Practice Exercise #8 PDF

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Practice exercise week 8 covers balance sheet review practice problems. Assets liabilities and owners equity....

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Balance Sheet Review PRACTICE Prob. 3-1 Prob. 3-1, parts a) thru f) The assets of Dallas and Associates consist entirely of current assets and net plant and equipment.

f

A) What is the company’s total debt

The common equity= total OE because there is no preferred stock, thus no preferred equity 1.0 million for total liabilities B) What is the amount of total liabilities and equity that appears on the firm’s balance sheet? Is 2,500,000. When the text says total assets= $2.5 million, you need to realize that A=L + OE. Therefore, L + OE = $2.5 million also C) What is the balance of current assets on the firm’s balance sheet?

$500,000 of total assets must be current if $2,000,000 is net plant and equipment (non current assets)

D) What is the balance of current liabilities on the firm’s balance sheet?

E) What is the amount of accounts payable on accruals on its balance sheet? (Hint: Consider this as a single line item on the firm’s balance sheet)

F) What is the firm’s net working capital?

Balance Sheet Review PRACTICE exercise #1 The following information is in the books at the end of 2020: Cash Retained earnings bonds payable (due 7/1/2027) Sales Note payable (due 9/1/2021) Accounts receivable Accounts payable Accrued wages and other expenses Inventories

$1,000,000 100,000,000 25,000,000 18,000,000 2,000,000 5,000,000 3,000,000 1,000,000 4,000,000

A) What is the company’s total current assets at the end of the year?

B) What is the company’s total current liabilities at the end of the year?

C) Calculate the company’s working capital.

D) If the industry average current ratio is 1.5, how does the company compare?

They have a stronger than avg. current ratio E) What is the company’s total long term liabilities at the end of the year?

F) What is the inventory turnover?

Income Statement Review- PRACTICE exercise The Moore Cowbell Corp. manufactures and sells a wide variety of percussion instruments, including tympani, djembes, congas, wood blocks and cowbells. Here are data for the latest year: net sales Cost of goods Interest expense EBIT

$700,000 325,000 10,000 75,000

A) Which is another term for sales? 1) net income 2) EBIT

B) What was the gross profit of Moore Cowbell Corp.? Show the formula used for determining gross profit.

C) What was the company’s gross margin?

D) Explain what the answer to c means. It means 54.6 cents of every net sales dollar remains after paying for the merchandise that was sold. It also means that 53.6 cents of every net sales dollar is available for operatin expenses, interest expense, taxes and profit for the owner(s). Yet another interpretation is that 46.4 cents of every dollar of net sales towar the cost of the merchandise that was sold. 100% - 53.6% gross profit = 46.4% cost of goods sold E) Which is another term(s) for EBIT? A) net income B) operating income C) net sales D) operating profit F) What were the operating expenses for the year?

G) Which is the bottom line? B) operating income C) net sales H) If sales return were $2,000 and sales discounts were $6,000, what amount was the company’s sales?

i) Who wanted more cowbell, and from whom? Blue Oyster Cult is Mr. Eric’s favorite band

Debt Management Ratios - PRACTICE ex. #1 Here are important data for a company at the beginning of the year (1/1, meaning January 1) and at the end of the year (12/31, meaning December 31): Here are important data for a company at the beginning of the year (1/1, meaning January 1) and at the end of year (12/31, meaning December 31): Total current assets, 1/1 Total assets, 1/1 Total current liabilities, 1/1 Total OE, 1/1 Total liabilities, 12/31 Total OE, 12/31

$300,000 1,000,000 250,000 500,000 490,000 650,000

A) Calculate the debt ratio at the BEGINNING of the year and explain what it means

B) Now calculate the debt ratio at the END of the year and explain what it means This means that the assets are 42.98% funded by debt capital (liabilities), which means 57.02% of the total capital is C) The debt ratio is also know as the: equity capital A) current ratio C) interest coverage

Debt Management Ratios - PRACTICE ex. #2 Given: total assets at year end total owners’ equity at the year end operating profit for the year net income for the year interest expense for the yr. cost of goods sold

$14,000,000 $4,000,000 $350,000 $100,000 $50,000 $500,000

A) What is the company’s debt to total assets ratio at year end?

B) Explain what the debt to total assets ratio in a) above means in a well written sentence. Debt Capital Pays for 71.43% of the company’s assets. This also means equity capital was used to pay for 28.57% (100% 71.43%) of the assets

C) What is the company’s TIE?

D) [review] What is the company’s debt to equity ratio?

E) [review] Would the debt to equity ratio in d) above make a typical bank want to lend to this company? The debt to equity ratio is higher than many banks would want to see in a loan applicant.

ROA and ROE - PRACTICE ex. #1 Given the following at the end of the year: common stock $1,000,000 additional paid in capital $24,000,000 retained earnings $40,000,000 treasury stock $5,000,000 total preferred equity none net income $10,000,000 cash and other current assets $25,000,000 non current assets $75,000,000 Note: Net income for the year has already been added to retained earnings. A) Calculate the ROA. Present the answer in the correct format and to 2 decimal places. (NOTE: To find the average total assets (for ROA) or average common equity (for ROE). you need figures for both the beginning of the year and the end of the year. In cases such as this example, when only end figures are provided, just use the year end figures instead of the average).

C) Determine the total common equity.

Treasury stock is shown as a negative figure on the balance sheet because its a contra asset account D) Calculate the ROE. Present the answer in the correct format.

E) Explain what the ROE means : It means the company earned 16.67% on the common stockholders' investment in the company, or generated a 16.67% return with the capital provided by the common shareholders.

ROA and ROE- PRACTICE firms L and U (p.110) A) For firm L under a good economy, the text shows an ROE of 48%. Show how the 48% was computed

Because the company is using financial leverage (i.e.e borrowing, as evidenced by liabilities > $0), the denominator of ROE is smaller than that of ROA, increasing the ratio is smaller than that of ROA, increasing the ratio for a given net income in the numerator. This is the math that provides the lever in leverage works. B) For firm L under a good economy calculate the return on assets. Why is it smaller than the ROE?

We only have an end-of-year figure for total assets, so we won't be able to take an average. We'll just use the total assets at the end of the year. The mathematical reason ROA < ROE is the ROE has a smaller denominator. By borrowing, the owners can invest less capital (leading to a smaller denominator for ROE) to buy the needed amount of business assets ($100 in this example).

C) For Firm U under a good economy, the text shows an ROE of 27.0%. Show how the 27% was computed.

D) For Firm U under a good economy calculate the return on assets (ROA). Why is it the same as the ROE?

c) and d) are both 27%. The Assets are equal to the common equity making ROE’s denominator the same as ROA’s, resulting in an identical ROE and ROA.! The reason that the 2 denominators are the same is that L = 0.! ! ! ! ! ! !A = L + OE If L = zero, then !!!!!!!!!! A = zero + OE or!!!!!! A = OE, which is why the denominators are the same in both c) and d). Comparing a) and b), where leverage was involved, with c) and d) with no leverage, shows the effects that borrowing can have on a business's return on the owners' investment.

EPS- PRACTICE exercise The charter authorizes 200 million shares of $0.10 par value common stock. To date 75 million shares have been issued. Treasury stock total 10 million shares. The latest year’s P&L shows a bottom line of $17 million. The top line was $246 million. The company paid preferred dividends of $3 million last year. A) How many shares of common stock are outstanding?

B) Calculate EPS for the latest fiscal year....