Foundations of Accounting Assignment
Once you have completed the assignment below, you must submit your answers using the answer sheet provided in Canvas (in the Assignments area); not all answers will be turned in. Once submitted, your answers cannot be changed. Where appropriate, partial credit will be given. The teaching assistants and I can help you on Part A of the assignment, but not on Part B. Unlike a quiz, you may work with other classmates if you wish, but you must submit your own work. You should keep a copy of your answers outside of Canvas.
Part A
The Derkins Corporation had the following information available:
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Year 3
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Year 2
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Year 1
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Income Statement
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|
|
|
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Revenue
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30,848
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27,433
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25,512
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Cost of goods sold
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23,122
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20,938
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19,875
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Selling &admin. expenses
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6,082
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5,053
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4,672
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Interest expense
|
504
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458
|
350
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Net Income
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1,140
|
984
|
615
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Balance Sheet
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Assets
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|
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Cash
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681
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354
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589
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Accounts receivable
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506
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587
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412
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Inventory
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3,200
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2,627
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2,245
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Property and equip. (net)
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3,281
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2,810
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2,514
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Total Assets
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7,668
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6,378
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5,760
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Liabilities
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Accounts payable
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373
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358
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280
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Unredeemed gift cards
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469
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410
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385
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Long-term liabilities
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3,234
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2,824
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2,643
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Stockholders' Equity
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|
|
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Common stock
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985
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985
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985
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Retained earnings
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2,607
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1,801
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1,467
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Total Liabilities and Equity
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7,668
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6,378
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5,760
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Required:
1. Prepare a horizontal analysis on revenue, cost of goods sold and net income and assess the results.
2. Prepare a vertical analysis on inventory, property and equipment as well as long-term liabilities and assess the results.
3. Calculate the current ratio, days' sales in inventory ratioas well as the liabilities to stockholders' equity ratio and assess the results to determine if the company's liquidity and solvency are generally getting better or worse.
4. Calculate the net income percentage as well as the return on investment ratio and assess the results to determine if the company's profitability is generally getting better or worse.
5. If the company purchased $750 of inventory on account, how would that transaction impact each ratiocalculated in requirement 3 and 4?
Part B
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Spiff Corporation
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Hobbes, Inc.
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Year 3
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Year 2
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Year 1
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Year 3
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Year 2
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Year 1
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Income Statement
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|
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Revenue
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11,598
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10,470
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9,785
|
14,268
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15,624
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16,256
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Cost of goods sold
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8,767
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7,901
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6,945
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10,894
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11,723
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12,333
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Selling & admin. expenses
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2,611
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2,479
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2,620
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2,500
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2,650
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2,612
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Interest expense
|
80
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28
|
14
|
220
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458
|
432
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Net Income
|
140
|
62
|
206
|
654
|
793
|
879
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Balance Sheet
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|
|
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Assets
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|
|
|
|
|
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Cash
|
984
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886
|
950
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3,732
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3,348
|
2,819
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|
Accounts receivable
|
221
|
231
|
356
|
506
|
375
|
450
|
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Inventory
|
1,698
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1,455
|
1,219
|
2,891
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2,851
|
2,407
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Property & equipment (net)
|
1,312
|
1,149
|
919
|
4,288
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3,720
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3,620
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Total Assets
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4,215
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3,721
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3,444
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11,417
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10,294
|
9,296
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Liabilities
|
|
|
|
|
|
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Accounts payable
|
743
|
678
|
562
|
3,029
|
2,824
|
2,424
|
|
Unredeemed gift cards
|
850
|
636
|
717
|
469
|
410
|
500
|
|
Long term liabilities
|
521
|
446
|
266
|
3,109
|
2,611
|
2,497
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Stockholders' Equity
|
|
|
|
|
|
|
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Common stock
|
815
|
815
|
815
|
1,290
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1,290
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1,290
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Retained earnings
|
1,286
|
1,146
|
1,084
|
3,520
|
3,159
|
2,585
|
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Total Liabilities and Equity
|
4,215
|
3,721
|
3,444
|
11,417
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10,294
|
9,296
|
Required:
1. Calculate the current ratio as well as the liabilities to stockholders' equity ratio for each company and assess the results.
2. Calculate the net income percentage as well as the return on investment ratio for each company and assess the results.
3. Based on your results in requirement 1 and 2, which company would you rather
a. sell inventory to,if sold on account?
b. make a long-term loan to?
c. invest in?
4. If each company borrowed $1,500 on a long-term loan, how would that transaction impact each ratio calculated in requirement1 and 2?
Assignment Questions
1. For the Derkins Corporation, in a horizontal analysis, what is the relative change in revenue for year 2? Round your answer to three decimal places and enter as a number not as a percentage (e.g. 0.209 not 20.9%).
2. For the Derkins Corporation, in a vertical analysis, what is the amount of property and equipment for year 3 relative to total assets? Round your answer to three decimal places and enter as a number not as a percentage (e.g. 0.209 not 20.9%).
3. For the Derkins Corporation, what is the company's current ratio for year 1? Round your answer to two decimal places.
4. For the Derkins Corporation, what is the company's liabilities to stockholders' equity ratio for year 2? Round your answer to two decimal places.
5. For the Derkins Corporation, the company's liquidity is generally getting ________ over the three year period.
a. Better
b. Worse
6. For the Derkins Corporation, the company's solvency is generally getting ________ over the three year period.
a. Better
b. Worse
7. For the Derkins Corporation, what is the company's return on investment ratio for year 3? Round your answer to three decimal places and enter as a number not as a percentage (e.g. 0.209 not 20.9%).
8. For the Derkins Corporation, the company's profitability is generally getting ________ over the three year period.
a. Better
b. Worse
9. If the Derkins Corporation purchased $750 of inventory on account, its current ratio would
a. Improve
b. Get worse
c. Not change
10. If the Derkins Corporation purchased $750 of inventory on account, its net income percentage would
a. Improve
b. Get worse
c. Not change
11. For the Spiff Corporation, what is the company's current ratio for year 2? Round your answer to two decimal places.
12. For Hobbes Inc., what is the company's liabilities to stockholders' equity ratio for year 3? Round your answer to two decimal places.
13. For Hobbes Inc., what is the company's return on investment ratio for year 3? Round your answer to three decimal places and enter as a number not as a percentage (e.g. 0.209 not 20.9%).
14. Between Spiff and Hobbes, which company would you rather sell inventory to, if sold on account?
a. Spiff
b. Hobbes
15. Between Spiff and Hobbes, which company would you rather make a long-term loan to?
a. Spiff
b. Hobbes
16. Between Spiff and Hobbes, which company would you rather invest in?
a. Spiff
b. Hobbes
17. If the Spiff Corporation borrowed $1,500 on a long-term loan, its net income percentage would
a. Improve
b. Get worse
c. Not change
18. If Hobbes Inc. borrowed $1,500 on a long-term loan, its return on investment ratio would
a. Improve
b. Get worse
c. Not change.