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# EXERCISE 19­4

(a) ACCRA CORPORATION
Condensed Income Statements
For the Years Ended December 31

Increase or (Decrease)
During 2005
2006 2005 Amount Percentage
Net sales \$600,000 \$500,000 \$100,000  20.0%
Cost of goods sold  480,000  420,000   60,000  14.3%
Gross profit  120,000   80,000   40,000  50.0%
Operating expenses   57,200   44,000   13,200  30.0%
Net income \$ 62,800 \$ 36,000 \$ 26,800   74.4%

(b) ACCRA CORPORATION
Condensed Income Statements
For the Years Ended December 31

2006 2005
Amount Percent Amount Percent
Net sales \$600,000 100.0% \$500,000 100.0%
Cost of goods sold  480,000  80.0%  420,000  84.0%
Gross profit  120,000  20.0%   80,000  16.0%
Operating expenses   57,200   9.5%   44,000   8.8%
Net income \$ 62,800  10.5% \$ 36,000   7.2%

PROBLEM 19­4

(a) LIQUIDITY
2005 2006 Change

\$343,000 \$374,000
Current  = 1.9:1  =1.9:1 No change
\$182,000 \$198,000

\$195,000 \$216,000
Acid­test  = 1.1:1  = 1.1:1 No change
\$182,000 \$198,000

## Receivables \$790,000 \$850,000

= 8.9 times  = 9.2 times Increase
turnover \$89,000 * \$92,000 * *
*(\$88,000 + \$90,000) ÷ 2 **(\$90,000 +
\$94,000) ÷ 2

## Inventory \$575,000 \$620,000

= 4.7 times  = 4.9 times Increase
turnover \$121,500 \$127,000

An overall increase in short­term liquidity has occurred.

PROFITABILITY

## Profit \$35,000 \$36,000

Decrease
margin  = 4.4%  = 4.2%
\$790,000 \$850,000

## Asset \$790,000 \$850,000

turnover  = 1.2 times  = 1.3 times Increase
\$639,000 \$666,000

## Return on \$35,000 \$36,000

Decrease
assets  = 5.5%  = 5.4%
\$639,000 \$666,000

## Earnings \$35,000 \$36,000

Increase
per share  = \$1.75  = \$1.80
20,000 20,000

Profitability has remained relatively the same.

PROBLEM 19­4 (Continued)
(b) 2006 2007 Change
1. Return on
common \$36,000 \$45,000
stockhold­ \$326,000 (a)  = 11.0%  = 10.0% Decrease
\$448,500 (b)
ers’ equity

## 2. Debt \$348,000 \$235,000

to total  = 50.9%  = 35.4% Decrease
assets \$684,000  \$700,000

## 3. Price­ \$9.00 \$12.80

earnings  = 5.0 times  = 5.7 times Increase
ratio \$1.80 \$2.25 (a)

(a) (\$200,000 + \$136,000 + \$200,000 + \$116,000) ÷ 2.
(b) (\$380,000 + \$181,000 + \$200,000 + \$136,000) ÷ 2.
(c) \$45,000 ÷ 20,000.
PROBLEM 19­5

## (a) Ratio Target Wal­Mart

(All Dollars Are in Millions)
(1) Current 1.4:1(\$9,648 ÷ \$7,054) 1.0:1     (\$28,246 ÷ \$27,282)
(2) Receivables turnover 20.4 (\$39,176 ÷ \$1,916) 115.6   (\$217,799 ÷ \$1,884)
(3) Average collection
period 17.9 (365 ÷ 20.4) 3.2 (365  ÷ 115.6)
(4) Inventory turnover 6.3 (\$27,246 ÷ \$4,349) 7.8 (\$171,562 ÷ \$22,028)
(5) Days in inventory 57.9 (365 ÷ 6.3) 46.8 (365 ÷ 7.8)
(6) Profit margin 3.5% (\$1,374 ÷  3.1% (\$6,854 ÷
(7) Asset turnover \$39,176) \$217,799)
(8) Return on assets 1.8 (\$39,176 ÷ \$21,822a) 2.7 (\$217,799 ÷
(9) Return on common 6.3% (\$1,374 ÷  \$80,790.5 )
c

## stockholders’ equity \$21,822a) 8.5% (\$6,854 ÷

(10) Debt to total assets \$80,790.5c)
(11) Times interest earned 19.1% (\$1,374 ÷
\$7,189.5 ) 20.6% (\$6,854 ÷ \$33,222.5d)
b

## 67.5% (\$16,294 ÷ \$24,154)   57.9% (\$48,349 ÷

5.8 (\$2,680 ÷ \$464) \$83,451)
9.1 (\$12,077 ÷
\$1,326)

(\$24,154 + \$19,490) ÷ 2 (\$83,451 + \$78,130)
a c

÷ 2
(\$7,860 + \$6,519) ÷ 2 (\$35,102 + \$31,343)
b d

÷ 2

(b) The comparison of the two companies shows the following:

Liquidit  y—Target’s current ratio of 1.4:1 is slightly better
than   Wal­Mart’s   1.0:1.   However,   Wal­Mart   has   a   better
inventory   turnover   ratio   than   Target   and   its   receivables
turnover is significantly better than Target’s.

Solvenc  y—Wal­Mart betters Target in both of the solvency
ratios. Thus, it is more solvent than Target.
Profitabilit  y—With   the   exception   of   profit   margins,   Wal­
Mart betters Target in all of the profitability ratios. Thus, it
is more profitable than Target.