Question

EXERCICE 1: (4 MARKS each year 2 marks) The following items were taken from the financial statements of Sigma, over a three-year period: Item 2009 2008_ 2007 Net Sales 640,000 $600,000 $500,000 Cost of Goods Sold 500,000 490.000 400.000 Gross Profit 140,000 $110.000 $100.000 Instructions: Using horizontal analysis and 2007 as the base year, compute the trend percentages for sales, cost of goods sold, and gross profit. 2007 SOLUTION EXERCICE 1: (4 marks each year 2 marks) 2009 2008 Item Net Sales Cost of Goods Sold Gross Profit EXERCICE 2: 8 marks (each ratio 2 marks) Selected financial statement data for Morton Company are presented below. December 31, 2009 December 31. 2008 $30,000 $ 25,000 Cash 18,000 35,000 Short-term investments 120,000 80,000 Receivables (net) 95,000 65,000 Inventories 120,000 90,000 Total current liabilities During 2009, net sales were $810,000, and cost of goods sold was $615,000. Instructions Compute the following ratios at December 31, 2009 (a) Current ratio. (b) Acid-test ratio. (c) Receivables turnover. (d) Inventory turnover.

Answer 1

Ex.1:

Item	2009	2008	2007
Net Sales	128 %	120 %	100 %
Cost of Goods Sold	125 %	122.5 %	100 %
Gross Profit	140 %	110 %	100 %

Ex 2 :

.a. Current ratio for 2009 = Current Assets / Current Liabilities = $ ( 25,000 + 35,000 + 120,000 + 95,000 ) / $ 120,000 = 2.29 : 1

b. Acid test ratio = Quick Assets / Current Liabilities = $ ( 25,000 + 35,000 + 120,000 ) / $ 120,000 = 1.5 : 1

c. Receivables Turnover = Sales / Average Accounts Receivable = $ 810,000 / $ 100,000 = 8.1 times.

d. Inventory Turnover = Cost of Goods Sold / Average Inventories = $ 615,000 / $ 80,000 = 7.69 times

Ex 3 :

1. Cost of raw materials purchased = $ 88,000 ( as given )

2. Cost of goods manufactured = Cost of materials used + direct labor + manufacturing overhead cost = ( Beginning raw materials + purchases - ending raw materials ) + direct labor + manufacturing overhead + beginning work in process - ending work in process = $ ( 22,000 + 88,000 - 35,000 ) + $ 21,000 + $ 55,000 + $ 21,000 - $ 24,000 = $ 148,000

3. Cost of goods sold = cost of goods manufactured + beginning finished goods inventory - ending finished goods inventory = $ 148,000 + $ 51,000 - $ 54,000 = $ 145,000.

4. Gross Profit = Sales - Cost of Goods Sold = $ 280,000 - $ 145,000 = $ 135,000.

Net income = Gross profit - Selling Expense - Administrative Expense = $ 135,000 - $ 10,000 - $ 25,000 = $ 100,000.