Practice problem answers - PowerPoint Presentation

1. Practice problem answers

2. Income StatementFarwell Company has the following information available from its most recent fiscal year. Use the relevant information to determine the net income (loss) for the period.Revenues: Cash Sales $40,000Sales on Account $58,000Total Revenue $98,000Expenses:COGS 102,000Empl salary expense 30,000Utility expense 1,500Property tax expense 10,000Rent expense 12,000 Total Operating Expenses $155,500Operating Income ($57,500)Interest Income 100Net Income (Loss) ($57,400)Cash sales, $40,000Employee salary expense, $30,000Common stock issued for cash, $100,000Sales on account, $58,000Utility expense, $1,500Long-term loan received, $50,000Interest earned on investments, $100Property tax expense, $10,000Inventory purchased for resale, $120,000Cost of inventory sold, $102,000Insurance purchased for the next year, $4,800Rent expense, $12,000

3. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expense $39,000 Rent expense 45,000 Depreciation expense 11,000 Bad debt expense 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750Quick ratio: (Cash + Short-term investments + Receivables) / Current liabilities($24,200+ $45,650) /($26,400+ $3,850+ 7,425) = 1.85$69,850 / $37,675 = 1.85 Financial Analysis (P2.7 pg.60)

4. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expense $39,000 Rent expense 45,000 Depreciation expense 11,000 Bad debt expense 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750Current ratio: Current assets / Current liabilities($24,200 + $45,650 + $79,200) /($26,400 + $3,850 + 7,425) = 3.96$149,050 / $37,650 = 3.96 Financial Analysis

5. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expense $39,000 Rent expense 45,000 Depreciation expense 11,000 Bad debt expense 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750Gross margin ratio: Gross margin / Sales$168,250 / $400,00 = 42.06%Financial Analysis

6. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expense $39,000 Rent expense 45,000 Depreciation expense 11,000 Bad debt expense 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750Return on sales ratio: Net income / Sales$42,750 / $400,00 = 10.69% Financial Analysis

7. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expense $39,000 Rent expense 45,000 Depreciation expense 11,000 Bad debt expense 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750Return oninvestment ratio: Net income / Average total assets$42,750 / ([$316,00 + $377,850] / 2) = 12.32% $42,750 / ($693,850 / 2) = 12.32% $42,750 / $346,925) = 12.32% Financial Analysis

8. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expense $39,000 Rent expense 45,000 Depreciation expense 11,000 Bad debt expense 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750Return on owners’ equity ratio: Net income / Average owners’ equity$42,750 / ([$80,00 + $86,500 + $88,00 + $142,175] / 2) = 21.55% $42,750 / ([$166,500 + $230,175] / 2) = 21.55% $42,750 / ([$396,675] / 2) = 21.55% $42,750 / $198,337.50 = 21.55% Financial Analysis

9. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expenses $39,000 Rent expenses 45,000 Depreciation expense 11,000 Bad debt expensee 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750Debt to equity ratio: Total debt / Total owners’ equity($26,400 + $3,850 + $7,425 + $110,000) / ($88,000 + $142,175) = 64 to 1.00$147,675 / $230,175 = 64 to 1.00Financial Analysis

10. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expense $39,000 Rent expense 45,000 Depreciation expense 11,000 Bad debt expense 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750A/R turnover: Sales / Average accounts receivable$400,000 / ([$39,000 + $45,650] / 2) = 9.45 times$400,000 / ($84,650 / 2) = 9.45 times$400,000 / $42,325 = 9.45 timesDays in the collection period: 356 / 9.45 = 38.62 daysFinancial Analysis

11. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expense $39,000 Rent expense 45,000 Depreciation expense 11,000 Bad debt expense 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750Inventory turnover: Cost of sales / Average inventory$231,750 / ([$79,200 + $64,000] / 2) = 3.24$231,750 / ($143,200 / 2) = 3.24$231,750 / $71,600= 3.24Days in the selling period: 356 / 3.24 = 112.65 daysFinancial Analysis

12. Petrisin Company – Comparative Balance Sheet – December 31, 2014 and 2013 2014 2013 Cash $ 24,200 $ 20,000 Accounts receivable 45,650 39,000 Inventory 79,200 64,000 Plant and equipment 316,800 265,000 Accumulated depreciation (88,000) (72,000) Total assets $377,850 $316,000 Accounts payable $ 26,400 $ 37,000 Wages payable 3,850 4,000 Taxes payable 7,425 8,500 Bonds payable 110,000 100,000 Common stock 88,000 80,000 Retained earnings 142,175 86,500 Total liabilities and shareholder’s equity $377,850 $316,000 _________________________________________________________________________________Petrisin Company – Income Statement – For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 231,750 Gross margin $ 168,250 Operating expenses: Selling expense $39,000 Rent expense 45,000 Depreciation expense 11,000 Bad debt expense 1,715 Interest expense 15,000 111,715 Income from operations $ 56,535 Loss on sale of equipment (2,000) Income before taxes $ 54,535 Income tax expense 11,785 Net income $ 42,750A/P turnover: Cost of goods sold / Average accounts payable$231,750 / ([$37,000+ 26,400 ]/ 2) = 7.31 times$231,750 / ($63,400 / 2) = 7.31 times$231,750 / $31,700 = 7.31 timesDays in the collection period:365 / 7.31 = 49.93 daysFinancial Analysis