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Chapter 2: 15BP_c (page 80)
Using the Du Pont method, evaluate the effects of the following relationships forthe Butters Corporation:
c. What would happen to return on equity if the debt-to-total-assets ratio
decreased to 35 percent?
The return on equity would decrease to 38.77%.
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Construct the current assets section of the balance sheet from the following data. (Use cash as a plug figure after computing the other values.)
Yearly sales (credit) | \(420,000 |
Inventory turnover | 7 times |
Current liabilities | \)80,000 |
Current ratio | 2 |
Average collection period | 36 days |
Current assets: | |
Cash | |
Accounts receivable | |
Inventory | |
Total current assets |
Given the following information, prepare an income statement for Jonas Brothers Cough Drops.
Selling and administrative expenses | $328,000 |
Depreciation expenses | 195,000 |
Sales | 1,660,000 |
Interest expenses | 129,000 |
Cost of goods sold | 560,000 |
Taxes | 171,000 |
Given the financial statements for Jones Corporation and Smith Corporation shown here:
b. In which one would you buy stock? Why?
JONES CORPORATION | |||
Current assets | Liabilities | ||
Cash | \(20,000 | Accounts payable | \)100,000 |
Accounts receivable | 80,000 | Bonds payable (long term) | 80,000 |
Inventory | 50,000 | ||
Long Term Assets | Stockholder鈥檚 Equity | ||
Fixeed assets | \(500,000 | Common Stock | \)150,000 |
Less: Accumulated Depreciation | (150,000) | Paid in capital | 70,000 |
Net fixed assets* | 350,000 | Retained earnings | 100,000 |
Total assets | \(500,000 | Total Liab. And equity | \)500,000 |
JONES CORPORATION | |
Sales (on credit) | \(1,250,000 |
Cost of goods sold | 750,000 |
Gross profit | \)500,000 |
Selling and administrative expenses | 257,000 |
Less: depreciation expenses | 50,000 |
Operating profits | \(193,000 |
Interest expenses | 8,000 |
Earning before taxes | \)185,000 |
Tax expenses | 92,500 |
Net income | \(92,500 |
*Use net fixed assets in computing fixed asset turnover.
鈥營ncludes \)7,000 in lease payments.
SMITH CORPORATION | |||
Current assets | Liabilities | ||
Cash | \(35,000 | Accounts payable | \)75,000 |
Marketable securities | 7,500 | Bonds payable (long term) | 210,000 |
Accounts receivable | 70,000 | ||
Inventory | 75,000 | ||
Long term assets | Stockholder鈥檚 equity | ||
Fixed assets | \(500,000 | Common stock | \)75,000 |
Less: accumulated depreciation | 250,000 | Paid in capital | 30,000 |
Net fixed assets* | 250,000 | Retained earnings | 47,500 |
Total assets | \(437,500 | Total liab. And equity | \)437,500 |
*use net fixed assets in computing fixed assets turnover.
SMITH CORPORATION | |
Sales (on credit) | \(1,000,000 |
Cost of goods sold | 600,000 |
Gross profit | \)400,000 |
Selling and administrative expenses | 224,000 |
Less: depreciation expenses | 50,000 |
Operating profits | \(126,000 |
Interest expenses | 21,000 |
Earning before taxes | \)105,000 |
Tax expenses | 52,500 |
Net income | \(52,500 |
Includes \)7,000 in lease payments
Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?
Classify the following balance sheet items as current or noncurrent:
Retained earning | Bond payable |
Accounts payable | Accrued wages payable |
Prepaid expenses | Accounts receivable |
Plant and equipment | Capital in excess of par |
Inventory | Preferred stock |
Common stock | Marketable security |
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