55 CHAPTER 8 DAILY MENU - OPTION 3 WHAT OPTION 3 IS USED FOR. DAILY Option 3 is used for printing: . A cumulative Income Statement, with or without footnote disclosures, . A cumulative Balance Sheet, with or without footnote disclosures, . Cumulative Statements of Owners' Capital (for partnerships and proprietorships - see chapters 18 & 19), and . A ratio analysis of the cumulative Income Statement & cumulative Balance Sheet. . An Income Statement for a month or a for continuous series of months, with or without footnote disclosures. ("Continuous series" means that the months must be in order - such as January, February, and March. "Continuous series" does NOT mean, for example, January and March because February is missing. Just to be sure you understand, let's assume that you would like to print ONE Income Statement for January and March, ONLY. (It's not possible in ONE Income Statement, to get to the point.) Continuing, you enter the beginning date as January and the ending date as March. Assuming that you have previously entered transactions for January through March, CPA-LEDGER will search the data base and accumulate all transactions for the period January, February, & March. Here is one final point - CPA-LEDGER does NOT check to see if you have entered your transactions - it merely searches the data base for the period that you request and accumulates transactions (zero and otherwise) for that period. For example, assume that you have entered transactions for January only and ask for an Income Statement that covers the period January and February. Your financial statement's printed data will be for January - because you haven't entered transactions for the entire period that you requested. If you not sure you understand, contact Jim Foster (see the cover page of the User's Manual). Refer to Chapter 2 for an explanation of the standard messages and reminders that are part of Option 3. After the standard messages and reminders, Option 3 asks for: 56 . The beginning and ending dates to be printed on your financial statements. . The value of the ending merchandise inventory, IF you previously directed CPA-LEDGER to include a Cost of Goods Sold Section in your Income Statement. (See Appendix A.) If you ask for an Income Statement for a month (or a series of months), CPA-LEDGER also asks for the value of both beginning and ending inventories, PROVIDED, of course, that you previously asked for the Cost of Goods Sold to be included in your Income Statement. . Information about primary and contra accounts. . Make very sure that you understand the concept of primary and contra accounts before you use this feature of CPA-LEDGER. Improper classification of accounts as having primary/contra relationships can cause your financial statements to be incorrect. If you need assistance in this area, contact your local CPA. If you want cumulative financial statements, the Income Statement is printed first, followed by the Balance Sheet. After both statements have been printed, Option 3 prints ratios pertaining to the reported financial data. If you want a monthly Income Statement, it is printed and you are returned to the DAILY menu, after, of course, you add any desired footnotes to the statement. OPTION 3 SEQUENCE OF EXECUTION AND AN ILLUSTRATION. Option 3 begins execution by asking which type of financial statement(s) that you wish. This screen appears: 57 YOU HAVE TWO OPTIONS FOR FINANCIAL STATEMENTS. 1. PRINT AN INCOME STATEMENT & BALANCE SHEET. (Note: The Statement of Partners'/Owner's Capital is also identified for partnerships/sole proprietorships. . THIS OPTION PRINTS FINANCIAL STATEMENTS FOR THE ENTIRE ACCOUNTING PERIOD - FROM THE FIRST OF THE YEAR TO THE LAST TRANSACTION THAT YOU ENTERED. FOR EXAMPLE, ASSUME THAT YOU STARTED YOUR GENERAL LEDGER AS OF JANUARY 1 AND THAT THE LAST TRANSACTION THAT YOU ENTERED WAS DATED JUNE 30. ALL FINANCIAL STATEMENTS WILL BE FOR THE PERIOD JANUARY 1 THRU THE LAST TRANSACTION THAT YOU ENTERED ON JUNE 30. 