Surveys of Accounting Chapter 9 Problem 4 The comparative financial statements o
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Surveys of Accounting Chapter 9 Problem 4
The comparative financial statements of Tec Solutions Inc. are as follows. The market price of Tec Solutions Inc. common stock was $89.75 on December 31, 20Y8.
Tec Solutions Inc. Comparative Income Statement For the Years Ended December 31, 20Y8 and 20Y7
20Y8
Sales $1,940,000
Sales returns and allowances 15,000
Net sales $1,925,000
Cost of goods sold 780,000
Gross profit $1,145,000
Selling expenses $ 385,000
Administrative expenses 215,000
Total operating expenses $ 600,000
Income from operations $ 545,000
Other income 25,000
$ 570,000
Other expense (interest) 115,000
Income before income tax $ 455,000
Income tax expense 91,000
Net income $ 364,000
20Y7
Sales $1,450,000
Sales returns and allowances 10,000
Net sales $1,440,000
Cost of goods sold 575,000
Gross profit $ 865,000
Selling expenses $ 365,000
Administrative expenses 200,000
Total operating expenses $ 565,000
Income from operations $ 300,000
Other income 43,000
$ 343,000
Other expense (interest) 75,000
Income before income tax $ 268,000
Income tax expense 40,000
Net income $ 228,000
Tec Solutions Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 20Y8 and 20Y7
20Y8
Retained earnings, January 1 $381,000
Add net income for year 364,000
Total $745,000
Deduct dividends:
On preferred stock $ 5,000
On common stock 40,000
Total $ 45,000
Retained earnings, December 31 $700,000
20Y7
Retained earnings, January 1 $168,000
Add net income for year 228,000
Total $396,000
Deduct dividends:
On preferred stock 5,000
On common stock 10,000
Total 15,000
Retained earnings, December 31 $381,000
TEc Solutions Inc. Comparative Balance Sheet December 31, 20Y8 and 20Y7
20Y8
Assets
Current assets:
Cash $ 175,000
Temporary investments 250,000
Accounts receivable (net) 190,000
Inventories 300,000
Prepaid expenses 50,000
Total current assets $ 965,000
Long-term investments 400,000
Property, plant, and equipment (net) 1,135,000
Total assets $2,500,000
Liabilities
Current liabilities $ 200,000
Long-term liabilities:
Mortgage note payable, 8%, due in 15 years $ 500,000
Bonds payable, 10%, due in 20 years 750,000
Total long-term liabilities $1,250,000
Total liabilities $1,450,000
Stockholders’ Equity
Preferred $5 stock, $100 par 100,000
Common stock, $5 par 250,000
Retained earnings 700,000
Total stockholders’ equity $1,050,000
Total liabilities and stockholders’ equity $2,500,000
20Y7
Assets
Current assets:
Cash $ 200,000
Temporary investments 292,000
Accounts receivable (net) 160,000
Inventories 260,000
Prepaid expenses 13,000
Total current assets $ 925,000
Long-term investments 100,000
Property, plant, and equipment (net) 875,000
Total assets $1,900,000
Liabilities
Current liabilities $ 419,000
Long-term liabilities:
Mortgage note payable, 8%, due in 15 years $ 0
Bonds payable, 10%, due in 20 years 750,000
Total long-term liabilities $750,000
Total liabilities $1,169,000
Stockholders’ Equity
Preferred $5 stock, $100 par 100,000
Common stock, $5 par 250,000
Retained earnings 381,000
Total stockholders’ equity $731,000
Total liabilities and stockholders’ equity $1,900,000
Instructions Determine the following measures for 20Y8, rounding to one decimal place:
1. Working capital
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days’ sales in receivables
6. Inventory turnover
7. Number of days’ sales in inventory 8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders’ equity
10. Number of times interest charges earned
11. Number of times preferred dividends earned
12. Ratio of net sales to assets
13. Rate earned on total assets
14. Rate earned on stockholders’ equity
15. Rate earned on common stockholders’ equity
16. Earnings per share on common stock
17. Price-earnings ratio
18. Dividends per share of common stock
19. Dividend yield
Explanation / Answer
1. Working capital = current assets - current liabilities 965000-200000 = 765000 2. Curent ratio = current assets/current liabilities 965000/200000 4.825 3. quick ratio =( cash at bank +cash in hand+Receivables+marketable securities) / Current liabilities 175000+250000+190000/200000 425001 4 Accounts receivable ratio = credit sales / Average accounts receivable Assuming all sales are credit sales 1925000/270000 = 7.12963 Average accounts receivable = opening receivable +closing receivable/2 190000+160000/2 270000 5. Number of days’ sales in receivables = 365/ Accounts receivable ratio 365/7.12963 51 days 6. Inventory turn over = Cost of goods sold/Average inventory 780000/(300000+260000)/2 1.813953488 7. Number of days’ sales in inventory = 365days/Inventory Turnover 365/1.813953 201.2180029 days 8. Ratio of fixed assets to long-term liabilities= 1135000/1250000 0.908 9. Ratio of liabilities to stockholders’ equity =1450000/1050000 1.380952 10. Number of times interest charges earned = Operating income /Annual interest charges 545000/115000 4.73913 11. Number of times preferred dividends earned = Net profit after tax / Preference dividend 364000/5000 72.8 12. Ratio of net sales to assets = 1925000/2500000 0.77 13. Rate earned on total assets = Income before interest expense and income tax/ Total assets (545000+25000)/2500000 0.228 14. Rate earned on stockholders’ equity = Net profit - Preference dividend / Stock holders equity 364000/1050000 0.346666667 15. Rate earned on common stockholders’ equity = Net profit after preference dividend before common stock dividend/ Common stock equity 364000-5000 / 250000 1.436 16. Earnings per share on common stock = earnings per share/ Common stock 1.436/250000 0.000005744 17. Price-earnings ratio = Market price per share/ earnings per share-=5/1.436= 3.481894 Market price per share = 250000/50000 shares 18. Dividend on stock= 40000/250000 5 0.16 19. Dividend yield = Dividend per share / market price per share 0.16/5 0.032
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