to 2017? Suppose the company had pald dividends on preferred stock and on commo
ID: 2335649 • Letter: T
Question
to 2017? Suppose the company had pald dividends on preferred stock and on commo during the yeat How would this affect your calculation in part C (c) 82-8 These financial statement items are fo Pairview Carporation at yearend, Toly 31,2017 Salaries and wages payable Salaries and wages expernse Supplies experse $ 2,080 57.500 15,600 28,500 4,100 66,100 8,500 1.800 16,000 Service revee Rent reverue Notes payable idoc in 3020) Cotoion sock 29.200 9,780 4.000 4,000 Instructions (a) Prepare an lncome siatemens and a reolted eomings aaiemens for ibe ywor. Eesoview Corporation did not issue any sew strck thane the yeaz (b) Prepare a dassified balance heet at July 31. (c) Compute the curtent rasio andà debt ti assete ratio, (d) Suppose that youd are the peesidebt of Lunar Esaiipened. You sales manager has sp to provide a loan to Fairview in the forrm of 2 30%S-ya ote pepable. Evalsate how this loan would change Falisviews ourent ratio and itebt to sosets ratin and discoss whether you would make the sale. Nordstrom, Inc operates depanment stores ie pumemous sanes. Seleched financial statement data (in máions of dollars) for a recers war toliow.Explanation / Answer
Part A
FAIRVIEW CORPORATION
Income Statement
For the Year Ended July 31, 2017
Revenues
Service revenue.............................$66,100
Rent revenue ...................................8,500
Total revenues ............................................. ...........$74,600
Expenses
Salaries and wages expense ........57,500
Supplies expense ...........................15,600
Depreciation expense .....................4,000
Total expenses.........................................................77,100
Net loss ...................................................................$(2,500)
FAIRVIEW CORPORATION
Retained Earnings Statement
For the Year Ended July 31, 2017
Retained earnings, August 1, 2016 ......................$34,000
Less:
Net loss ...........................................$2,500
Dividends .........................................4,000.......... .....6,500
Retained earnings, July 31, 2017 ................... .........$27,500
Part B
FAIRVIEW CORPORATION
Balance Sheet July 31, 2017
Assets
Current assets
Cash .......................................$29,200
Accounts receivable. ..............9,780
Total current assets ............................... ...... .......$38,980
Property, plant, and equipment Equipment .....................................................18,500
Less: Accumulated depreciation—equipment ..................................... ..............6,000..................... 12,500
Total assets ..............................................................$51,480
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ....................$ 4,100
Salaries and wages payable.......2,080
Total current liabilities ................................ ........$ 6,180
Long-term liabilities
Notes payable ............................................... .........1,800
Total liabilities ............................................... .........7,980
Stockholders’ equity
Common stock .......................16,000
Retained earnings ..................27,500
Total stockholders’ equity........... ...................... ......43,500
Total liabilities and stockholders’equity ......... ........$51,480
Part C
Current ratio =current assets / current liabilities = 38980/6180 = 6.31 : 1 = 6.3 : 1
Debt to assets ratio =total liabilities / total = 7980/51480=15.50% =15.5%
Part D
The current ratio would not change because equipment is not a current asset and a 5-year note payable is a long-term liability rather than a current liability. The debt to assets ratio would increase from 15.5% to 39.1% ($7,980 + $20,000) ÷ ($51,480 + $20,000)
Considering, the debt to assets ratio, I would recommend the sale because Fairview’s debt to assets ratio of 15.5% is very low. Considering additional financial data, it is clear that Fairview reported a significant loss for the current year which raise the question regarding its ability to make interest and loan payments in the future. I would not make the proposed sale unless Fairview convinced me that it would be capable of earnings in the future rather than losses.
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