Information related to Bledsoe Corporation’s inventory, as of December 31, 2007, follows:
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Estimated selling price |
$3,500,000 |
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Estimated disposal costs |
50,000 |
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Estimated completion costs |
300,000 |
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Original FIFO cost |
3,200,000 |
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Replacement cost |
3,300,000 |
Using the appropriate valuation method, what adjustment is necessary to accurately report Bledsoe’s inventory at the end of 2007, and will this adjustment affect Bledsoe’s quick ratio?
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Adjustment |
Quick ratio |
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Inventories are valued on the balance sheet at the lower of cost or net realizable value. Net realizable value is equal to $3,150,000 ($3,500,000 selling price – $300,000 completion costs – $50,000 disposal costs). Since the original cost of $3,200,000 exceeds the net realizable value of $3,150,000, a $50,000 write-down is necessary. An inventory write-down has no impact on the quick ratio since inventory is excluded from both the numerator and denominator of the quick ratio.
Common size balance sheets express all balance sheet items as a percentage of:
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Common size balance sheets express all balance sheet items as a percentage of assets. Note that common size income statements express all income statement items as a percentage of sales.
The following data is from Delta's common size financial statement:
Earnings after taxes 18% Equity 40% Current assets 60% Current liabilities 30% Sales $300 Total assets $1,400
What is Delta's total-debt-to-equity ratio?
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If equity = 40%, debt must = 60%, thus 60 / 40 = 1.5.
Common size balance sheets express all balance sheet accounts as a percentage of:
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Common size statements normalize balance sheet and income statements and allow the analyst to make easier comparisons of different sized firms. A common size balance sheet expresses all balances as a percentage of total assets.
Coleman Corporation’s unadjusted trial balance at the end of 2007 reflected compensation expense of $90 million. The trial balance did not include the following:
Because of the holidays, no salary accrual was made for the last week of the year. Salaries for the last week totaled $3.5 million and were paid on January 4, 2008.
Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008.
Ignoring payroll taxes, what is Coleman’s adjusted compensation expense for the year ended 2007 and what impact will the adjustment have on Coleman’s 2007 current ratio?
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Compensation expense |
Current ratio |
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Because of the matching principle, compensation expense should be increased by the (accrued) salary expense for the last week of 2007 and the liability for the bonuses was incurred in 2007. Thus, total compensation expense for 2007 is $98.5 million ($90 million unadjusted compensation expense + $3.5 million salary accrual + $5 million bonus accrual). Since the salaries and bonuses were not paid in 2007, accrued liabilities would increase by $8.5 million. An increase in accrued liabilities, a current liability, would decrease the current ratio.
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