2. PRINT AN INCOME STATEMENT FOR ANY ONE MONTH OR ANY SERIES OF CONTINUOUS MONTHS. . FOR EXAMPLE, YOU CAN PRINT AN INCOME STATEMENT FOR JANUARY, FOR JANUARY THRU FEBRUARY, FOR JANUARY THRU MARCH, FOR FEBRUARY THRU JUNE, OR FOR ANY OTHER PERIOD. THE ONLY REQUIREMENT IS THAT THE MONTHS MUST BE CONTINUOUS AND THAT YOU MUST HAVE ENTERED TRANSACTIONS FOR THOSE MONTHS - IF YOUR INCOME STATEMENT INCLUDES A COST OF GOODS SOLD SECTION, YOU WILL BE ASKED FOR THE VALUES OF BOTH (1) BEGINNING & (2) ENDING INVENTORY. BE PREPARED TO ENTER THOSE VALUES. DO YOU WISH TO CONTINUE? (Y/N) _ If you enter "N", the DAILY menu reappears. If you answer "Y", the question, above, "DO YOU WISH TO CONTINUE? (Y/N) is replaced by this question: WHICH FINANCIAL STATEMENT OPTION DO YOU WISH? _ If you enter "1", the option for cumulative financial statements is processed. If you answer "2", CPA-LEDGER processes the monthly financial statement option. The following discussion takes up (1) cumulative financial statements first, (2) followed by monthly ones, (3) followed by processing that is the same for both cumulative and monthly financial statements. Processing, as far as you are concerned, is almost the same for either cumulative or monthly Income Statements. To distinguish the differences, the following discussion will be subdivided into "CUMULATIVE FINANCIAL STATEMENTS ONLY", (2) "MONTHLY INCOME STATEMENT ONLY", AND (3) "BOTH CUMULATIVE AND MONTHLY FINANCIAL STATEMENTS". 58 CUMULATIVE FINANCIAL STATEMENTS ONLY. After the standard messages and reminders, Option 3 begins by requesting that you enter two dates and the value of ending inventory. The requests and the assumed input ("010184", "123184", and "112250.00") are: DATES, BELOW, DO NOT GOVERN THE PERIOD COVERED FOR FINANCIAL STATEMENT AMOUNTS. THE DATES ARE FOR PRINTING PURPOSES ONLY. ENTER THE BEGINNING DATE TO BE PRINTED ON ALL FINANCIAL STATEMENTS. (USE FORMAT MMDDYY. I.E., JUNE 30,1984 = 063084.) 010184 ENTER THE ENDING DATE TO BE PRINTED ON ALL FINANCIAL STATEMENTS. (USE FORMAT MMDDYY. I.E., DECEMBER 31,1984 = 123184.) 123184 ENTER VALUE OF ENDING INVENTORY. 112250.00 (Note: You are asked for the value of the ending inventory ONLY if you set up accounts for beginning inventory and one or more accounts related to purchases. See Appendix A. MONTHLY FINANCIAL STATEMENTS ONLY. Dates to be printed on the Income Statement are requested, in the same manner as explained above for "CUMULATIVE FINANCIAL STATEMENTS ONLY" - except that the dates requested are those to be printed on the Income Statement. After entering the dates, the following screen appears ONLY IF YOU REQUESTED CPA-LEDGER TO INCLUDE A COST OF GOODS SOLD SECTION IN YOUR INCOME STATEMENT. See Appendix A. ENTER THE VALUE OF BEGINNING INVENTORY ___________ ENTER THE VALUE OF ENDING INVENTORY ___________ After entering the inventory values, the following screen appears, in all cases, whether or not you have a Cost of Goods Sold Section in your Income Statement: 59 AS REQUESTED BELOW, ENTER THE BEGINNING AND ENDING MONTHS TO BE COVERED BY THE INCOME STATEMENT. USE FORMAT `MM'. I.E., JANUARY = 01, FEBRUARY = 02, ETC. THE ENDING MONTH MUST BE EQUAL TO OR GREATER THAN THE BEGINNING MONTH AND ALL MONTHS MUST BE EQUAL TO OR BETWEEN 01 AND 12. ENTER BEGINNING MONTH __ ENTER ENDING MONTH __ (Note: The dates entered DO NOT control the beginning and ending dates printed on the Income Statement. Printing dates are asked for when the program first starts to execute.) After you enter the ending month, the following question appears on the same screen: REVIEW YOU DATES. ARE THEY CORRECT? (Y/N) _ If you enter "N", you are asked to reenter the beginning and ending months. If you answer "Y", processing continues as described below for "BOTH CUMULATIVE AND MONTHLY FINANCIAL STATEMENTS". Before leaving the monthly financial statement, however, there are two final points. ---->POINT 1. If you are already using CPA-LEDGER, run the program titled "UPDATE.BAS" that is on the Program Disk. UPDATE.BAS will start your monthly data base. Know this - the monthly data base will be updated each time that you post the general ledger from the date that you run UPDATE.BAS; however, IT DOES NOT update the monthly data base for your previous transactions. For example, it you are already using CPA-LEDGER and the day that you run UPDATE.BAS is June 16, the monthly data base will be updated each time that you post the general ledger June 16 and thereafter. ---->POINT 2. There is a process that CPA-LEDGER follows that you should know about. CPA-LEDGER uses a data base that summarizes monthly transactions to prepare your Income Statement. If the data base become unusable, the following message will appear: 60 PROCESSING ERROR. MONTHLY DATA BASE RECORD NOT FOUND. DISCONTINUE YOUR USE OF CPA-LEDGER UNTIL YOU CONTACT JIM FOSTER AT (703)569-2254. CALL (OR WRITE IF YOU PREFER) JIM FOSTER AND GIVE HIM THIS MESSAGE: A message for Jim appears here. PRESS ANY KEY TO CONTINUE. As the message states, you should discontinue using CPA-LEDGER and contact Jim Foster. (You should rarely, if ever, see the message - it will appear only if CPA-LEDGER notices that notices that the data base is not usable. The message is listed in this manual so that you will know what to do - contact Jim Foster. In the meantime, be sure that you keep frequent backups of your data files (those with an extension of .FIL)). BOTH CUMULATIVE AND MONTHLY FINANCIAL STATEMENTS. The illustration that follows is for the Income Statement. Option 3 processing for the Balance Sheet is the same, except for the name of the financial statement, account titles, and account numbers. After you enter the two dates and the inventory value (above), Option 3 continues with: THE PURPOSE OF THESE INSTRUCTIONS IS TO EXPLAIN THE MEANING OF `PRIMARY' AND `CONTRA' ACCOUNTS. YOU SHOULD UNDERSTAND THESE INSTRUCTIONS BEFORE YOU CONTINUE. A `CONTRA' ACCOUNT IS AN ACCOUNT WHOSE BALANCE IS SHOWN ON THE INCOME STATEMENT AS EITHER AN ADDITION TO OR A SUBTRACTION FROM ANOTHER ACCOUNT. FOR EXAMPLE, THE BALANCE OF THE ACCOUNT `PURCHASE RETURNS AND ALLOWANCES' IS SHOWN ON THE INCOME STATEMENT AS A SUBTRACTION FROM THE ACCOUNT `PURCHASES'. `PURCHASE RETURNS AND ALLOWANCES' IS THE ***CONTRA*** ACCOUNT AND `PURCHASES' IS THE ***PRIMARY*** ACCOUNT. IT IS IMPORTANT THAT YOU UNDERSTAND THE MEANING OF `PRIMARY' AND `CONTRA' ACCOUNTS' BEFORE YOU CONTINUE. YOU CAN IDENTIFY `PRIMARY' AND `CONTRA' ACCOUNTS, AS WELL AS THEIR ACCOUNT NUMBERS, FROM A TRIAL BALANCE OR A LISTING OF ACTIVE ACCOUNTS. IN THE QUESTIONS THAT FOLLOW AFTER THESE INSTRUCTIONS, YOU WILL BE ASKED TO ENTER THE ACCOUNT NUMBERS OF PRIMARY AND CONTRA ACCOUNTS. PRESS ANY KEY TO CONTINUE. After you press a key, the following appears on your computer screen: 61 DOES THE INCOME STATEMENT CONTAIN ANY CONTRA ACCOUNTS? ENTER `Y' FOR `YES' OR `N' FOR `NO'. _ If you answer `N', Option 2 prints the Income Statement. If you answer `Y', the following appears on your computer screen: ENTER THE QUANTITY OF *** PRIMARY *** ACCOUNTS THAT HAVE CONTRA ACCOUNTS. YOU SHOULD DETERMINE THIS QUANTITY BY REVIEWING A CURRENT TRIAL BALANCE OR A LISTING OF ACTIVE ACCOUNTS. ENTER THE QUANTITY OF PRIMARY ACCOUNTS NOW. IF YOU HAVE MADE A MISTAKE AND WISH TO INDICATE THAT THERE ARE NO PRIMARY ACCOUNTS WITH CONTRA ACCOUNTS, ENTER A ZERO (0). _ If you enter a zero, Option 3 starts printing the Income Statement. If you enter one or another number up through 20 (there is a limit of 20 primary accounts), Option 3: . Displays instructions on how you should proceed. . Asks for pertinent information that pertains to each primary and contra account. An example follows, assuming one primary and one contra account. The primary account is Sales (account number 171), and the contra account is Sales Returns and Allowances (account number 175). 