Book 2 - Chapter 30

Reinforcement Problems

LG 30-1. See the table on pages 882 and 883.

LG 30-2. Grand Forks Company

	2008 changes		2007 changes
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . .	$116,000	23.7%	$71,000	16.9%
Cost of goods sold . . . . . . . . . . . . . . . . . . . .	82,000	29.7	25,000	10.0
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . .	34,000	16.0	46,000	27.5
Operating expenses . . . . . . . . . . . . . . . . . . .	25,000	17.9	14,000	11.1
Income from operations . . . . . . . . . . . . . . . .	9,000	12.3	32,000	78.0
Interest expense . . . . . . . . . . . . . . . . . . . . . .	1,000	100.0	(1,000)	(50.0)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .

In 2007, net income increased by a greater percentage than sales because total expenses increased
by a lower percentage than sales. As the biggest expense item, cost of goods sold had the biggest
effect. In 2008, net income increased by a lower percentage than sales because the total expenses
increased by a higher percentage than sales. Cost of goods sold again had the greatest effect, as
operating expenses actually increased by a lesser percentage than sales.

LG 30-3. Ketchikan Company

Current ratio: 2.13:1 (14,000 + 15,700 + 24,300 + 2,500)/(11,000 + 15,500)		Accounts receivable turnover: 15.4 times per year 312,000/[(15,700 + 24,800)/2] = 15.4
Average collection period: 24 days (312,000)/[(15,700 + 24,800)/2] = 15.4 365/15.4 = aprox. 24 days		Inventory turnover: 6.76 times per year 210,000/[(24,300 + 37,800)/2] = 6.76
Debt ratio: 35.3% (11,000 + 15,500 + 98,700)/355,000 = .353		Cash flow to debt ratio: 28% 36,300/[(125,200 + 134,300)/2] = .279
Rate of return on total assets: 11% 37,600/[(355,000 + 325,700)/2] = .11		Rate of return on equity: 17.9% 37,600/[(229,800 + 191,400)/2] = .1785
Earnings per share: $.18 per common share 37,600/210,000 = .179		Quick ratio: 1.12 ($14,000 + $15,700)/$26,500 = 1.12
Profit margin ratio: .12 (about 12%) $37,600/$312,000 = .12

(Note: No preferred stock or dividends in this problem.)

LG 30-4.

	1a.	The current ratio improves! (Current assets and current liabilities each decrease by $10,000.) The new ratio is 2.8:1.
	1b.	The debt ratio also improves. (Total debt and total assets each decrease by $10,000.) The new ratio is 33.3%.

Learning Goal 30, continued

SOLUTIONS

Section VI · Financial Statement Analysis

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