Determining the amount of liabilities and assets

Question

Practice Problems for final exam:

Question 1. Use the basic accounting equation (Assets=Liabilities + Owners Equity) to answer each of the following questions. Show any calculations you make.

a) The assets of Bugs Bunny Company are $650,000 and the owners equity is $360,000. Mr. Bunny wants to know--what is the amount of liabilities?

b) The liabilities and owners equity of Gotitall Company are $95,000 and $32,000, respectively. Mr. Gotit wants to know—what is the amount of assets?

c) At the beginning of the year, the Bonnie Company’s assets were $220,000 and its owners’ equity was $100,000.  During the year, assets increased $60,000 and liabilities decreased $10,000.  Billy, the owner, wants to know what the owner’s equity is at the end of the year?

Question 2. Congratulations you have been promoted to the position of Chief Financial Officer of The Daily Planet, which produces a newspaper. One of your financial analysts has presented you with a set of comparative ratios for your firm. Since that particular analyst tends to disappear at a moments notice, you decide to check his work. So you need to do the following: First, provide the formula for calculating each of the ratios listed below. Second, his analysis shows the following and you need to decide if it is good news or bad news? Why? Consider each one as an independent case.  Assume all else is unchanged.

a. He reports an increase in the average collection period.
b. He reports a decrease in the inventory turnover ratio.
c. He reports a decrease in the times interest earned.
d. He reports an increase in the return on assets ratio.
e. He reports an decrease in the cash coverage ratio.

Question 3. Pat Summers has decided to invest some of her savings in common stock. She feels that the chemical industry has good growth prospects and has narrowed her choice to two companies in that industry.  As a final step in making the choice she has decided to perform a comprehensive analysis of the two companies, Morton and Pound.  Income Statement and Balance Sheet data for the two companies appear below:

Income Statement
		Morton		Pound
Net Sales		9,486,200		27,287,300
Cost of Goods Sold		5,812,200		18,372,400
Gross Martin		3,674,000		8,914,900
Operating Expenses
	Selling Expenses	1,194,000		1,955,700
	Administrative Expense	1,217,400		4,126,000
	Interest Expense	270,000		1,360,000
	Income Taxes Expense	450,000		600,000
	Total Operating Expenses	3,131,400		8,041,700
Net Income		542,600		873,200
Earnings Per Share		$1.55		$0.88
Balance Sheet
		Morton		Pound
Assets
	Cash	126,100		514,300
	Marketable Securities	117,500		1,200,000
	Accounts Receivable	456,700		2,600,000
	Inventories	1,880,000		4,956,000
	Prepaid Expenses Total Current Assets	72,600 2,652,900		156,600 9,426,900
	Property, Plant & Equipment (Net)	5,342,200		19,356,000
	Intangible and Other Assets	217,000		580,000
Total Assets		8,212,100		29,362,900
Liabilities and Stockholders' Equity
	Accounts Payable	517,400		2,342,000
	Notes Payable	1,000,000		2,000,000
	Income Taxes Payable Total Current Liabilities	85,200 1,602,600		117,900 4,459,900
	Bonds Payable Total Liabilities	2,000,000 3,602,600		15,000,000 19,459,900
	Common Stock-$1 par value	350,000		1,000,000
	Paid in Capital in Excess of Par
	Value, Common	1,747,300		5,433,300
	Retained Earnings	2,512,200		3,469,700
Total Liabilities and Stockholders' Equity		8,212,100		29,362,900

Additional Information:  During the year, Morton paid a total of $140,000 in dividends, and its current market price per share is $20.  Pound paid a total of $600,000 in dividends during the year and its current market price per share is $9.  Morton has net cash flows from operations of $771,500 and net capital expenditures of $450,000.  Pound has net cash flows from operations of $843,000 and net capital expenditures of $1,500,000.  Information pertaining to prior years is not readily available.  Assume that all notes payable are current liabilities and that all bonds payable are long-term liabilities.  Assume that all assets except property, plant and equipment and Intangible and Other Assets are current assets. No taxes are shown on the Income Statement so they will not be considered in your analysis.

Requirements:

a) Prepare a common size balance sheet for each company.

b) Prepare an analysis of liquidity by calculating for each company (a) current ratio, (b) quick ratio, (c) net working capital to assets ratio.

c) Prepare an analysis of profitability by calculating for each company the (a) operating profit margin, (b) payout ratio.

d) Prepare an analysis of leverage ratios by calculating for each company the (a) long term debt ratio, (b) total debt ratio (c) debt to equity ratio.

e) Prepare a presentation to Pat, recommending the company in which she should invest her funds.  Defend your recommendation via an analysis of the information calculated in Nos.  3a through 3d above and any other information provided for Morton and Pound.  Your analysis should be about 250 words.