 2012

Operating expenses 4,783 3,951

Net income

2. Complete the portion for July 31, 2010, of the income statement shown for Miss Muffins’ Bakery using the given information: gross sales, \$32,596; returns and allowances, \$296; cost of beginning inventory, \$16,872; cost of purchases, \$33,596; cost of ending inventory, \$21,843; total operating expenses, \$1,894. Compute net sales, cost of goods sold, gross profit, and net income.

3. Use the information recorded for Miss Muffins’ Bakery for the month ending July 31, 2011, to extend the income statement for Exercise 2: gross sales, \$35,403; returns and allowances, \$342; cost of beginning inventory, \$17,403; cost of purchases, \$27,983; cost of ending inventory, \$22,583; total operating expenses, \$3,053. Compute net sales, cost of goods sold, gross profit, and net income

4. Extend the income statement for Sitha Ros’s Oriental Groceries to include a vertical analysis for 2011 and for 2012.

Sitha Ros’s Oriental Groceries

Income Statement for Years Ending

June 30, 2011 and 2012

Percent of Percent of

2012 Net Sales 2011 Net Sales

Net sales

Cost of goods sold

Gross profit

Operating expenses

Net income

5. Extend the income statement for Miss Muffins’ Bakery to include a vertical analysis for 2010 and 2011

Miss Muffins’ Bakery

Vertical Analysis of Income Statement for the Months Ending

July 31, 2010 and July 31, 2011

Percent of Percent of

2011 Net Sales 2010 Net Sales

Gross sales

Returns and allowances

Net sales

Cost of beginning inventory

Cost of purchases

Cost of ending inventory

Cost of goods sold

Gross profit

Total operating expenses

Net income

6. Extend the income statements for Sitha Ros’s Oriental Groceries to include the amounts of increase or decrease and the percents of

increase or decrease for a horizontal analysis.

7. Extend the income statement for Miss Muffins’ Bakery to include the amounts of increase or decrease and the percents of increase or

decrease for a horizontal analysis.

Miss Muffins’ Bakery

Horizontal Analysis of Income Statement for the Months Ending

July 31, 2010 and July 31, 2011

Increase

(Decrease)

2011 2010 Amount Percent

Gross sales

Returns and allowances

Net sales

Cost of beginning inventory

Cost of purchases

Cost of ending inventory

Cost of goods sold

Gross profit

Total operating expenses

Net income

CHAPTER 21-3

1. What is the current ratio for Denmark, Inc., which has current assets of \$148,947 and current liabilities of \$103,537?

2. Find the operating ratio for Chaney’s Pharmacy if the annual cost of goods sold is \$315,842, the operating expenses are \$62,917, and net sales are \$597,064.

3. Find the gross profit margin ratio if The Premier Eatery had net sales of \$392,054 and its cost of goods sold was \$179,515.

4. Proud Larry’s Grill reported net sales of \$289,512 and had average total assets of \$145,753. Find its asset turnover ratio.

5. Find the current ratio for George’s business and the current ratio for José’s business, given the following information:

George José

Current assets \$28,000 \$840,000

Current liabilities  7,000 819,000

Working capital \$21,000 \$21,000

6. Find the acid-test ratio for Carley’s business if the balance sheet shows the following amounts: cash, \$32,981; receivables, \$12,045; marketable securities, \$0; current liabilities, \$22,178.

7. Find the operating ratio for Sol’s Dry Goods if the income statement for the month shows net sales, \$15,500; cost of goods sold, \$7,500; gross profit, \$8,000; operating expenses, \$3,500; net income, \$4,500. Express results to the nearest tenth of a percent.

8. Find the gross profit margin ratio for Sol’s Dry Goods in Exercise 7 to the nearest tenth of a percent

EXERCISES SET A

1. Complete the following balance sheet for Fawcett’s Plumbing Supplies.

Fawcett’s Plumbing Supplies

Balance Sheet

March 31, 2011

Assets

Current assets

Cash \$1,724.00

Office supplies 173.00

Accounts receivable 9,374.00

Total current assets

Plant and equipment

Equipment 12,187.00

Total plant and equipment 12,187.00

Total assets

Liabilities

Current liabilities

Accounts payable \$2,174.00

Wages payable 674.00

Property and taxes payable 250.00

Total current liabilities

Total liabilities

Owner’s equity

D. W. Fawcett, capital 20,360.00

Total liabilities and owner’s equity

2. Complete the vertical analysis and horizontal analysis of the comparative balance sheet for Seymour’s Videos, Inc. Express percents to

the nearest tenth of a percent.

