PRACTICE EXERCISES

CHAPTER 18 – FINANCIAL STATEMENT ANALYSIS

Exercise 18.1
Selected comparative financial statements of SES Company follow:

SES COMPANY
Comparative Income Statements
For The Years Ended December 31 2021 2020 2019
Sales $ 555,000 $ 340,000 $ 278,000
Cost of goods sold 283,500 212,500 153,900
Gross profit 271,500 127,500 124,100
Selling expenses 102,900 46,920 50,800
Administrative expenses 50,668 29,920 22,800
Total expenses 153,568 76,840 73,600
Income before taxes 117,932 50,660 50,500
Income tax expense 40,800 10,370 15,670
Net income $ 77,132 $ 40,290 $ 34,830

SES COMPANY
Comparative Balance Sheets
At December 31 2021 2020 2019
Assets
Current assets $ 52,390 $ 37,924 $ 51,748
Long-term investments 0 500 3,950
Plant assets, net 100,000 96,000 60,000
Total assets $ 152,390 $ 134,424 $ 115,698

Liabilities and Equity

Current liabilities $ 22,800 $ 19,960 $ 20,300
Common stock 72,000 72,000 60,000
Other paid-in capital 9,000 9,000 6,000
Retained earnings 48,590 33,464 29,398
Total liabilities and equity $ 152,390 $ 134,424 $ 115,698

Requirements:
1. Compute each year’s current ratio. Round ratios to one decimal.
2. Express the income statement data in vertical analysis. Round percents to two
decimals.
3. Express the balance sheet data in horizontal analysis with 2019 as base year. Round
percents to two decimals.
 4. Refer to the results from parts 1, 2, and 3. (a) Did cost of goods sold make up a greater
portion of sales for the most recent year compared to the prior year? (b) Did income as
a percent of sales improve in the most recent year compared to the prior year? (c) Did
plant assets grow over this period?

Exercise 18.2
Typo Corporation and its selected current year-end financial statements. All sales were on
credit
Selected balance sheet amounts at December 31 of the prior year were:

• Inventory, $48,900
• Total assets, $189,400
• Common stock, $90,000
• Retained earnings, $33,748

Assets
Cash
Short-term investments
Account receivable, net
Merchandise inventory
Prepaid expenses
Plant assets, net
Total assets
TYPO CORPORATION
Balance Sheet
December 31 of Current Year
Liabilities and Equity
$ 10,000 Account Payable $ 17,500
8,400 Accrued wages payable 3,200
33,700 Income taxes payable 3,300
32,150 Long-term note payable, secured
by mortgage on plant assets 63,400
2,650 Common stock 90,000
153,300 Retained earnings 62,800
$ 240,200 Total liabilities and equity $ 240,200

TYPO CORPORATION
Income Statement
For The Current Year Ended December 31
Sales $ 448,600
Cost of goods sold 297,250
Gross profit 151,350
Operating expenses 98,600
Interest expense 4,100
Income before taxes 48,650
Income tax expense 19,598
Net income $ 29,052
Requirements:
Compute the following:
1. current ratio
2. acid-test ratio
3. inventory turnover
4. times interest earned
5. profit margin ratio
6. total asset turnover
7. return on total assets
8. return on equity

Round to one decimal place; for part 6, round to two decimals