21.1 Contemporary Wood Furniture Charles Royston was checking the year-end balances for his wood furniture manufacturing and retail business and was concerned about the numbers. From what he remembered, his debts and accounts receivable were higher than the previous year. Rather than get worked up over nothing, he decided he would gather the information and make a comparison. For December 31, 2011, the business had current assets of: $1,844 cash, $11,807 accounts receivable, and $9,628 inventory. Plant
and equipment totaled $158,700. Current liabilities were: accounts payable $13,446; wages payable $650; and property and taxes payable $4,124. Long-term debt totaled $92,800 and owner’s equity $70,959. By comparison, for December 31, 2010, the business had current assets of: $3,278 cash;
$6,954 accounts receivable; $17,417 inventory. Plant and equipment totaled $144,500. Current liabilities
were: accounts payable $9,250; wages payable $1,110; property and taxes payable $3,650.
Long-term debt totaled $75,800; and owner’s equity $82,339.
1. Construct a comparative balance sheet for Contemporary Wood Furniture for year- end 2010 and 2011, including a vertical and horizontal analysis of the comparative balance sheet. Express percent to the nearest tenth of a percent.
2. Calculate the current ratio and the total debt to total assets ratio for 2010 and 2011.
3. Overall, what does your analysis mean? Is Charles correct to be concerned about these numbers? Explain.
21.2 Balanced Books Bookkeeping Jessica and David are student interns at Balanced Books Bookkeeping. They have taken several business math and accounting classes and are now applying what they have learned to real-life situ- ations. They enjoy their internship, but they are sometimes surprised by the assignments they are given. Luckily, they work together, so they share the assignments and learn from each other. Their most recent assignment is to take a listing of accounts provided by one of Balanced Books’ clients and turn them into a balance sheet and income statement. David suggests that their client might ap- preciate it if they also performed a vertical analysis of each statement. Jessica suggests that they should also compute the current ratio and the acid-test ratio.
1. Create the financial statements for December 31, 2011, depict them in vertical format, and compute the current and acid test ratios. Account title Amount Account title Amount Cash $4,000 Accounts payable $3,500 Depreciation 2,000 Merchandise inventory 15,000 Carlton, equity 34,500 Accounts receivable 6,000 Cost of goods sold 85,000 Net sales 120,000 Rent expense 15,000 Insurance payable 500 Wages payable 1,500 Equipment 15,000 Utilities 6,500 Wages 8,000 Miscellaneous expenses 1,500 write a paragraph or so summarizing what you “took-away” from Case Study 21-2, p. 769. You can also include a real-world application of the tools used in each case study.