Seymour’s Videos, Inc.

Comparative Balance Sheet

December 31, 2010 and 2011

Increase Percent of

(decrease) total assets

2011 2010 Amount Percent 2011 2010

Assets

Current assets

Cash \$2,374 \$2,184

Accounts receivable 5,374 4,286

Merchandise inventory 15,589 16,107

Total assets

Liabilities

Current liabilities

Accounts payable \$7,384 \$6,118

Wages payable 1,024 964

Total liabilities

Owner’s equity

James Seymour, capital 14,929 15,495

Total liabilities and owner’s equity

3. Complete the following income statement and vertical analysis.

Marten’s Family Store

Income Statement

For Year Ending December 31, 2011

Percent of

net sales

Revenue:

Gross sales \$238,923

Sales returns and allowances 13,815

Net sales

Cost of goods sold:

Beginning inventory, January 1, 2011 25,814

Purchases 109,838

Ending inventory, December 31, 2011 23,423

Cost of goods sold

Gross profit from sales

Operating expenses:

Salary 42,523

Rent 8,640

Utilities 1,484

Insurance 2,842

Fees 860

Depreciation 1,920

Miscellaneous 3,420

Total operating expenses 61,689

Net income

4. Complete the following horizontal analysis of a comparative income statement.

Alonzo’s Auto Parts

Comparative Income Statement

For years ending June 30, 2011 and 2012

Increase (decrease)

2012 2011 Amount Percent

Revenue:

Gross sales \$291,707 \$275,873

Sales returns and allowances 5,895 6,821

Net sales

Cost of goods sold:

Beginning inventory, July 1 35,892 32,587

Purchases 157,213 146,999

Ending inventory, June 30 32,516 30,013

Cost of goods sold

Gross profit from sales

Operating expenses:

Salary 42,000 40,000

Insurance 3,800 3,800

Utilities 1,986 2,097

Rent 3,600 3,300

Depreciation 4,000 4,500

Total operating expenses

Net income

5.Current assets Current liabilities

\$1,231,704 \$784,184

6. Current assets Current liabilities

\$174,316 \$125,342

7. Stevens Gift Shop: cash, \$2,345; accounts receivable, \$5,450; government securities, \$4,500; accounts payable, \$6,748; notes payable, \$7,457. Find the acid-test ratio. Round to the nearest hundredth.

8. Find the acid-test ratio for Edna Nunez and Company if the balance sheet shows cash, \$23,500; marketable securities, \$0; receivables, \$12,300; current liabilities, \$27,800. Round to the nearest hundredth.

9. Find the operating ratio and gross profit margin ratio for the following income statement:

Corner Grocery

Income Statement

For the Month Ending June 30, 2011

Net sales \$25,000

Cost of goods sold \$18,750

Gross profit \$6,250

Operating expenses \$3,750

Net income \$2,500

10. Find the operating ratio for A to Z Sales if the income statement for the month shows net sales, \$173,200; cost of goods sold, \$138,400; gross profit, \$34,800; operating expenses, \$16,300; net income, \$18,500. Express answer to the nearest tenth of a percent.

11. Find the gross profit margin ratio for the business in Exercise 10 to the nearest tenth of a percent.

12. Find the operating ratio and the gross profit margin ratio for Molene Internet Store if the month’s income statement shows net sales, \$285,832; cost of goods sold, \$198,530; gross profit, \$87,302; operating expenses, \$36,593; net income, \$50,709. Round to the nearest tenth.

EXERCISES SET B

1. Complete the following balance sheet for Rooter Company.

Rooter Company

Balance Sheet

June 30, 2012

Assets

Current assets

Cash \$2,350.00

Supplies 175.00

Accounts receivable 8,956.00

Total current assets

Plant and equipment

Equipment 11,375.00

Total plant and equipment 11,375.00

Total assets

Liabilities

Current liabilities

Accounts payable \$1,940.00

Wages payable 855.00

Rent payable 775.00

Total current liabilities

Total liabilities

Owner’s equity

Wilson Rooter, capital 19,286.00

Total liabilities and owner’s equity

2. Complete the vertical analysis and the horizontal analysis of the comparative balance sheet for Miller’s Model Ships. Express percents

to the nearest tenth of a percent.

