ACCTG 101 Lecture Notes - Lecture 19: Income Statement

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harlequinmink794

18 Dec 2020

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Measurement policy, total inventory and inventory by classification, amount of inventory recognized as expense of the income statement (reported as cogs), any amount of inventory pledged as security for liabilities. The number of times on average that the inventory was sold during the period. Average days to sell inventory = 365/inventory turnover ration. The number of days it takes on average to sell inventory. Retail inventory method of estimating inventory cost. The retail inventory method requires the following info is available: The total cost and retail value of the goods purchased. The total cost and retail value of the goods available for sale. The sales for the period are deducted from the retail value of the goods available for sale. The result is an estimate of the ending inventory at retail (selling prices) (retail value of goods available for sale - sales for the period =

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Problem 13-18A Common-Size Statements and Financial Ratios for a Loan Application [LO13-1, LO13-2, LO13-3, LO13-4]

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $540,000 long-term loan from Gulfport State Bank, $120,000 of which will be used to bolster the Cash account and $420,000 of which will be used to modernize equipment. The companyâs financial statements for the two most recent years follow:

Sabin Electronics
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	86,000	$	190,000
Marketable securities		0		22,000
Accounts receivable, net		529,000		340,000
Inventory		960,000		635,000
Prepaid expenses		22,000		26,000

Total current assets		1,597,000		1,213,000
Plant and equipment, net		1,631,600		1,410,000

Total assets	$	3,228,600	$	2,623,000

Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	820,000	$	470,000
Bonds payable, 12%		800,000		800,000

Total liabilities		1,620,000		1,270,000

Stockholders' equity:
Common stock, $15 par		810,000		810,000
Retained earnings		798,600		543,000

Total stockholdersâ equity		1,608,600		1,353,000

Total liabilities and equity	$	3,228,600	$	2,623,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,200,000	$	4,470,000
Cost of goods sold		3,915,000		3,490,000

Gross margin		1,285,000		980,000
Selling and administrative expenses		661,000		556,000

Net operating income		624,000		424,000
Interest expense		96,000		96,000

Net income before taxes		528,000		328,000
Income taxes (30%)		158,400		98,400

Net income		369,600		229,600
Common dividends		114,000		93,000

Net income retained		255,600		136,600
Beginning retained earnings		543,000		406,400

Ending retained earnings	$	798,600	$	543,000

During the past year, the company introduced several new product lines and raised the selling prices on a number of old product lines in order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 2/10, n/30. All sales are on account.

Required:

1.	To assist in approaching the bank about the loan, Paul has asked you to compute the following ratios for both this year and last year:

a.	The amount of working capital.

	This Year	Last Year
Working Capital

b.	The current ratio. (Round your answers to 2 decimal places.)

	This Year	Last Year
Current Ratio

c.	The acid-test ratio. (Round your answers to 2 decimal places.)

	This Year	Last Year
Acid-test ratio

d.	The average collection period. (The accounts receivable at the beginning of last year totaled $290,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

	This Year	Last Year
Average Collection Period	days	days

e.	The average sale period. (The inventory at the beginning of last year totaled $540,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

	This Year	Last Year
Average Sale Period	Days	Days

f.	The operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

	This Year	Last Year
Operating Cycle	Days	Days

g.	The total asset turnover. (The total assets at the beginning of last year were $2,540,000.) (Round your answers to 2 decimal places.)

	This Year	Last Year
Total Asset Turnover

h.	The debt-to-equity ratio. (Round your answers to 3 decimal places.)

	This Year	LastYear
Debt-to-equity ratio

i.	The times interest earned ratio. (Round your answers to 1 decimal place.)

	This Year	Last Year
Times interest earned ratio

j.	The equity multiplier. (The total stockholdersâ equity at the beginning of last year totaled $1,343,000.) (Round your answers to 2 decimal places.)

	This Year	Last Year
Equity multiplier

2.	For both this year and last year:

a.	Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Sabin Electronics

Common-Size Balance Sheets

	This Year		Last Year
Assets
Current Assets:
Cash		%		%
Marketable securities
Account receivable, net
Inventory
Prepaid expenses
Total current assets
Plant and equipment, net
Total assets		%		%
Liabilities and Stockholders' Equity
Liabilities:
Current Liabilities		%		%
Bonds payable, 12%
Total Liabilities
Stockholders' equity:
Common stock, $15 par
Retained earnings
Total stockholders' equity
Total liabilities and equity		%		%

Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Sabin Electronics

Common-Size Income Statements

	This Year		Last Year
Sales		%		%
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
Interest expense
Net income before taxes
Income taxes
Net Income		%		%

olivehyena656

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $580,000 long-term loan from Gulfport State Bank, $140,000 of which will be used to bolster the Cash account and $440,000 of which will be used to modernize equipment. The companyâs financial statements for the two most recent years follow:

Sabin Electronics
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	100,000	$	230,000
Marketable securities		0		26,000
Accounts receivable, net		581,000		380,000
Inventory		1,025,000		675,000
Prepaid expenses		26,000		30,000

Total current assets		1,732,000		1,341,000
Plant and equipment, net		1,759,600		1,450,000

Total assets	$	3,491,600	$	2,791,000

Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	840,000	$	510,000
Bonds payable, 12%		650,000		650,000

Total liabilities		1,490,000		1,160,000

Stockholders' equity:
Common stock, $15 par		930,000		930,000
Retained earnings		1,071,600		701,000

Total stockholdersâ equity		2,001,600		1,631,000

Total liabilities and equity	$	3,491,600	$	2,791,000

Sabin Electronics
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,400,000	$	4,590,000
Cost of goods sold		3,955,000		3,530,000

Gross margin		1,445,000		1,060,000
Selling and administrative expenses		669,000		564,000

Net operating income		776,000		496,000
Interest expense		78,000		78,000

Net income before taxes		698,000		418,000
Income taxes (30%)		209,400		125,400

Net income		488,600		292,600
Common dividends		118,000		97,000

Net income retained		370,600		195,600
Beginning retained earnings		701,000		505,400

Ending retained earnings	$	1,071,600	$	701,000

Required:

1.	To assist in approaching the bank about the loan, Paul has asked you to compute the following ratios for both this year and last year:

a.	The amount of working capital.

b.	The current ratio. (Round your answers to 2 decimal places.)

c.	The acid-test ratio. (Round your answers to 2 decimal places.)

d.	The average collection period. (The accounts receivable at the beginning of last year totaled $330,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

e.	The average sale period. (The inventory at the beginning of last year totaled $580,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

f.	The operating cycle. (Round your intermediate calculations and final answer to 1 decimal place.)

g.	The total asset turnover. (The total assets at the beginning of last year were $2,660,000.) (Round your answers to 2 decimal places.)

h.	The debt-to-equity ratio. (Round your answers to 3 decimal places.)

i.	The times interest earned ratio. (Round your answers to 1 decimal place.)

j.	The equity multiplier. (The total stockholdersâ equity at the beginning of last year totaled $1,621,000.) (Round your answers to 2 decimal places.)

2.	For both this year and last year:

a.	Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

b.	Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

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ACCTG 101 Lecture Notes - Lecture 19: Income Statement

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