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Financial Statement Preparation and Ratio Analysis for Covington Pike Corporation

This assignment covers the preparation of financial statements and ratio analysis for Covington Pike Corporation.

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Financial Statement Preparation and Ratio Analysis for Covington PikeCorporationIntegrating Case 5-23 on page 296You are a new staff accountant with a large regional CPA firm, participating in your first audit. You recallfrom your auditing class that CPAs often use ratios to test the reasonableness of accounting numbersprovided by the client. Since ratios reflect the relationships among various account balances, if it isassumed that prior relation-ships still hold, prior years’ ratios can be used to estimate what currentbalances should approximate. However, you never actually performed this kind of analysis until now.The CPA in charge of the audit of Covington Pike Corporation brings you the list of ratios shown belowand tells you these reflect the relationships maintained by Covington Pike in recent years.Profit margin on sales = 5%Return on assets = 7.5%Gross profit margin = 40%Inventory turnover ratio = 6 timesReceivables turnover ratio = 25Acid-test ratio = .9Current ratio = 2 to 1Return on shareholders’ equity = 10%Debt to equity ratio = 1/3Times interest earned ratio = 12 timesJotted in the margins are the following notes:●Net income $15,000●Only one short-term note ($5,000); all other current liabilities are trade accounts●Property, plant, and equipment are the only noncurrent assets●Bonds payable are the only noncurrent liabilities●The effective interest rate on short-term notes and bonds is 8%●No investment securities

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