HTF 100 Study Guide - Income Tax
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E13-5 Matching Each Ratio with Its Computational Formula LO 13-4, 13-5, 13-6, 13-7 | |||||||
Match each definition with its related ratios or percentages by selecting the appropriate letter in the drop down provided. | |||||||
Definitions: | Ratios or Percentages | Definitions | |||||
A. | Net Income (before extraordinary items) ÷ Net Sales | 1 | Profit margin | ||||
B. | Days in Year ÷ Receivable Turnover ratio | 2 | Inventory turnover ratio | ||||
C. | Net Income ÷ Average Stockholdersâ Equity | 3 | Average collection period | ||||
D. | Net Income ÷ Average Number of Shares of Common Stock Outstanding | 4 | Dividend yield ratio | ||||
E. | Return on Equity â Return on Assets | 5 | Return on equity | ||||
F. | Quick Assets ÷ Current Liabilities | 6 | Current ratio | ||||
G. | Current Assets ÷ Current Liabilities | 7 | Debt-to-equity ratio | ||||
H. | Cost of Goods Sold ÷ Average Inventory | 8 | Price/earnings ratio | ||||
I. | Net Credit Sales ÷ Average Net Receivables | 9 | Financial leverage percentage | E | |||
J. | Days in Year ÷ Inventory Turnover Ratio | 10 | Receivable turnover ratio | ||||
K. | Total Liabilities ÷ Stockholdersâ Equity | 11 | Average daysâ supply of inventory | ||||
L. | Dividends per Share ÷ Market Price per Share | 12 | Earnings per share | ||||
M. | Market Price per Share ÷ Earnings per Share | 13 | Return on assets | ||||
N. | [Net Income + Interest Expense (net of tax)] ÷ Average Total Assets | 14 | Quick ratio | ||||
O. | Cash from Operating Activities (before interest and taxes) ÷ Interest Paid | 15 | Times interest earned | ||||
P. | Net Sales Revenue ÷ Net Fixed Assets | 16 | Cash coverage ratio | ||||
Q. | (Net Income + Interest Expense + Income Tax Expense) ÷ Interest Expense | 17 | Fixed asset turnover ratio | ||||
BOR CPAs, Inc. is a closely held corporation owned by threestockholders who used the initials of their last names to form thecorporationâs name: Cyrus Bailey, John Ogden, and Samuel Rogers.The firmâs Certified Public Accountants (CPAs) perform audits ofboth public companies and privately owned companies. BORâs CPAsalso provide tax services to both individuals and businesses.
The corporation is divided into two profit centers: the AuditDivision and the Tax Division. Each division is composed of twocost centers. The Audit Division is composed of two cost-centerdepartments: Public Company Audits and Private Company Audits. TheTax Division is composed of two cost-center departments also:Individual Tax and Business Tax.
BOR, a decentralized organization, is interested in evaluatingthe performance of the two divisions. The stockholders areresponsible for deciding on investment in the two divisions. CyrusBailey is in charge of the performance evaluation, and turns to youfor assistance. Mr. Bailey is only interested in evaluatingoperations at the profit center (division) level, and not at thecost center (department) level.
Mr. Bailey is considering temporarily using some of the stafffrom the Tax Division to assist the Audit Division during theupcoming busy audit season, and would like to evaluate the effectof this on net income. The Tax Division is estimated to have 800hours of excess capacity.
The unit for determining sales revenue in both divisions is the"engagement", which means the total agreed-upon work for a givenclient in either audit or tax for a given year. The company chargeson average a fee of $75,000 per audit engagement, and $15,750 pertax engagement.
The company has its own Payroll Office, which provides payrollservices to both divisions and will allocate its total expenses tothe two divisions as service department charges.