Miller’s Model Ships

Comparative Balance Sheet

December 31, 2010 and 2011

Increase Percent of

(decrease) total assets

2011 2010 Amount Percent 2011 2010

Assets

Current assets

Cash \$2,176 \$1,948

Accounts receivable 2,789 1,742

Merchandise inventory 4,985 5,450

Total assets

Liabilities

Current liabilities

Accounts payable \$901 \$872

Wages payable 1,342 1,224

Insurance payable 690 680

Total liabilities

Owner’s equity

Kathy Miller, capital 7,017 6,364

Total liabilities and owner’s equity

3. Complete the following income statement and vertical analysis. Express percents to the nearest tenth of a percent

Income Statement

For Year Ending December 31, 2010

Percent of

net sales

Revenue:

Gross sales \$148,645

Sales returns and allowances 8,892

Net sales

Cost of goods sold:

Beginning inventory, January 1, 2010 12,100

Purchases 47,800

Ending inventory, December 31, 2010 11,950

Cost of goods sold

Gross profit from sales

Operating expenses:

Salary 25,500

Rent 4,500

Utilities 1,445

Insurance 2,100

Fees 225

Depreciation 1,240

Miscellaneous 750

Total operating expenses

Net income

4. Complete the following horizontal analysis of a comparative income statement. Express percents to the nearest tenth of a percent.

Designer Crafts

Comparative Income Statement

For Years Ending December 31, 2011 and 2012

Increase (decrease)

2012 2011 Amount Percent

Revenue:

Gross sales \$239,873 \$236,941

Sales returns and allowances 12,815 13,895

Net sales

Cost of goods sold:

Beginning inventory, January 1 27,814 25,887

Purchases 123,213 112,604

Ending inventory, December 31 24,482 23,838

Cost of goods sold

Gross profit from sales

Operating expenses:

Salary 44,772 42,640

Insurance 3,006 2,863

Utilities 1,597 1,521

Rent 3,600 3,600

Depreciation 4,100 3,400

Total operating expenses

Net income

5. \$32,194 \$38,714

Current assets Current liabilities

6. \$724,987 \$334,169

Current assets Current liabilities

7. Find the acid-test ratio for Central Office Supply: cash, \$5,745; accounts receivable, \$12,496; accounts payable, \$10,475. Round to the nearest hundredth.

8. Find the acid-test ratio for Jefferson’s Photo if the balance sheet shows cash, \$6,700; marketable securities, \$0; receivables, \$12,756; current liabilities, \$18,345.

9. Find the operating ratio for M. Ng’s Grocery if the income statement for the month shows net sales, \$23,500; cost of goods sold, \$16,435; gross profit, \$7,065; operating expenses, \$3,100; net income, \$3,965. Round to the nearest tenth of a percent.

10. Find the gross profit margin ratio for the business in Exercise 9 to the nearest tenth of a percent

Practice Test

1. Complete the horizontal analysis of the following comparative balance sheet. Express percents to the nearest tenth of a percent.

FINANCIAL STATEMENTS 765

O’Toole’s Hardware Store

Comparative Balance Sheet

December 31, 2011 and 2012

Increase (Decrease)

2012 2011 Amount Percent

Assets

Current assets

Cash \$7,318 \$5,283

Accounts receivable 3,147 3,008

Merchandise inventory 63,594 60,187

Total current assets

Plant and equipment

Building 36,561 37,531

Equipment 8,256 4,386

Total plant and equipment

Total assets

Liabilities

Current liabilities

Accounts payable \$5,174 \$4,563

Wages payable 780 624

Total current liabilities

Long-term liabilities

Mortgage note payable 34,917 36,510

Total long-term liabilities

Total liabilities

Owner’s Equity

James O’Toole, capital 78,005 68,698

Total liabilities and owner’s equity

2. Find the current ratio to the nearest hundredth for 2012 for O’Toole’s Hardware Store.

3. Find the acid-test ratio to the nearest hundredth for 2012 for O’Toole’s Hardware Store.

4. Find the current ratio to the nearest hundredth for 2011 for O’Toole’s Hardware Store.

5. Find the acid-test ratio to the nearest hundredth for 2011 for O’Toole’s Hardware Store.

6. Complete the horizontal analysis of the following comparative income statement.

Mile Wide Woolens, Inc.

