Case 5-23

Case 5-23                  

            Net income     16000

            Short term note         5000

            Bonds interest rate   0.08

            Cash balance  15000

            Profit margin on sales          0.05

            Return on assets       0.075

            Gross profit margin  0.4

            Inventory turnover ratio     6

            Receivables turnover ratio  25

            Acid test ratio            0.9

            Current ratio 2

            Return on shareholders equity       0.1

            Debt to equity ratio  0.33

            Times interest earned          12

                       

Integrating Case 5-23

                              Balance Sheet

                                                                       

        Assets                                                                                                    

      Cash                                                          $  15,000
      Accounts receivable (net)                                            (e)
      Inventory                                                                     (d)
      Prepaid expenses and other current assets                  (i)
     Current assets                                                               (h)
      Property, plant, and equipment (net)                          (j)
                                                                                    $   (b)
        Liabilities and Shareholders’ Equity                                     
      Accounts payable                                                $     (g)
      Short-term notes                                             5,000  
     Current liabilities                                                          (f)
      Bonds payable                                                            (l)
      Shareholders’ equity                                                   (k)
                                                                                    $   (b)

                           Income Statement

     Sales                                                                             (a)
     Cost of goods sold                                                       (c)
        Gross profit                                                               (c)
     Operating expenses                                                      (o)
     Interest expense                                                            (m)
     Tax expense                                                                 (n)
       Net income                                                                                                     $   

Case 5-23 (concluded)

 

Calculations ($ in 000s):

a.  Profit margin on sales = Net income ÷ Sales = 5%     

     For example:

     Net income = 17000

     17000/X = .05

     Cross multiply

17000

_____    =.05

X

17000 = .05X

Divide both sides by .05

X = 17000/.05

X = 340,000

                                                                                          

b.  Return on assets = Net income ÷ Total assets = 7.5%

     For example:

     Net income = 17000

     17000/X = .075

     Cross multiply

     17000 = .075X

     Divide both sides by .075

     X = 17000/.075

     X = 226,666

 

 

    

c.  Gross profit margin = Gross profit ÷ Sales = 40%          
Cost of goods sold = Sales – Gross profit =                 

d.  Inventory turnover ratio = Cost of goods sold ÷ Inventory = 6  

e.  Receivables turnover ratio = Sales ÷ Accounts receivable = 25            

f.   Acid-test ratio = Cash + AR + ST Investments ÷ Current liabilities = .9                 

g.  Accounts payable = Current liabilities – Short-term notes = $

h.  Current ratio = Currentassets ÷ Currentliabilities = 2  

i.   Prepaid expenses and other current assets =                
Current assets – (Cash + AR + Inventory) = $

j.   Property, plant, and equipment = Total assets – Current assets =

k.  Return on shareholders’ equity = Net income ÷ Shareholders’ equity =10%

l.   Debt to equity ratio = Total liabilities ÷ Shareholders’ equity =
Bonds payable = Total liabilities – Current liabilities =

m. Interest expense = 8% x (Short-term notes + Bonds )  
Interest expense =

n   Times interest earned ratio = (Net income + Interest +Taxes) ÷ Interest = 12
Times interest earned ratio =                                        
Times interest earned ratio =                                        
Tax expense = $

o.      Operating expenses = (Sales – Cost of goods sold – Interest expense – Tax expense) – Net income =

 

 

Answers

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