1. Ribbon Industries reported sales of $3 million and net income of $400,000 for

Question

1. Ribbon Industries reported sales of $3 million and net income of $400,000 for 2010. The retained earnings balance at the end of 2012 is $7 million. Ribbon Industries has a dividend payout ratio of 30%. If sales are expected to increase by 25% next year, what will be the projected balance in retained earnings using the percent of sales method?

Select one:

a. $7,280,000

b. $6,720,000

c. $8,750,000

d. $7,350,000

2.

Use the "percent of sales method" of preparing pro forma financial statements to determine the projection for next year's inventory. Make the following assumptions: current year's sales are $27,800,000; current year's cost of goods sold is $17,528,000; sales are expected to rise by 30%. The firm's investment in inventory in the current year is $5,890,200. What is the projection for next year's inventory?

Select one:

a. $4,526,600

b. $5,845,500

c. $7,657,260

d. $6,981,250

3.

MDX Sales Corp. is expecting a 10% increase in sales next year. MDX has an inventory balance of $1,000,000 and uses the percent of sales forecasting method. Which of the following could explain why the inventory forecast of $1,100,000 might be too high?

Select one:

a. A fixed amount of inventory is required to do business, so inventory doesn't increase proportionally with sales.

b. The company is going to change its depreciation method in the coming year.

c. The growth in sales could be as high as 15%.

d. The current inventory balance of $1,000,000 is lower than usual because of a one-time end of year fire sale.

Explanation / Answer

Solution : Net profit margin = net profit / Sales                                    = 400,000/ 3,000,000                                    = 13.33% Dividend to be distributed = net income x Payout ratio                                                      = $400,000 x 30% = $120,000 Projected retained earnings = Current retained earnings + net income – dividend to be distributed = $7,000,000 + $400,000 - $120,000 = $7,280,000

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.