Comparative Income Statement

For Years Ending December 31, 2010 and 2011

Increase (decrease)

2011 2010 Amount Percent

Revenue

Gross sales \$219,827 \$205,852

Sales returns and allowances 8,512 7,983

Net sales

Cost of goods sold

Beginning inventory, January 1 42,816 40,512

Purchases 97,523 94,812

Ending inventory, December 31 43,182 42,521

Cost of goods sold

Gross profit from sales

Operating expenses

Salary 28,940 27,000

Insurance 800 750

Utilities 1,700 1,580

Rent 3,600 3,000

Depreciation 2,000 2,400

Total operating expenses

Net income

7. Find the operating ratio for Mile Wide for 2010 and 2011.

8. Find the gross profit margin ratio for Mile Wide for 2010 and 2011.

9. Find the asset turnover ratio for Mile Wide for 2010 if its average total assets were \$126,432.

10. Find the asset turnover ratio for Mile Wide for 2011 if its average total assets were \$138,057.

Critical thinking

1. Use the formulas in the How To box: Prepare a Balance Sheet (p. 727) to explain the formula: and equipment = total liabilities + total owner’s equity. Total current assets + total plant

2. Explain how the formula Gross profit = net sales – cost of goods sold can be rearranged to find net sales.

3. If you have the formula: and the net profit is \$25,982 and operating expenses are \$150,986, write an equation to find gross profit. Net profit = gross profit – operating expenses,

4. Explain how the formula can be rearranged to find the amount of the item. Percent of net sales = amount of item net sales

5. Compare the formula in step 3 of the How To box: Prepare a Horizontal Analysis of a Comparative Income Statement (p. 741) with the formula you would use to find the percent of sales tax if you know the amount of tax and the amount (price) of the item.

6. How do the two formulas in Exercise 5 compare to the basic percentage formula ?P = RB

7. Explain why the same formula can be used to calculate an increase or a decrease. P = RB

8. If a current ratio for a company equals 1, what is the relationship of the current assets to the current liabilities?

9. If the current ratio is less than 1, what is the relationship of the current assets to the current liabilities?

10. If a company has an acid-test ratio that is greater than 1, what is the relationship of the quick current assets to current liabilities?

Challenge Problem

Cedar-Crest Greeting Card Company ended the year 2010 with assets that totaled \$120,000. The assets for 2011 increased to \$580,000. What was the rate of growth for Cedar-Crest?

Case studies

Charles Royston was checking the year-end balances for his wood furniture manufacturing and retail business and was concerned about the numbers. From what he remembered, his debts and accounts receivable were higher than the previous year. Rather than get worked up over nothing, he

decided he would gather the information and make a comparison. For December 31, 2011, the business had current assets of: \$1,844 cash, \$11,807 accounts receivable, and \$9,628 inventory. Plant

and equipment totaled \$158,700. Current liabilities were: accounts payable \$13,446; wages payable

\$650; and property and taxes payable \$4,124. Long-term debt totaled \$92,800 and owner’s equity

\$70,959. By comparison, for December 31, 2010, the business had current assets of: \$3,278 cash;

\$6,954 accounts receivable; \$17,417 inventory. Plant and equipment totaled \$144,500. Current liabilities were: accounts payable \$9,250; wages payable \$1,110; property and taxes payable \$3,650.

Long-term debt totaled \$75,800; and owner’s equity \$82,339.

1. Construct a comparative balance sheet for Contemporary Wood Furniture for year-end 2010 and 2011, including a vertical and horizontal analysis of the comparative balance sheet. Express percents to the nearest tenth of a percent.

2. Calculate the current ratio and the total debt to total assets ratio for 2010 and 2011

3. Overall, what does your analysis mean? Is Charles correct to be concerned about these numbers? Explain.

Jessica and David are student interns at Balanced Books Bookkeeping. They have taken several

business math and accounting classes and are now applying what they have learned to real-life situations. They enjoy their internship, but they are sometimes surprised by the assignments they are

given. Luckily, they work together, so they share the assignments and learn from each other. Their

most recent assignment is to take a listing of accounts provided by one of Balanced Books’ clients

and turn them into a balance sheet and income statement. David suggests that their client might appreciate it if they also performed a vertical analysis of each statement. Jessica suggests that they

should also compute the current ratio and the acid-test ratio.

1. Create the financial statements for December 31, 2011, depict them in vertical format, and

compute the current and acid test ratios.

Account title Amount Account title Amount

Cash \$4,000 Accounts payable \$3,500

Depreciation 2,000 Merchandise inventory 15,000

Carlton, equity 34,500 Accounts receivable 6,000

Cost of goods sold 85,000 Net sales 120,000

Rent expense 15,000 Insurance payable 500

Wages payable 1,500 Equipment 15,000

Utilities 6,500 Wages 8,000

Miscellaneous expenses 1,500