62 ENTER THE PRIMARY AND CONTRA ACCOUNT NUMBERS BELOW. PAY ATTENTION TO THE TYPE OF INPUT THAT IS REQUESTED. WORK FROM A CURRENT TRIAL BALANCE. THE INPUT THAT YOU MAKE (BELOW) WILL BE DISPLAYED (LATER) FOR YOUR REVIEW AND APPROVAL OR DISAPPROVAL. IF YOU DISAPPROVE THE INPUT, YOU WILL BE ASKED TO REENTER ALL OF THE DATA - STARTING AT THE POINT WHERE THE COMPUTER ASKS IF THERE ARE ANY PRIMARY AND CONTRA ACCOUNTS TO BE CONSIDERED. THUS, IF YOU REJECT YOUR INPUT, IT WILL BE COMPLETELY ERASED FROM THE COMPUTER'S MEMORY AND YOU WILL BE GIVEN A FRESH START. ENTER THE ACCOUNT NUMBER FOR *** PRIMARY *** ACCOUNT 1. 171 (Note: See the note immediately below.) ENTER THE ACCOUNT NUMBER FOR *** CONTRA *** ACCOUNT 1. 175 (Note: CPA-LEDGER will not accept an inactive account, an active account with a zero balance, or a valid account more than one time.) ENTER THE QUANTITY OF CONTRA ACCTS. FOR THE ABOVE PRIMARY ACCT. (LIMIT 2) 1 The sequence followed by Option 3 in asking for the above data is: . First, you are asked to enter the account number for the primary account. (See the first input line.) . Next, you are asked to enter the quantity of contra accounts. Note that there is a limit of two contra accounts for each primary account. (See the third input line.) . Finally, you are asked for the account numbers of up to two contra accounts, depending on your input on the third input line. (See the second input line.) This process is repeated for each primary account that has an offsetting contra account. After your entries are complete, the following will appear on the computer screen: 63 YOUR INPUT WILL BE DISPLAYED FOR YOUR REVIEW. ACCOUNT NUMBERS, AS WELL AS ACCOUNT TITLES WILL BE DISPLAYED. IT IS VERY IMPORTANT THAT THE INPUT BE ABSOLUTELY CORRECT BEFORE THE PROGRAM USES IT TO PREPARE THE INCOME STATEMENT. OTHERWISE, THE STATEMENT MAY BE INCORRECTLY PREPARED. SO, REVIEW THE DATA V-E-R-Y CAREFULLY AND NOTE ANY ERRORS. TO THE LEFT ON THE SCREEN WILL BE ONE PRIMARY ACCOUNT, WITH THE RELATED CONTRA ACCOUNT(S) TO THE RIGHT. STUDY THE DISPLAYED DATA VERY C-A-R-E-F-U-L-L-Y AND NOTE ANY INPUT ERRORS. STUDY THE ACCOUNT TITLES, AS WELL AS THE ACCOUNT NUMBERS. IT IS EXTREMELY IMPORTANT THAT YOUR INPUT FOR THE PRIMARY AND CONTRA ACCOUNTS BE ABSOLUTELY CORRECT. AFTER YOU FINISH YOUR REVIEW, YOU WILL BE ASKED TO INDICATE WHETHER YOUR INPUT WAS OR WAS NOT CORRECT. IF YOU INDICATE THAT YOUR INPUT WAS INCORRECT, THE COMPUTER WILL ASK YOU TO REENTER YOUR DATA, FROM THE BEGINNING. PRESS ANY KEY TO CONTINUE. After you press a key to continue, the following will appear on your screen: (Refer to the previously entered account number 175 (Sales Returns and Allowances) as a contra account to primary account number 171 (Sales). These entries were made, above, when Option 3 asked for the account numbers of primary and contra accounts.) YOUR INPUT (WITH ACCOUNT TITLES) IS DISPLAYED BELOW. CAREFULLY REVIEW THE INPUT AND NOTE ANY ERRORS. ONE PRIMARY ACCOUNT, WITH THE ACCOUNT NUMBER AND TITLE, IS ON THE SCREEN TO THE LEFT. THE RELATED CONTRA ACCOUNT(S), WITH ACCOUNT NUMBER(S) AND TITLE(S), IS ON THE SCREEN TO THE RIGHT. CONSIDER IT TO BE AN INPUT ERROR IF ACCOUNT NUMBERS DO NOT CORRESPOND TO THE ACCOUNT TITLES. ALSO CONSIDER IT TO BE AN INPUT ERROR IF THE DISPLAYED CONTRA ACCOUNT(S) DO NOT RELATE TO THE DISPLAYED PRIMARY ACCOUNT. (IF ALL OF YOUR ACCOUNT NUMBERS ARE NOT SHOWN BELOW, THEY WILL APPEAR WHEN YOU PRESS A KEY TO CONTINUE.) ****** PRIMARY ACCOUNT ****** ****** CONTRA ACCOUNT ****** ACCT. ACCT. NBR. ACCOUNT TITLE NBR. ACCOUNT TITLE 171 SALES 175 SALES RETURNS & ALLOWANCES DISPLAY IS COMPLETE. PRESS ANY KEY TO CONTINUE. 