The following chart shows some basic data for the company:
Hourly market rate for staff (theprice the company would have to pay from an outside contractor forstaff services) | $110.00 |
Average hourly cost rate for staff(the average price the company pays to its staff) | $50.00 |
Number of paychecks issued by AuditDivision | 110 |
Number of paychecks issued by TaxDivision | 340 |
Total expense for PayrollOffice | $29,250 |
Amount of assets invested in AuditDivision by BOR CPAs, Inc. | $10,000,000 |
Amount of assets invested in TaxDivision by BOR CPAs, Inc. | $4,000,000 |
Mr. Bailey asks that you prepare Divisional Income Statementsshowing what 20Y1 results would have been had the Audit Divisionpurchased all the excess capacity of the Tax Division, using anegotiated transfer price. The divisional managers tell you that,with the excess capacity of the Tax Division of 800 hours, theAudit Division can perform 4 more audits during the year, and theAudit Division would agree to a negotiated rate of $80.00 per hourto be paid to the Tax Division for the additional hours required,with the Tax Division selling all its excess capacity to the AuditDivision. The Tax Division would still be responsible for payingthe salaries of their employees.
Complete the following Income Statements. Enter all amounts aspositive numbers. If there is no amount or an amount is zero, enterâ0â.
BOR CPAs, Inc. |
Income Statements |
For the Year Ended December 31, 20Y1 |
1 | Audit Division | Tax Division | Total Company | |
2 | Fees earned: | |||
3 | Audit fees (16 engagements) | $1,200,000.00 | $1,200,000.00 | |
4 | Tax fees (45 engagements) | $708,750.00 | 708,750.00 | |
5 | Transfer-pricing fees | |||
6 | Expenses: | |||
7 | Variable: | |||
8 | Audit hours provided by Audit Division | 180,000.00 | 180,000.00 | |
9 | Tax hours provided by Tax Division | 236,250.00 | 236,250.00 | |
10 | Excess capacity hours paid to salaried staff | |||
11 | Audit hours provided by Tax Division | |||
12 | Fixed expenses | 50,000.00 | 65,500.00 | 115,500.00 |
13 | Income from operations before service department charges | |||
14 | Service department charges for payroll | |||
15 | Income from operations |
You are now able to put together all the information youâvecollected and analyze the data. In the following table, âROIâstands for âReturn on Investment.â
Complete the following tables using the information from theother panels and selection lists provided.
Audit Division | |||||
---|---|---|---|---|---|
Profit Margin | x | Investment Turnover | = | ROI | |
No Transfer | x | = | |||
Market Price | x | = | |||
Negotiated Price | x | = | |||
Cost Price | x | = |
Tax Division | |||||
---|---|---|---|---|---|
Profit Margin | x | Investment Turnover | = | ROI | |
No Transfer | x | = | |||
Market Price | x | = | |||
Negotiated Price | x | = | |||
Cost Price | x | = |
BOR CPAs, Inc. | |||||
---|---|---|---|---|---|
Profit Margin | x | Investment Turnover | = | ROI | |
No Transfer | x | = | |||
Market Price | x | = | |||
Negotiated Price | x | = | |||
Cost Price | x | = |
Star Industries Inc comparative financial statements for the years ending December 31, 2010 and 2009, are as follows. The market price for Star Industries common stock was $ 20 on December 31, 2009, and $ 32 on December 31, 2010. Common stock shares outstanding for both 2010 and 2009 are 70000 shares (Ie $ 700,000 / $ 10 par)
Star Industries
Comparative Income Statement
For the Years Ended December 31, 2010 and 2009
