Martha\'s Corporation’s data regarding the store\'s operations follow: • Sales a

Question

Martha's Corporation’s data regarding the store's operations follow:

• Sales are budgeted at $360,000 for November, $380,000 for December, and $350,000 for
January.
• Collections are expected to be 75% in the month of sale, 20% in the month following the sale,
and 5% uncollectible.
• The cost of goods sold is 65% of sales.
• The company desires an ending merchandise inventory equal to 60% of the cost of goods sold in the following month.
• Payment for merchandise is made in the month following the purchase.
• Other monthly expenses to be paid in cash are $21,900.
• Monthly depreciation is $20,000.
• Ignore taxes.

1. Prepare a budgeted balance sheet for the end of December. show calculations

2. Show the formula of each of the following, state what the dollar amount or ratio means, and
calculate the dollar amount or ratio (as appropriate) for Martha's Corporation as of December 31:

a) Working Capital
b) Accounts Receivable Turnover
c) Inventory Turnover
d) Net Margin
e) Total Asset Turnover
f) Current Ratio
g) Debt to Equity Ratio

Balance Sheet October 31 Assets Accounts receivable (net of allowance for uncollectible accounts)... Property, plant and equipment (net of $500,000 accumulated depreciation)....1066,000 Liabilities and Stockholders Equity $ 16,000 74,000 140,400 240,000 640,000 416.400 Accounts payable. Retained eamings Total liabilities and stockholders' equity

Explanation / Answer

Workings:

2)

a. Working Capital = Current assets - Current liabilities.This shows how efficiently the company is run and also depicts the short term financial health of the company.

Cash + A/R + Inventory - A/P = 168,600

B. Accounts receivable turnover = Net Annual credit sales / Average Accounts receivable. This ratio tells us the number of times a company collects its average a/r

Sales for Nov and dec = 360,000+380,000 = 740,000

Average A/R = (Beginning A/R+ Ending A/R )/2 = (74,000+76,000) / 2 = 75,000

A/R turnover ratio = 740,000/ 75,000 = 9.87/ On an average the company collects its average A/R 10 times during an year

c. Inventory turnover = COGS for the period / Average Inventory. This ratio tells us how effectively inventory is being managed by a company. This measures how many times the average inventory is sold during the period

COGS for the period = 234000+247000 = 481,000

Average inventory = (140,400+136,500)/2 = 138,450

Ratio = 481,000/ 138,450 = 3.474

d. Net Margin is nothing but (net profit / sales )*100 - For december it is 72,100/380,000 = 18.97%.

This is the % of revenue left for common stock holders after all expenses have been incurred

e. Total Asset turnover:

Total sales / Average Assets .This helps us understand the company's ability to generate sales from its assets

Sales for Nov and Dec = 360,000+380,000 = 740,000

Average Assets = (1,296,400+1,429,900) /2 = 1,363,150

Ratio = 0.543

f. Current ratio = current assets / current liabilities. This helps us to see the short term financial health of a company. It is a liquidity ratio whihc gauges a company's ability to pay off current liabilities

Ratio = 403,900 / 235,300 = 1.72

g. Debt to Equity - is a leverage ratio used to assess to which degree the assets are owned by the business

Debt = All liabilities = 235,300

Equity = Common stock + RE = 1,194,600

Ratio = 19.70% or 0.197

Balance sheet as of Dec 31 Assets Cash $     191,400.00 Accounts Receivable $       76,000.00 Merchandise Inventory $     136,500.00 PPE (Net of accumulated depreciation) $ 1,026,000.00 Total Assets $ 1,429,900.00 Liabilities and Stockholders' equity Accounts Payable $     235,300.00 Common Stock $     640,000.00 RE $     554,600.00 Total Liabilities and Stockholders' equity $ 1,429,900.00

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