64 After you press a key, the following appears on you screen: WERE ALL PRIMARY / CONTRA ACCOUNTS CORRECT AS DISPLAYED? (IF YOU INDICATE THAT THEY WERE N-O-T CORRECT, YOU WILL BE ASKED TO ENTER THE DATA AGAIN.) ENTER `Y' FOR `YES' OR `N' FOR `NO'. _ If your answer is `N', Option 3 will ask you reenter all of your input about the primary and contra accounts, beginning with the question "DOES THE INCOME STATEMENT INCLUDE ANY CONTRA ACCOUNTS?". If your answer is `Y', Option 3 prints the Income Statement. ERROR MESSAGES. Like all CPA-LEDGER options, Option 3 monitors your input to help ensure that you do not make a mistake. In some cases, the system will merely refuse to accept your input. An example is where you enter a date in the incorrect format - perhaps you enter 20 for the month. In these cases, instructions for correct input are already displayed on the screen. In other cases, however, you will need a more detailed explanation. The following is a summary of the error messages that you may encounter. INACCURATE ENTRY FOR THE BEGINNING OR ENDING FINANCIAL STATEMENT DATES. In this case, the system refuses to proceed until you enter the correct range of values. Instructions are on the computer screen. INACCURATE ENTRY FOR THE BEGINNING INVENTORY OR ENDING INVENTORY. If you enter anything except zeros through nines and a decimal point to separate dollars and cents, the following message will appear below your input: ENTRY IS INCORRECT. TRY AGAIN. PRESS ANY KEY TO CONTINUE. After pressing a key, you will be asked to reenter the ending inventory value. 65 INACCURATE ENTRY FOR PRIMARY OR CONTRA ACCOUNT NUMBERS. An incorrect entry for primary or contra account numbers may fall into several areas. They are: . You might not enter a numeric value - ZZ for example. In this case, Option 1 requests that you reenter your input. . You might enter an account number that is not on the financial statement that is about to be printed. In this case, the following message appears at the top of the computer screen: YOUR ENTRY FOR THE ACCOUNT NUMBER WAS (a number is shown). THAT ACCOUNT NUMBER IS NOT INCLUDED IN THE (the financial statement to be printed is identified). STUDY A CURRENT TRIAL BALANCE AND CORRECT YOUR INPUT. PRESS ANY KEY TO CONTINUE. . You might enter the same account number the second time. In that case the following message appears at the top of your computer screen: YOU ENTERED THE SAME ACCOUNT NUMBER A SECOND TIME. A PRIMARY OR CONTRA ACCOUNT SHOULD BE IDENTIFIED ONE TIME ONLY. STUDY A CURRENT TRIAL BALANCE AND CORRECT YOUR INPUT. PRESS ANY KEY TO CONTINUE. . You might enter an inactive account number or an active account with a zero balance. In that event the following appears at the top of your screen: ERROR - INACTIVE ACCOUNT OR ACCOUNT WITH A ZERO BALANCE. YOUR INPUT CALLS FOR ACCT. NUMBER (a number is shown). STUDY A CURRENT TRIAL BALANCE AND CORRECT YOUR INPUT. PRESS ANY KEY TO CONTINUE. After you press a key, Option 3 asks if you wish to start again. If so, you are asked again if there are any primary accounts that have contras. If you indicate that you do not wish to start again, Option 3 continues where it left off. PRINTED OUTPUT. As already mentioned, printed output from Option 3 will be: 66 . FOR CUMULATIVE FINANCIAL STATEMENTS. . First, an Income Statement. And, if you ordered the footnote, Balance Sheet, and analysis capabilities of CPA-LEDGER (see pages ii and iii of this manual), the processing will continue, as follows: . Second, footnote disclosures for the Income Statement. . Third, a