Convert Cash-Basis Income to Accrual Basis; Compute Ratios; Assets and Liabilities; Balance Sheet

Problem Two

O'Connor, Inc. maintains its books and records on the cash basis. You
have been

assigned to convert the cash-basis income to the accrual basis for
reporting purposes.

Presented below is the cash-basis income statement and additional
information.

O'Connor, Inc.

Statement of Income (Cash Basis)

For the Year Ended December 31, 2003

Cash receipts from customers $250,000

Cash expenses:

Salaries $75,000

Interest 10,000

Insurance 18,000

Other taxes 42.000

Total cash expenses 145,000

Net Income (Cash Basis) $105,000

Additional Information:

Account Balances 12/31/02 12/31/03

Accounts Receivable $20,000 $35,000

Prepaid Insurance 3,000 1,000

Salaries Payable 10,000 5,000

Interest Payable 2,000 4,000

Other Taxes Payable 1,500 2,800

Required: Prepare the accrual basis income statement for O'Connor, Inc.
for the year

ended December 31. 2003. 0'Connor's tax rate is 40%.

Problem Three

The following information is available for the Armillei Corporation.
Condensed Balance

Sheet:

Assets 12/31/03

Cash $ 80,000

Accounts Receivable (net) 250,000

Merchandise Inventory 150,000

Plant, Property, & Equipment (net) 720.000

Total Assets $1.200.000

Liabilities and Stockholders' Equity

Accounts Payable $ 160,000

Long-term Notes Payable 300,000

Common Stock 300,000

Additional Paid-in Capital 80,000

Retained Earnings 360.000

Total Liabilities and Stockholders' Equity $1.200.000

Net Income 2003 $ 162,000

Cost of Goods Sold 1,140,000

Net Credit Sales 1,800,000

Required: Compute the following ratios for 2003 from the information
provided.

A. Total Asset Turnover E. Long-Term Debt to Assets

B. Quick Ratio F. Return on Common Equity

C. Current Ratio G. Financial Structure Leverage

D. Inventory Turnover H. Accounts Receivable Turnover

Problem Four (10 points):

The Trost Corporation has a loan with the bank that requires the
maintenance of a

minimum Current Ratio of 2.00 to 1. On December 1, current assets are
$245,000 and

current liabilities are $135,000.

Required:

A. With the fourth quarter report due to the bank after the books
close on December

31, will Trost be in compliance with this covenant if there is no change
in the

current assets and liabilities?

B. What action might management take to correct any problem in
advance?

C. Is there any ethical problem with your strategy?

Problem Five (USE EXCEL & WORD BALANCE SHEET)

Required: Use the following information along with your knowledge of
financial ratios

and balance sheet relationships to fill in the missing items on the
balance sheet Of Walters

Corporation. Round all amounts to the nearest dollar.

Additional Information:

1. Days accounts payable outstanding was 45.6 days in 2001, compared to
66.3 days in

2000.

2. The current ratio at the end of 2001 was 2.5, compared to 2.0 at the
end of 2000.

3. The firm's gross profit rate was 25% in 2001 and 28% in 2000.

4. Net income for 2001 was $1,250,000 compared to $1,000,000 in 2000.

5. No common or preferred stock was issued during 2001.

6. Return on average assets was 5% for 2001, compared to 8% in 2000.

7. Cash dividends declared and paid in 2001 were $250,000; in 2000 they
were

$200,000.

8. Days accounts receivable outstanding was 36.5 days in 2001 and 50.5
days in 2000.

9. The long-term debt to total asset ratio at the end of 2001 was 0.40,
compared to 0.30

at the end of 2000.

10. The quick ratio at the end of 2001 was 1.6875, compared to 1.5 at
the end of 2000.

11. Days inventory held was 60.8 days in 2001 and 75.7 days in 2000.

12. Net sales in 2001 were $20,000,000, compared to $18,000,000 in 2000.

13. Net operating profit after taxes - but before interest - for 2001
was $1,750,000,

compared to $1,400,000 in 2000.

As of December 31

2001 2000

Liabilities and Stockholders' Equity

Current liabilities

Accounts Payable $ (k) $
(1)

Wages and employee benefits payable 775,000
(m)

Income taxes 300,000 750,000

Advances and deposits 100,000
200,000

Other current liabilities 200.000
400.000

Total current liabilities (n)
(o)

Long-term liabilities

Long-term debt (p)
9,000,000

Deferred income taxes 3,000,000
2,000,000

Other ____(a) 500,000

Total liabilities (r)
15,000,000

Stockholders' equity

Preferred stock 1,000,000
(s)

Common stock (t)
2,000,000

Paid-in capital (u)
9,000,000

Retained earnings ____(v) ____(w)

Total stockholders' equity ____(x) _____(y)

Total liabilities and stockholders' equity S (z) $
(zz)

Helpful Hints:

• Start by calculating the missing values for common and preferred
stock. Then

compute total assets for 2000.

• Total assets for 2001 can be found using 2000 total assets along
with the

information in (6) and (13).

• Accounts receivable for 2001 can be found using 2000 accounts
receivable along

with the information in (8) and (12)