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Chapter 15: Q11SE (page 838)

Old Mills’s income statement appears as follows (amounts in thousands):

Use the following ratio data to complete Old Mills’s income statement:


1. Inventory turnover is 3.70 (beginning Merchandise Inventory was \(810; ending

Merchandise Inventory was \)770).

2. Profit margin ratio is 14%.

Short Answer

Expert verified

Answer

Complete income statement given below.

Step by step solution

01

Preparation of Income Statement

Income Statement- Old Mills Company
For year ended 31 Dec, 2018
Particulars
Amount
Net sales Revenue
$6,900.00
Cost of Goods Sold
2,923.00
Gross Profit
3,977.00
Selling and Administrative Expenses
1,710.00
Interest Expense ($3,977-1,710-120-1,150)
997.00
Other Expenses
120.00
Income Before Income Taxes
1,150.00
Income Tax Expense ($1,150-$966)
184.00


Net Income
$966.00


02

Working Notes

Inventory Turnover= 3.70

Cost of goods sold/ Average Inventory= 3.70

Average Inventory =($810+770)/2 = $790

Cost of Goods Sold = 3.70x 790 = $2,923

Net Sales = $6,900

Profit Margin ratio= 14%

Net Income = $6,900x14% = $966.00

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Most popular questions from this chapter

Question:Theater by Design and Show Cinemas are asking you to recommend their stock to your clients. Because Theater by Design and Show Cinemas earn about the same net income and have similar financial positions, your decision depends on their statement of cash flows, summarized as follows:

Theater by Design Show Cinemas

Net Cash Provided by Operating Activities \( 30,000 \) 70,000

Cash Provided by (Used for) Investing Activities:

Purchase of Plant Assets \( (20,000) \) (100,000)

Sale of Plant Assets 40,000 20,000 10,000 (90,000)

Cash Provided by (Used for) Financing Activities:

Issuance of Common Stock 0 30,000

Payment of Long-term Debt (40,000) 0

Net Increase (Decrease) in Cash \( 10,000 \) 10,000

Based on their cash flows, which company looks better? Give your reasons.

Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.

Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s recommendation, Ross’s board of directors votes to reclassify long-term investments as short-term.

Requirements

1. What effect will reclassifying the investments have on the current ratio? Is Ross’s true financial position stronger as a result of reclassifying the investments?

2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross’s management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.

Muscateer Corp. reported the following revenues and net income amounts:

(In millions)2019 2018 2017 2016

Revenue \( 9,610 \) 9,355 \( 9,050 \) 8,950

Net Income 7,290 6,790 5,020 4,300

Requirements

1. Calculate Muscateer’s trend analysis for revenues and net income. Use 2016 as the

base year, and round to the nearest percent.

2. Which measure increased at a higher rate during 2017–2019?

Using ratios to evaluate a stock investment

Comparative financial statement data of Garfield, Inc. follow:

GARFIELD, INC
Comparative Income Statement
Years Ended December 31, 2018 and 2017

2018

2017

Net sales revenue

\(461,000

\)424,000

Cost of goods sold

241,000

211,000

Gross profit

220,000

213,000

Operating expenses

137,000

135,000

Income from operations

83,000

78,000

Interest expenses

9,000

13,000

Income before taxes

74,000

65,000

Income tax expenses

18,000

24,000

Net income

\(56,000

\)41,000

GARFIELD, INC
Comparative Income Statement
Years Ended December 31, 2018 and 2017

2018

2017

2016

Assets

Current assets

Cash

\(99,000

\)98,000

Accounts receivables, Net

108,000

114,000

107,000

Merchandise inventory

146,000

164,000

202,000

Prepaid expenses

20,000

9,000

Total current assets

373,000

385,000

Property, plant, and equipment

211,000

181,000

Total assets

\(584,000

\)566,000

\(602,000

Liabilities

Total current liabilities

\)227,000

\(246,000

Long-term liabilities

117,000

100,000

Total liabilities

344,000

346,000

Stockholder’s equity

Preferred stock, 3%

98,000

98,000

Common stockholder equity, no par

142,000

122,000

89,000

Total liabilities and stockholder’s equity

\)584,000

\(566,000

1. Market price of Garfield’s common stock: \)69.36 at December 31, 2018, and $38.04 at December 31, 2017.

2. Common shares outstanding: 14,000 on December 31, 2018 and 12,000 on December 31, 2017 and 2016.

3. All sales are on credit.

Requirements

1. Compute the following ratios for 2018 and 2017:

a. Current ratio

b. Cash ratio

c. Times-interest-earned ratio

d. Inventory turnover

e. Gross profit percentage

f. Debt to equity ratio

g. Rate of return on common stockholders’ equity

h. Earnings per share of common stock

i. Price/earnings ratio

2. Decide (a) whether Garfield’s ability to pay debts and to sell inventory improved or deteriorated during 2018 and (b) whether the investment attractiveness of its common stock appears to have increased or decreased.

Question: Using ratios to decide between two stock investments

Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to All Digital Corp. and Green Zone, Inc. and have assembled the following data.

Selected income statement data for the current year:

All digital

Green Zone

Net sales revenue (all on credit)

\(417,925

\)493,115

Cost of goods sold

209,000

258,000

Interest expenses

0

14,000

Net income

58,000

72,000

Selected balance sheet and market price data at the end of the current year:

All digital

Green Zone

Current assets:

Cash

\(23,000

\)18,000

Short-term investment

37,000

17,000

Accounts receivables, Net

39,000

49,000

Merchandise inventory

64,000

102,000

Prepaid expenses

21,000

17,000

Total current assets

\(184,000

\)203,000

Total assets

\(263,000

\)326,000

Total current liabilities

105,000

99,000

Total liabilities

105,000

134,000

Common stock:

\(1 par (10,000 shares)

10,000

\)2 par (14,000 shares)

28,000

Total stockholder’s equity

158,000

192,000

Market price per share of common stock

92.80

128.50

Dividend paid per common share

1.20

0.90

Selected balance sheet data at the beginning of the current year:

All digital

Green Zone

Balance sheet:

Accounts receivables, Net

\(41,000

\)54,000

Merchandise inventory

81,000

89,000

Total assets

258,000

277,000

Common stock:

\(1 par (10,000 shares)

10,000

\)2 par (14,000 shares)

28,000

Your strategy is to invest in companies with low price/earnings ratios but in good financial shape. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.

Requirements

1. Compute the following ratios for both companies for the current year:

a. Acid-test ratio

b. Inventory turnover

c. Days’ sales in receivables

d. Debt ratio

e. Earnings per share of common stock

f. Price/earnings ratio

g. Dividend payout

2. Decide which company’s stock better fits your investment strategy
See all solutions

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