Balance Sheet. . Fourth, footnote disclosures for the Balance Sheet. . Fifth, ratios pertaining to amounts shown on the Income Statement and the Balance Sheet. . FOR MONTHLY FINANCIAL STATEMENTS. . The Income Statement is printed, followed by footnotes to the Income Statement. Then you are returned to the DAILY menu. For cumulative financial statements, if you do not have CPA-LEDGER's footnote, Balance Sheet, and ratio capabilities, you will be returned to the DAILY menu once the Income Statement is printed. Otherwise, the processing continues, as indicated above (footnotes for the Income Statement, the Balance Sheet, footnotes for the Balance Sheet, and a ratio analysis of information on both the Income Statement and the Balance Sheet). Because the output from Option 1 can be quite lengthy, sample output not shown in this chapter. Rather, the example for the Income Statement will come from the practice section that is to follow. The Balance Sheet, also not illustrated, is quite detailed. For example, accounts are grouped by account classification (current assets, operational assets, current liabilities, long-term liabilities, contributed capital, retained earnings, etc.). Subtotals and final totals are shown, contra and primary accounts are offset and then the contra account is subtracted from primary account, with the net balance also being printed. Totals are shown for various captions such as current assets, operational assets, current liabilities, long-term liabilities, total assets, and total liabilities and owners' equity. 67 FOOTNOTE DISCLOSURES. Footnote disclosures are usually included with financial statements. The objective of these footnotes is to disclose all relevant information needed for economic decisions but which cannot be effectively communicated in any other manner. Full disclosure is important so that the financial statements will not be misleading. Examples of common disclosures are: . An explanation of all significant accounting policies of the company, such as depreciation methods, amortization of intangibles, and inventory costing methods. . Details of pension plans. . Maturity dates on payables and receivables. . Certain restrictions related to long-term debt. . Long-term leases. . Contingencies. . Any changes in accounting principles. If you have ordered the additional capabilities (see pages ii and iii of this manual), Option 3 displays a message on your computer screen after either the Income Statement or the Balance Sheet has printed. The message: 68 . Reminds you of the importance of footnote disclosures. . Identifies common types of disclosures for the financial statement that has just been printed. . Shows an example of a disclosure that you can use as a guide. After you have had a chance to read the message, Option 3 continues by asking if you would like to include any footnote disclosures in the financial statement. If your answer is no, the footnotes are bypassed. If your answer is yes, you will be asked to enter each disclosure, one at a time. Option 3 consecutively numbers each disclosure and gives you a chance to make corrections before they are printed. The following is an example of a disclosure that Option 3 might print. (You enter the narrative, beginning with "Long-Term Notes Payable" and ending with "... and 1987 ($30,000).". CPA-LEDGER does everything else. FOOTNOTE DISCLOSURES. Note 1. Long-Term Notes Payable ($50,000) shown in the Balance Sheet are payable in 1986 ($20,000) and 1987 ($30,000). 