Managerial Accounting
Managerial Accounting
16th Edition
ISBN: 9781259995484
Author: Ray Garrison
Publisher: MCGRAW-HILL HIGHER EDUCATION
Question
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Chapter 15, Problem 21P
To determine

Concept Introduction:

Basic Earnings per share:

The Basic Earnings per share is the amount of net income earned by each common share outstanding. The Earnings per share calculated by with help of following formula:

  Basic Earnings per share=Net Income - Preferred DividendWeighted Average Common Shares Outstanding

   Net Income available to common stockholder = Net income  Preferred Dividend

Debt to Equity Ratio:

Debt to equity ratio is calculated to determine the leverage position of the company. It compares the total liabilities of the company with it total shareholders’ equity. The debt to equity ratio is calculated by dividing the Total Liabilities by Total Stockholder’s Equity. The formula to calculate Debt to equity ratio is as follows:

  Debt to equity ratio = Total liabilitiesTotal Stockholder’s Equity

Current Ratio:

Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

  Current Ratio=Current assetsCurrent liabilities

Acid test ratio:

Acid test ration is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:

  Acid test ratio = (Cash + Cash equivalents + Short term investments + Accounts receivables) Current Liabilities

Accounts receivable turnover ratio:

This is an efficiency ratio that indicates the conversion of accounts receivable into cash. This ratio is calculated by dividing the Net credit Sales by the Average accounts receivable. The formula to calculate this ratio is as follows:

  Accounts receivable turnover ratio = Net credit SalesAverage accounts receivable 

Inventory Turnover Ratio: Inventory Turnover Ratio measures the efficiency of the company in converting its inventory into sales. It is calculated by dividing the Cost of goods sold by Average inventory. The formula of the Inventory Turnover Ratio is as follows:

  Inventory Turnover Ratio=Cost of goods soldAverage inventory

Note: Average inventory is calculated with the help of following formula:

  Average inventory=(Beginning inventory + Ending inventory)2

Times interest earned Ratio:

A company pays its interest expenses from the Net operating Income available. To find the company’s ability to pay the interest expenses, the ratio of Net operating income to Interest expense should be calculated. Times Interest earned ratio shows the number of times interest expenses are covered by the net operating income. It is calculated by dividing the Net operating Income by Interest Expense. The formula is as under:

Times interest earned Ratio = Net Operating Income / Interest Expense

(Note: The numerator of the formula .Net operating income. is equal to the Income before deduction of Interest and taxes)

Return on total Assets: The Return on total assets is profitability ratio that measures the percentage of profit earned on average assets invested in the business. Return on asset is calculated by dividing the net income by average total assets. The formula to calculate Return on assets is as follows:

  Return on assets = Net incomeAverage Total Assets 

Note: Average total assets are calculated as an average of beginning and ending total assets. The formula to calculate the average total assets is as follows:

  Average total Assets = (Beginning total assets + Ending total assets)2 

To calculate:The missing amounts for balance sheet and income statement

Expert Solution & Answer
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Answer to Problem 21P

Solution: The Complete balance sheet and income statement are as follows:

    Pepper Industries
    Balance Sheet
    Mar. 31
    Current Assets:
    Cash $ 70,000
    Accounts Receivables, Net $ 330,000
    Inventory $ 480,000
    Total Current Assets $ 880,000
    Plant and Equipment, net $ 908,889
    Total Assets $ 1,788,889
    Liabilities:
    Current Liabilities: $ 320,000
    Bonds Payable, 10% $ 514,815
    Total Liabilities $ 834,815
    Stockholder's Equity:
    Common Stock, $5 par value $ 700,000
    Retained earnings $ 254,074
    Total Stockholder's Equity $ 954,074
    Total Liabilities and Stockholder's Equity $ 1,788,889
    Pepper Industries
    Income Statement
    For the year ended Mar. 31
    Sales $ 4,200,000
    Cost of Goods Sold $ 2,730,000
    Gross Margin $ 1,470,000
    Selling and administrative expenses $ 930,000
    Net operating income $ 540,000
    Interest Expense $ 80,000
    Net Income before taxes $ 460,000
    Income taxes (30%) $ 138,000
    Net Income $ 322,000

Explanation of Solution

The missing amounts for balance sheet and income statement are calculated as follows:

    Pepper Industries
    Balance Sheet
    Mar. 31
    Calculations
    Current Assets:
    Cash Total Current Assets -Accounts Receivable -Inventory = 880000-330000-480000 = $ 70,000
    Accounts Receivables, Net (Credit Sales /Accounts Receivable turnover)*2-Beginning Accounts receivable =(4200000/14)*2- 270000= $ 330,000
    Inventory Total Current Assets - (Current Liabilities * Acid Test Ratio) = 880000-(320000*1.25) = $ 480,000
    Total Current Assets Current Liabilities * Current Ratio = 320000*2.75 = $ 880,000
    Plant and Equipment, net Total Assets - Total Current Assets = 1788889-880000= $ 908,889
    Total Assets Net Income / Return on Total Assets = 322000/18% = $ 1,788,889
    Liabilities:
    Current Liabilities: $ 320,000
    Bonds Payable, 10% Total Liabilities - Current Liabilities = 834815-320000= $ 514,815
    Total Liabilities Total Assets * Debt to equity ratio / (1+Debt to equity ratio) = 1788889*0.875/1.875 = $ 834,815
    Stockholder's Equity:
    Common Stock, $5 par value (Net Income / Earnings per share )*Par value = (322000/2.3)*5 = $ 700,000
    Retained earnings Total Stockholder's Equity - Common Stock = 954074-700000= $ 254,074
    Total Stockholder's Equity Total Assets - Total Liabilities = 1788889-834815 = $ 954,074
    Total Liabilities and Stockholder's Equity Total Liabilities and Stockholder's Equity = Total Assets = $ 1,788,889
    Pepper Industries
    Income Statement
    For the year ended Mar. 31
    Sales $ 4,200,000
    Cost of Goods Sold Average Inventory * Inventory Turnover = ((360000+480000)/2))*6.5= $ 2,730,000
    Gross Margin Sales - Cost of Goods Sold = 4200000-3900000= $ 1,470,000
    Selling and administrative expenses Gross Margin -Net operating income = 1470000-540000= $ 930,000
    Net operating income Interest expense * Times interest earned ratio = 80000*6.75 = $ 540,000
    Interest Expense $ 80,000
    Net Income before taxes Net operating income - Interest Expense = 540000-80000= $ 460,000
    Income taxes (30%) Net Income before taxes * 30% = 460000*30% = $ 138,000
    Net Income Net Income before taxes - Income tax = 460000-138000= $ 322,000

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