Financial Exercises:
1. The information below shows the assets, liabilities and net worth fo a small business. Arrange the items into a balance sheet format.
Retained earnings $78,000
Equipment 50,000
Accrued liabilities 9,000
Prepaid insurance 1,000
Accounts receivable 38,000
Cash 20,000
Land 28,000
Buildings 50,000
Common stock 100,000
Inventories 78,000
Accounts payable 18,000
Notes payable due 2007 45,000
Notes payable due 90 days 15,000
2. a. Calculate the indicated ratios for Mainframe
b. What are Mainframe's strengths and Weaknesses as revealed by this analysis?
Mainframe Balance Sheet as of Dec. 31, 2003
Cash $ 155,000 Accounts payable $ 258,000
Receivables 672,000 Notes payable 168,000
Inventory 483,000 Other current liabilities 234,000
________ __________
Total current assets $1,310,000 Total current liabilities $ 660,000
Net fixed assets 585,000 Long term debt 513,000
_________ Common Equity 722,000
_________
Total Assets $1,895,000 Total Claims $1,895,000
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Mainframe Income Statement for year ended Dec. 31, 2003
Sales $3,215,000
Cost of goods sold:
Material $1,434,000
Labor 906,000
Heat, Light & Power 136,000
Indirect labor 226,000
Depreciation 83,000 2,785,000
__________ __________
Gross Profit 430,000
Selling Expenses 230,000
General & administrative expenses 60,000
__________
Earnings before interest & tax $ 140,000
Interest expense 49,000
__________
Net Income before taxes 91,000
Federal & State taxes 36,400
__________
Net Income $ 54,000
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Answer 2. a
Ratio Mainframe Industry Average
Current ratio 2.0X
Average collection period 35 days
Inventory turnover 6.7X
Asset turnover 2.9X
Profitability 1.2%
ROA 3.4%
ROE 8.3%
Total Debt/ Total Assets 60.0%
Answer 2 b.
3. The Torrence Company is planning to request a line of credit from the bank. But they have to prepare a cash flow statement to find out how much they need. The following is the sales forecast and purchase information:
Month $Sales forecast $ Labor & Raw mtl.estimate
May 2004 150,000 75,000
June 150,000 75,000
July 300,000 105,000
Aug. 450,000 735,000
Sept. 600,000 255,000
Oct. 300,000 195,000
Nov. 300,000 135,000
Dec. 75,000 75,000
Jan. 2005 150,000
Collection estimates were obtained from the credit department as follows: Collected within the month of sale 5%; collected the month following the month of sale 80%; and collected the second month following the month of sale 15%. Payments for labor and raw material are made during the month following the month in which these costs are incurred.
General and administrative salaries are $22,500 a month; lease payments under long term lease contract will be $7,500 a month; depreciation charges will be $30,000 a month; miscellaneous expenses will be $2,250 a month; income tax payments will be $52,500 each due in September and December; a progress payment of $150,000 on a new research laboratory must be paid in October. Cash on hand on July 1 will amount to $110,000 and a minimum balance of $75,000 should be maintained throughout the cash budget period.
a. Prepare a monthly cash budget for the last six months of 2004 (july-Dec).
b. How much money will Torrence need to borrow each month?
4.
a.Find the accounting return on investment for a project that costs $10,000, will have no salvage value, and has expected annual after tax profits of $1000
b.Determine the payback period for a capital investment that costs $40,000 and has the following after tax profit. (The project outlay of $40,000 will be depreciated on a straight line basis to a zero salvage value.)
Year After-tax Profits
1 $4,000
2 5,000
3 6,000
4 6,500
5 6,500
6 6,000
7 5,000