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Chapter 24: Question 26Q (page 1446)
What is the relationship of the asset turnover to the return on assets?
An increase in asset turnover while maintaining a stable profit margin leads to an increase in relation to returning on resources and vice versa.
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Where can authoritative IFRS be found related to the various disclosure issues discussed in the chapter?
(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two \(35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of \)6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a \(300,000 plant expansion over the next 2 fiscal years through internally generated funds. The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years
BRADBURN CORPORATION BALANCE SHEET MARCH 31 | ||
Assets | 2018 | 2017 |
Cash | \) 18,200 | \( 12,500 |
Notes receivable | 148,000 | 132,000 |
Accounts receivable (net) | 131,800 | 125,500 |
Inventories (at cost) | 105,000 | 50,000 |
Plant & Equipment (net of depreciation) | 1,449,000 | 1,420,500 |
Total assets | \)1,852,000 | \(1,740,500 |
Liabilities and Stockholders’ Equity | ||
Accounts payable | \) 79,000 | \( 91,000 |
Notes payable | 76,000 | 61,500 |
Accrued liabilities | 9,000 | 6,000 |
Common stock (130,000 shares, \)10 par) | 1,300,000 | 1,300,000 |
Retained earnings* | 388,000 | 282,000 |
Total liabilities and stockholders’ equity | \(1,852,000 | \)1,740,500 |
*Cash dividends were paid at the rate of \(1 per share in the fiscal year 2017 and \)2 per share in the fiscal year 2018.
BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31 | ||
2018 | 2017 | |
Sales revenue | \(3,000,000 | \)2,700,000 |
Cost of goods sold* | 1,530,000 | 1,425,000 |
Gross margin | 1,470,000 | 1,275,000 |
Operating expenses | 860,000 | 780,000 |
Income before income taxes | 610,000 | 495,000 |
Income taxes (40%) | 244,000 | 198,000 |
Net income | \( 366,000 | \) 297,000 |
Depreciation charges on the plant and equipment of \(100,000 and \)102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.
Instructions
A. Compute the following items for Bradburn Corporation.
4) Return on assets for fiscal years 2017 and 2018. (Assume total assets
were $1,688,500 at 3/31/16.)
Answer each of the questions in the following unrelated situations.
a) The current ratio of a company is 5:1 and its acid-test ratio is 1:1. If the inventories and prepaid items amount to $500,000, what is the amount of current liabilities?
Cineplex Corporation is a diversified company that operates in five different industries: A, B, C, D, and E. The following information relating to each segment is available for 2018.
A | B | C | D | E | |
Sales revenue | \(40,000 | \)75,000 | \(580,000 | \)35,000 | \(55,000 |
Cost of goods sold | 19,000 | 50,000 | 270,000 | 19,000 | 30,000 |
Operating expenses | 10,000 | 40,000 | 235,000 | 12,000 | 18,000 |
Total expenses | 29,000 | 90,000 | 505,000 | 31,000 | 48,000 |
Operating profit (loss) | \)11,000 | \((15,000) | \)75,000 | \(4,000 | \)7,000 |
Identifiable assets | \(35,000 | \)80,000 | \(500,000 | \)65,000 | \(50,000 |
Sales of segments B and C included intersegment sales of \)20,000 and $100,000, respectively.
Instructions
(b) Prepare the necessary disclosures required by GAAP.
Keystone Corporation’s financial statements for the year ended December 31, 2017, were authorized for issue on March 10, 2018. The following events took place early in 2018.
Instructions
Discuss how the preceding subsequent events should be reflected in the 2017 financial statements.
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