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Chapter 2: 3DQ (page 74)
If the accounts receivable turnover ratio is decreasing, what will be happening to the average collection period?
When the account receivable turnover ratio decreases, the average collection period increases.
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What conditions would help make a percent-of-sales forecast almost as accurate as pro forma financial statements and cash budgets?
Given the following information, prepare an income statement for the Dental Drilling Company.
Selling and administrative expenses | $112,000 |
Depreciation expenses | 73,000 |
Sales | 489,000 |
Interest expenses | 45,000 |
Cost of goods sold | 156,000 |
Taxes | 47,000 |
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
Botox Facial Care had earnings after taxes of \(370,000 in 20X1 with 200,000 shares of stock outstanding. The stock price was \)31.50. In 20X2, earnings after taxes increased to \(436,000 with the same 200,000 shares outstanding. The stock price was \)42.00
a. Compute earnings per share and the P/E ratio for 20X1. The P/E ratio
equals the stock price divided by earnings per share.
b. Compute earnings per share and the P/E ratio for 20X2.
c. Give a general explanation of why the P/E ratio changed.
The Sterling Tire Company鈥檚 income statement for 20X1 is as follows:
STERLINE TIRE COMPANY Income Statement For the year ended December 31, 20X1 | |
Sales (20,000 tires at \(60 each) | \)1,200,000 |
Less: variable costs (20,000 tires at \(30) | 600,000 |
Less: fixed cost | 400,000 |
Earnings before interest and taxes (EBIT) | \)200,000 |
Interest expenses | 50,000 |
Earning before taxes (EBT) | \(150,000 |
Income tax expenses (30%) | 45,000 |
Earning after taxe (EAT) | \)105,000 |
Given this income statement, compute the following:
b. Degree of financial leverage.
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