68-1 FINANCIAL STATEMENT ANALYSIS. First, remember this - financial statement analysis is for cumulative financial statements ONLY. They are NOT printed for monthly Income Statements. Financial statements give valuable information concerning the position of a business and the results of its operation. Analysis of data on financial statements is necessary in reaching conclusions about financial matters. When the financial position of a business is being considered, three factors are usually of primary interest. They are: . Solvency. To be solvent, a business must be able to meet its liabilities as they mature. Statements are analyzed to determine if the business is, and will likely continue to be, solvent. . Profitability. Profitability is measured by earnings shown on Income Statements. The nature, amount, and regularity of earnings are important in appraising profitability. . Endurability. To be endurable, a business must be able to (1) meet both short-term and long-term obligations and (2) provide a reasonable return to the owners. Solvency, profitability, and efficient use of resources are important in appraising endurability. There are many available methods for analyzing financial statements. One method is to use financial and operating relationships expressed in the terms of "ratios". CPA-LEDGER presents several ratios that may be helpful in analyzing your financial statements. You should understand, however, that ratios have little significance unless they are judged after applying appropriate standards. Standards might consist of: . Ratios of your industry. . Ratios of other companies that are within your industry and that are in your local area. . Past ratios of your company. You should also understand that the ratios that you will need for a particular analysis depends upon the purpose of that analysis. CPA-LEDGER presents several ratios that may assist you in making a preliminary study of the solvency, profitability, and endurability of your business. We caution you, however, that no attempt has been made to give CPA-LEDGER capability for complete financial statement analysis. Carefully read the two paragraphs that follow "EXPLANATION OF RATIOS" on page 66. 68-2 RATIOS PREPARED BY OPTION 3. Option 3 automatically prepares over a dozen ratios for your study. (Assuming, that is, that your financial statements have the data necessary to compute the ratios.) They ratios are: . Ratios for solvency analysis: . Current ratio. . Ratio of working capital to total assets. . Ratio of cash in bank to current liabilities. . Ratio of sales to accounts receivable. . Distribution of cash, accounts receivable, and inventory: . Cash in bank to the total of the three. . Accounts receivable to the total of the three. . Merchandise inventory to the total of the three. . Ratios for profitability analysis: . Ratio of operating income to net sales. . Ratio of net profit to net sales. . Ratio of gross profit to net sales. . Ratio of operating expenses to net sales. . Operating ratio. . Ratio of net income to owners' equity. . Ratios for endurability analysis. . Ratio of assets provided by creditors. . Ratio of assets provided by owners. . Ratio of owner's equity to fixed assets. . Ratio of current assets to total liabilities. . Ratio of operating income to total assets. Option 3 not only prints the ratios. It also prints a short explanation on how each ratio can be used in studying the results of operations. SAMPLE PRINTOUT OF THE ANALYSIS OF FINANCIAL STATEMENTS. The following is a sample printout of how Option 3 presents the analysis of the Income Statement and the Balance Sheet: 68-3 RATIOS FOR SOLVENCY ANALYSIS. CURRENT RATIO 250.5 % RATIO OF WORKING CAPITAL TO TOTAL ASSETS 15.9 % RATIOS FOR PROFITABILITY ANALYSIS. RATIO OF OPERATING INCOME TO NET SALES 15.0 % RATIO OF NET INCOME TO OWNER'S EQUITY 8.5 % RATIOS FOR DURABILITY ANALYSIS. RATIO OF ASSETS PROVIDED BY CREDITORS 21.5 % RATIO OF ASSETS PROVIDED BY OWNERS 78.5 % EXPLANATION OF RATIOS. THOROUGH ANALYSIS OF FINANCIAL STATEMENTS IS A SPECIALIZED AREA THAT REQUIRES PROFESSIONAL TRAINING AND JUDGEMENT. ALSO, CPA-LEDGER