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Chapter 2: 4DQ (page 74)
What advantage does the fixed charge coverage ratio offer over simply using times interest earned?
The fixed charges coverage ratio is computed to measure the company鈥檚 ability to meet all the fixed financial liabilities rather than just interest expenses.
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What role does depreciation play in break-even analysis based on accounting flows? Based on cash flows? Which perspective is longer term in nature?
The Manning Company has financial statements as shown next, which are representative of the company鈥檚 historical average.
The firm is expecting a 35 percent increase in sales next year, and management is concerned about the company鈥檚 need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales.
Using the percent-of-sales method, determine whether the company has external financing needs, or a surplus of funds. (Hint: A profit margin and payout ratio must be found from the income statement.)
Income statement | |
Sales | \(250,000 |
Expenses | 192,000 |
Earnings before interest and taxes | \)58,000 |
Interest | 7,500 |
Earnings before taxes | \(50,500 |
Taxes | 15,500 |
Earning after taxes | \)35,000 |
Dividends | \(7,000 |
BALANCE SHEET | |||
Assets | Liabilities and Stockholder鈥檚 equity | ||
Cash | \)8,500 | Accounts payable | \(26,400 |
Accounts receivable | 63,000 | Accrued wages | 2,350 |
Inventory | 91,000 | Accrued taxes | 3,750 |
Current assets | \)162,500 | Current liabilities | \(32,500 |
Fixed assets | 85,000 | Notes payable | 7,500 |
Long term debts | 17,500 | ||
Common stock | 125,000 | ||
Retained earnings | 65,000 | ||
Total assets | \)247,500 | Total liabilities and stockholder鈥檚 equity | $247,500 |
Arrange the following items in proper balance sheet presentation:
Accumulated depreciation | \(309,000 |
Retained earnings | 187,000 |
Cash | 14,000 |
Bonds payable | 136,000 |
Accounts receivable | 54,000 |
Plant and equipment 鈥� original cost | 775,000 |
Accounts payable | 35,000 |
Allowance for bad debts | 9,000 |
Common stock, \)1 par, 100,000 share outstanding | 100,000 |
Inventory | 70,000 |
Preferred stock, $59 par, 1,000 share outstanding | 59,000 |
Marketable securities | 24,000 |
Investments | 20,000 |
Notes payable | 34,000 |
Capital paid in excess of par (common stock) | 88,000 |
Explain how the Du Pont system of analysis breaks down return on assets. Also explain how it breaks down return on stockholders鈥� equity
Wright Lighting Fixtures forecasts its sales in units for the next four months as follows:
March | 4,000 |
April | 10,000 |
May | 8,000 |
June | 6,000 |
Wright maintains an ending inventory for each month in the amount of one and one-half times the expected sales in the following month. The ending inventory for February (March鈥檚 beginning inventory) reflects this policy. Materials cost \(7 per unit and are paid for in the month after production. Labor cost is \)3 per unit and is paid for in the month incurred. Fixed overhead is \(10,000 per month. Dividends of \)14,000 are to be paid in May. Eight thousand units were produced in February.
Complete a production schedule and a summary of cash payments for
March, April, and May. Remember that production in any one month is equal to
sales plus desired ending inventory minus beginning inventory.
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