Book 2 - Chapter 30

LG 30-4, continued

	2a.	The current ratio decreases. (Current assets and current liabilities each increase by $20,000.) The new ratio is approximately 1.165:1.
	2b.	The inventory turnover ratio decreases as more inventory is added. (Average inventory increases.) The new ratio is 5.1 times per year.
	3a.	The debt ratio increases. (Total assets and total debt each increase by $50,000.) The new ratio is 43%.
	3b.	The cash flow to debt percentage decreases. (Operating cash flow is unchanged, but total debt increases by $50,000.) The new ratio is 23%.
	4a.	The current ratio increases. (Two items affect the current ratio here! Accounts receivable increases by $19,000; inventory decreases by $10,000 so there is a net increase in current assets of $9,000.) The new ratio is 2.47:1.
	4b.	The accounts receivable turnover ratio decreases as another account receivable is added. (Accounts receivable and sales increase by $19,000.) The new ratio is 11 times per year.
	4c.	The inventory turnover ratio increases because cost of goods sold increases $10,000 and average inventory decreases by $5,000. The new ratio is 8.45 times per year.
	4d.	The rate of return on equity increases because the sale increases net income by $9,000. The new ratio is 22%.
	5a.	The current ratio decreases because less cash is received. The new current ratio is 2:1.
	5b.	The ratio increases. Normally a discount taken means that a receivable is paid more quickly, so we can assume that net sales decrease by $500 and ending accounts receivable decrease by $7,500. The new ratio is 18.9.
	6a.	The current ratio decreases as follows: current assets decrease by $10,000 for Accounts Receivable decrease, but current assets increase by $6,000 for inventory returned. This is a net $4,000 decrease in current assets and the new ratio is 1.98:1.
	6b.	The accounts receivable turnover ratio is affected as follows: net sales decrease to $302,000 and average accounts receivable decrease to $15,250. The new ratio increases to 19.8 times per year! A somewhat misleading result caused only by a return of merchandise. However, the result on the income statement will be a decrease in net income due to the decrease in net sales.
	6c.	Average inventory increases by $3,000 and cost of goods sold decreases by $6,000. The new inventory turnover ratio decreases to 6 times.
	7a.	The rate of return on equity is reduced because uncollectible accounts expense is debited and reduces the net income. The rate decreases to 16.9%.
	7b.	The accounts receivable turnover will actually increase! (Because Allowance for Uncollectible Accounts is credited, which increases the account, thereby decreasing the net accounts receivable.) The changed accounts receivable turnover ratio would be 16.2 times per year.

LG 30-5. Hilo Enterprises—analysis: The primary concern of a lender is to be paid back the
    principal and interest on a loan. Therefore, the primary focus of most loan evaluations will be on
    liquidity and cash flow and solvency. The loan officer is correct: Operating and net income have
    been increasing, the working capital as of 2008 is $162,000 ($285,000 – $123,000), and the
    current ratio is good and from 2007 to 2008 has improved from 1.95:1 to 2.3:1. The 2008 acid-test
    ratio is good at 1.27:1 and is stable. However, unfortunately the loan officer has not focused on
    the cash balance. An essential question is: “Why is cash decreasing if the company is profitable?”

Learning Goal 30, continued

SOLUTIONS

Learning Goal 30: Analyze Financial Statements

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