IS NOT DESIGNED TO PROVIDE FINANCIAL STATEMENT ANALYSIS TO COVER ALL NEEDS IN ALL CIRCUMSTANCES. DO NOT MAKE FINAL JUDGMENTS BASED ON RATIOS THAT COME FROM CPA-LEDGER. INSTEAD, USE THE RATIOS AS GENERAL GUIDELINES AND GET PROFESSIONAL ASSISTANCE BEFORE YOU MAKE ANY CONCLUSIONS OR DECISIONS. BEFORE INTERPRETING RATIOS FOR YOUR BUSINESS, YOU SHOULD DEVELOP STANDARDS AS TO WHAT CONSTITUTES A HIGH RATIO AND WHAT CONSTITUTES A LOW RATIO. YOU CAN DO THIS BY USING PAST HISTORY OF YOUR BUSINESS, BY CONSULTING INDUSTRY STANDARDS, AND BY CONSULTING, IF AVAILABLE, RATIOS OF SELECTED COMPETING COMPANIES IN YOUR LOCAL AREA. IN SETTING YOUR STANDARDS, REMEMBER THAT THERE IS A DELICATE BALANCE BETWEEN A RATIO THAT IS TOO HIGH AND A RATIO THAT IS TOO LOW. CURRENT RATIO. THE CURRENT RATIO IS COMPUTED BY DIVIDING TOTAL CURRENT ASSETS BY TOTAL CURRENT LIABILITIES. THIS RATIO IS A MEASURE OF A BUSINESS' ABILITY TO MEET ITS CURRENT OBLIGATIONS. A RULE OF THUMB IS THAT THE CURRENT RATIO IS UNSATISFACTORY IF IT IS LESS THAN 200 PERCENT. HOWEVER, AS MENTIONED, DEVELOP YOUR OWN STANDARD. ALSO CONSIDER THE FOLLOWING: . YOUR BUSINESS CAN HAVE A HIGH CURRENT RATIO AND STILL HAVE A CASH DEFICIENCY. . A HIGH CURRENT RATIO MAY BE THE RESULT OF OVERSTOCKING OF INVENTORY. . A HIGH CURRENT RATIO MAY INDICATE EXCESS FUNDS WHICH SHOULD BE PUT TO BETTER USE, SUCH AS INVESTING IN SHORT-TERM SECURITIES. 68-4 RATIO OF WORKING CAPITAL TO TOTAL ASSETS. THIS RATIO IS COMPUTED BY DIVIDING CURRENT ASSETS MINUS CURRENT LIABILITIES BY TOTAL ASSETS. THE RATIO IS A MEASURE OF THE DISTRIBUTION AND LIQUITY OF ASSETS AFTER CURRENT LIABILITIES HAVE BEEN DEDUCTED FROM CURRENT ASSETS. A HIGH RATIO MIGHT INDICATE: . EXCESSIVE ACCOUNTS RECEIVABLE, DUE TO POOR COLLECTION PERFORMANCE. . UNUSED CASH THAT POSSIBLY SHOULD BE PUT TO BETTER USE, SUCH INVESTMENT IN SHORT-TERM SECURITIES. . OVERSTOCKING OF INVENTORY. A SHIFT FROM THE MORE CURRENT ASSETS OF CASH AND RECEIVABLES TO INVENTORY IS USUALLY REGARDED AS UNDESIRABLE. A LOW RATIO MAY INDICATE A WEAKNESS IN THE CURRENT POSITION. (SEE THE CURRENT RATIO.) For brevity, additional explanations of the ratios are not shown in this chapter. The remaining explanations are similar in nature. The public domain version of CPA-LEDGER does not have capability for analyzing financial statements. If you would like to have this added feature, refer to the instructions on pages ii and iii of this User's Manual. Practice. Use Option 3 and your practice general ledger to prepare a CUMULATIVE Income Statement - Option 1 of financial statement menu. . Use the following input: . Beginning date for the Income Statement is 010185 . Ending date for the Income Statement is 022885. . The value of the ending inventory is $112,250.00. (Use 112250.00 as your input.) . The primary and contra accounts are: (Note that Sales and Purchases have two contra accounts each.) 68-5 ------PRIMARY ACCOUNT------ ---------CONTRA ACCOUNT-------- ACCT. ACCT. NO. ACCOUNT TITLE NO. ACCOUNT TITLE INCOME STATEMENT: 171 SALES 175 SALES RETURNS AND ALLOWANCES 179 SALES DISCOUNT 185 MERCHANDISE PURCHASES 189 PURCHASE RETURNS & ALLOWANCES 193 PURCHASES DISCOUNT After printing the CUMULATIVE financial statements, use Option 3 of the DAILY menu once again. This time, ask for an Income Statement for March. When your are asked: Enter 03 for the beginning date. Enter 03 for the ending date. Enter 10000 for the beginning inventory. Enter 9500 for the ending inventory. ---->Your practice disk does not include any "monthly" postings for any month other than March. These transactions were entered for the sole purpose of allowing you to practice using the monthly Income Statement feature. The March transactions are not intended to be fully consistent with January transactions, which were created in the past.