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3 problem set
Assessment 7 Complete three problems: Problem 1 focuses on working capital and quick ratio, and
Problem 2 involves reading public financial statements. Problem 3 is a comprehensive problem in
which you will bring together various financial analysis measures and interpret their meaning in order
to draw conclusions. Problem 1: Working Capital, Current Ratio, Quick Assets, Acid-Test Ratio The
Sanchez Corporation is preparing its 2012 balance sheet. The company records show the following
selected amounts at the end of the accounting period, December 31, 2012:
Using the information provided in the table, complete the following: Compute (a) working capital and
(b) the quick ratio (quick assets are $120,000) Then, answer the following questions? 1. Why is
working capital important to management? 2. How do financial analysts use the quick ratio? 3.
Would your computations be different if the company reported $250,000 worth of contingent
liabilities in the notes to the statements? Explain. Include in your explanation a definition of
contingent liabilities and an example of a contingent liability
Problem 2: Reading Publically Available Financial Statements Use the Lowe's 2011 10-K, to answer
the following questions, which all refer to the fiscal year end 2012. Indicate the source of each
answer, including the page number from the Lowe's 2011 10-K. 1. How many shares of common
stock are authorized at the end of the current year? How many shares are issued and outstanding at
the end of the current year? 2. Is there more than one class of common stock? If so, what is the
name of each class of common stock? 3. Is there any preferred stock? If so, what is the dividend
rate on the preferred stock, as a percentage of the par value of the preferred stock? 4. Did the
company pay dividends on the common stock during the most recent reporting year? If so, what was
the total amount of dividends paid and how much were they per share? 5. Does the company have
any treasury stock? If so how much? 6. Has the company issued a stock dividend or a stock split
over the past three reporting years? If so, what percentage and in what year or years? 7. Does the
company's common stock have par value? If it does, what is the par value? 8. Did the common buy
back a significant amount of its shares in the current year? You can see this in the Statement of
Stockholders' Equity as a reduction in shares.
Problem 3: Comprehensive Problem 2 Bring together various financial analysis measures and
interpret their meaning in order to draw conclusions about various companies. Note that each
situation provided is to be considered independently of the others. Situation A: The following tables
represent selected data from recent financial statements of Lincoln and Samuelson, Inc. (dollars in
thousands of dollars):
Situation B: The Israel Manners Entertainment Group uses the allowance approach to estimate bad
debt expense, as is required of all companies with significant sales on accounts receivable. At the
end of 2012, the Manners Group reported a balance in accounts receivable of $4,350,000 and
estimated that $44,000 of its accounts receivable would likely be uncollectible. The allowance for
doubtful accounts has a $1,500 debit balance at year-end, prior to the adjustment needed to raise it
to the $44,000 desired amount. Use this information to answer the following questions: 1. How is it
possible that the allowance for doubtful accounts has developed a debit balance instead of a credit
balance? 2. What amount of bad debt expense should be recorded for 2012? 3. What amount will be
reported on the 2012 balance sheet as the net realizable amount of accounts receivable? Situation
C: At the end of 2012, the unadjusted trial balance of Donovan, Inc. included $6,000,000 in accounts
receivable, a credit balance of $50,000 in the allowance for doubtful accounts, and sales revenue (all
on credit) of $200,000,000. Based on knowledge that the current economy is in distress, Donovan
increased its bad debt rate estimate to 0.4 percent on credit sales. Use this information to answer
the following: 1. What amount of bad debt expense should be recorded for 2012? 2. What amount

will be reported on the 2012 balance sheet for the net realizable amount of accounts receivable,
after being reduced by the balance in the allowance for uncollectible accounts?