2010 | 2009 | ||
Sales | $7,000,000 | $5,670,000 | |
Sales returns and allowances | $325,000 | $175,000 | |
Net Sales | $6,675,000 | $5,495,000 | |
Cost of Goods Sold | $4,850,000 | $3,950,000 | |
Gross Profit | $1,825,000 | $1,545,000 | |
Selling Expenses | $780,000 | $464,000 | |
Administrative Expenses | $485,000 | $423,000 | |
Total Operating Expenses | $1,465,000 | $887,000 | |
Income From Operations | $360,000 | $658,000 | |
Other Income | $25,000 | $19,200 | |
Earnings before Interest & taxes (EBIT) | $385,000 | $677,200 | |
Other Expenses (interest) | $105,000 | $64,000 | |
Income Before Income Tax | $280,000 | $613,200 | |
Income Tax Expense | $35,000 | $176,000 | |
Net Income | $245,000 | $437,200 |
`
Star Industries
Comparative Retained Earnings Statement
For the Years Ended December 31, 2010 and 2009
2010 | 2009 | ||
Retained Earnings, Januray 1 | $ 723,000 | $ 355,800 | |
Add Net Income for year | $245,000 | $437,200 | |
Total | $ 968,000 | $ 793,000 | |
Deduct dividends: | |||
Preferred Stock | $ 40,000 | $ 40,000 | |
Common Stock | $ 45,000 | $ 30,000 | |
Total | $ 85,000 | $ 70,000 | |
Retained Earnings, December 31 | $883,000 | $ 723,000 |
Star Industries
Comparative Balance Statement
December 31, 2010 and 2009
12-31-2010 | 12-31-2009 | ||||
Assets | |||||
Current Assets | |||||
Cash | $235,000 | $215,000 | |||
Temporary Investments | $10,000 | $50,000 | |||
Accounts Receivable (Net) | $525,000 | $425,000 | |||
Inventories | $940,000 | $580,000 | |||
Prepaid Expenses | $30,000 | $20,000 | |||
Total Current Assets | $1,740,000 | $1,290,000 | |||
Long-Term Investments | $165,000 | $135,000 | |||
Property, Plant and Equipment (Net) | $2,525,000 | $1,878,000 | |||
Total Assets | $4,430,000 | $3,303,000 | |||
Liabilities | |||||
Current Liabilities | $950,000 | $780,000 | |||
Long-Term Liabilities | |||||
Mortgage Note Payable 8% (due 2013) | $410,000 | $0 | |||
Bonds Payable, 7% (due 2016) | $1,200,000 | $800,000 | |||
Total Long Term Liabilities | $1,610,000 | $800,000 | |||
Total Liabilities | $2,560,000 | $1,580,000 | |||
Stockholders' Equity | |||||
Preferred 8% stock, $ 100 Par | $300,000 | $300,000 | |||
Common Stock, $ 10 Par | $700,000 | $700,000 | |||
Retained Earnings | $883,000 | $723,000 | |||
Total Stockholders' Equity | $1,883,000 | $1,723,000 | |||
Total Liabilities and Stockholders' Equity | $4,443,000 | $3,303,000 |
Determine the following measures for 2010: Compare with industry norms and comment:
Ratios | Industry Norm | ||||
1. Working Capital | N/A | ||||
2. Current Ratio | 2.2 | ||||
3. Quick Ratio | 0.8 | ||||
4. Accounts Receivable Turnover | 16.0 | ||||
5. Number of days sales in receivables | 22.2 | ||||
6. Inventory Turnover | 5.0 | ||||
7. Number of days sales in inventory | 75.0 | ||||
8. Ratio of fixed assets to long-term liabilites | 2.0 | ||||
9. Ratio of liabilities to stockkholders equity | 0.7 | ||||
10. Number of times interest charges are earned | 8.5 | ||||
11. Number of times preferred dividends earned | 7.1 | ||||
12. Ratio of net sales to assets | 2.1 | ||||
13. Rate earned on total assets | 8.5% | ||||
14. Rate earned on stockholders' equity | 12.0% | ||||
15. Rate earned on common stockholders' equity | 14.2% | ||||
16. Earnings per share on common stock | $3.65 | ||||
17. Price-earnings ratio | 9.2 | ||||
18. Dividends per share | $0.80 | ||||
19. Dividend yield | 2.50% |
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