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Case Study 21-1

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 percents 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.

Case Study 21-2

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 situations.
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 appreciate
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
Cogs 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 1,500

Cogs = Cost of Goods Sold
Miscellaneous = Miscellaneous Expense