Page 723 - Accounting Principles (A Business Perspective)

17. Analysis and interpretation of financial statements

Current assets 1,890,000
Total assets (operating) 2,880,000
Cost of goods sold 1,458,000
If the switch to LIFO takes place, the December 31 merchandise inventory would be USD 900,000.
a. Compute the current ratio, inventory turnover ratio, and rate of return on operating assets assuming the
company continues using FIFO.
b. Repeat (a) assuming the company adjusts its accounts to the LIFO inventory method.

Beyond the numbers – Critical thinking
Business decision case A The comparative balance sheets of the Darling Corporation for 2011 December 31,
and 2010 follow:
Darling Corporation
Comparative balance sheets
2011 December 31, and 2010
(USD millions)
2011 2010
Assets
Cash $ 480,000 $ 96,000
Accounts receivable, net 86,400 115,200
Merchandise inventory 384,000 403,200
Plant and equipment, net 268,800 288,000
Total assets $ 1,219,200 $902,400
Liabilities and stockholders' equity
Accounts payable $ 96,000 $ 96,000
Common stock 672,000 672,000
Retained earnings 451,200 134,400
Total liabilities and stockholders' equity $1,219,200 $902,400
Based on your review of the comparative balance sheets, determine the following:
a. What was the net income for 2011 assuming there were no dividend payments?

b. What was the primary source of the large increase in the cash balance from 2010 to 2011?
c. What are the two main sources of assets for Darling Corporation?
d. What other comparisons and procedures would you use to complete the analysis of the balance sheet?
Business decision case B As Miller Manufacturing Company's internal auditor, you are reviewing the
company's credit policy. The following information is from Miller's annual reports for 2008, 2009, 2010, and 2011:
2008 2009 2010 2011
Nets accounts receivable $ 1,080,000$ 2,160,000 $ 2,700,000 $ 3,600,000
Net sales 10,800,000 13,950,000 17,100,000 19,800,000
Management has asked you to calculate and analyze the following in your report:

a. If cash sales account for 30 per cent of all sales and credit terms are always 1/10, n/60, determine all turnover
ratios possible and the number of days' sales in accounts receivable at all possible dates. (The number of days' sales
in accounts receivable should be based on year-end accounts receivable and net credit sales.)
b. How effective is the company's credit policy?
Business decision case C Wendy Prince has consulted you about the possibility of investing in one of three
companies (Apple, Inc., Baker Company, or Cookie Corp.) by buying its common stock. The companies' investment
shares are selling at about the same price. The long-term capital structures of the companies alternatives are as

follows:
Apple, Baker Cookie
Inc. Company Corp.
Bonds with a 10% interest rate $2,400,000
Preferred stock with an 8% $2,400,000

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