Problem: Buster Container Company is suffering declining sales of its principal
ID: 2369462 • Letter: P
Question
Problem: Buster Container Company is suffering declining sales of its principal product, nonbiodegradeable plastic cartons. The president, Dennis Harwood instructs his controller, Shelly McGlone, to lengthen asset lives to reduce depreciation expense. A processing line of automated plastic extruding equipment, purchased for 3.1 million in January 2012, was originally estimated to have a useful life of 8 years and a salvage value of 300,000. Depreciation has been recorded for 2 years on that basis. Dennis wants the estimated life changed to 12 years total, and the straight-line method continued. Shelly is hesitant to make the change, believing it is unethical to increase net income in this manner. Dennis says, Hey, the life is only an estimate, and i've heard that our competition uses a 12 year life on thier production equipment.
What is the effect of Dennis Harwood's proposed change on income before taxes in the year of change??
Explanation / Answer
Sales Revenue
COGS
Gross Margin
Expenses
Wages and Salaries Expense
Rent Expense
Insurance Expense
Utility Expense
Miscellaneous Operating Expense
Depreciation Expense
Income Before Interest and Tax
Interest Expense
Taxable Income
Taxes (0.35)
Net Income
Dividends (0.1)
Income after Dividends
Net Income
+Dep
- A/R increase
+ Inventory decrease
- A/P decrease
Total Cash Flow from Operations
- Investment in PPE
Total cash from investing
activities
- Dividends
+ Increase in Notes Payable
Total cash from financing
activities
Change in Cash Flow
ROS
ROA
ROE
Receivables
Turnover
Inventory Turnover
Asset Turnover
Debt
Times Interest Earned
Current
Quick
P/E
Mkt to Book
INCOME STATEMENT
431,000
250,000
181,000
76,000
43,000
23,000
6,000
4,000
6,250
158,250
181,000
22,750
2,500
20,250
7,087.50
13,162.50
1,316.25
11,846.25
CASH FLOW STATEMENT
35000
57000
69500
81000
14000
47000
13162.5
6,250
(46,000)
43,000
(22,500)
?6087.5
?21000
?21000
?1316.25
+12000
+10683.75
?16403.75
22750
22750
13162.5
431000
250000
431000
84000
22750
105896.25
91,896.25
4.625
4.625
RATIOS:
431000
156473.13
67223.13
58000
35500
156473.13
157146.25
2500
47000
47000
0.6581
3.6573
0.0528
0.1454
0.1958
7.4310
7.0423
2.7545
0.5345
9.1000
2.2531
1.9552
7.0278
1.2646
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