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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.