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Chapter 2: 19BP (page 81)
Martin Electronics has an accounts receivable turnover equal to 15 times. If accounts receivable are equal to $80,000, what is the value for average daily credit sales?
The average daily credit sales is $3,288.
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Lemon Auto Wholesalers had sales of \(1,000,000 last year, and cost of goods sold represented 78 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation expense was \)11,000 and interest expense for the year was \(8,000. The firm鈥檚 tax rate is 30 percent.
a. Compute earnings after taxes.
b. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by increasing selling and administrative expenses to 14 percent of sales, sales can be increased to \)1,050,900. The extra sales effort will also reduce cost of goods sold to 74 percent of sales. (There will be a larger markup in prices as a result of more aggressive selling.) Depreciation expense will remain at \(11,000. However, more automobiles will have to be carried in inventory to satisfy customers, and interest expense will go up to \)15,800. The firm鈥檚 tax rate will remain at 30 percent. Compute revised earnings after taxes based on Ms. Carr鈥檚 suggestions for Lemon Auto Wholesalers. Will her ideas increase or decrease profitability?
Assume the following data for Cable Corporation and Multi-Media Inc.
Capable corporation | Muli-media inc | |
Net income | \(31,200 | \)140,000 |
Sales | 317,000 | 2,700,000 |
Total assets | 402,000 | 965,000 |
Total debts | 163,000 | 542,000 |
Stockholder鈥檚 equity | 239,000 | 423,000 |
Compute the return on stockholders鈥� equity for both firms using Ratio 3a. Which firm has the higher return?
If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?
Fill in the blank spaces with categories 1 through 7:
1. Balance sheet (BS)
2. Income statement (IS)
3. Current assets (CA)
4. Fixed assets (FA)
5. Current liabilities (CL)
6. Long-term liabilities (LL)
7. Stockholders鈥� equity (SE)
Indicate whether item is on Balance sheet (BS) or Income statement (IS) | If on Balance sheet, designate which category | Item |
Accounts receivable | ||
Retained earnings | ||
Income tax expense | ||
Accrued expense | ||
Cash | ||
Selling and administrative expenses | ||
Plant and equipment | ||
Operating expenses | ||
Marketable securities | ||
Interest expense | ||
Sales | ||
Notes payable (6 month) | ||
Bonds payable, maturity 2019 | ||
Common stock | ||
Depreciation expense | ||
Inventories | ||
Capital in excess of par value | ||
Net income (earning after tax) | ||
Income tax payable |
For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:
Current assets | Liabilities | ||
Cash | \(15,000 | Accounts payable | \)17,000 |
Accounts receivable | 20,000 | Notes payable | 25,000 |
Inventory | 30,000 | Bonds payable | 55,000 |
Prepaid expenses | 12,500 | ||
Fixed assets | Stockholder鈥檚 equity | ||
Plant and equipment (gross) Less: accumulated depreciation | \(255,000 51,000 | Preferred stock | \)25,000 |
Net plant and equipment | \(204,000 | Common stock | 60,000 |
Paid in capital | 30,000 | ||
Retained earnings | 69,500 | ||
Total assets | \)281,500 | Total liabilities and stockholder鈥檚 equity | \(281,500 |
Sales for 20X2 were \)245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was \(24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.
\)2,500 in preferred stock dividends were paid, and \(5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.
During 20X2, the cash balance and prepaid expenses balances were
unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of \)40,000. Accounts payable increased by 20 percent. Notes payable increased by \(6,500 and bonds payable decreased by \)12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.
a. Prepare an income statement for 20X2.
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