Chapter 24: 25Q (page 1446)
In calculating inventory turnover, why is cost of goods sold used as the numerator? As the inventory turnover increases, what increasing risk does the business assume?
This results in a shortage of inventory as the inventory turnover ratio increases.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
What are the accounting problems related to the presentation of interim data?
Answer each of the questions in the following unrelated situations.
b) A company had an average inventory last year of $200,000 and its inventory turnover was 5. If sales volume and unit cost remain the same this year as last and inventory turnover is 8 this year, what will average inventory have to be during the current year?
(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
b)Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown’s request for a time extension on Bradburn’s notes.
As a loan analyst for Utrillo Bank, you have been presented with the following information.
Toulouse Co. | Lautrec Co. | |
Assets | ||
Cash | \(120,000 | \) 320,000 |
Receivables | 220,000 | 302,000 |
Inventories | 570,000 | 518,000 |
Total current assets | 910,000 | 1,140,000 |
Other assets | 500,000 | 612,000 |
Total assets | \(1,410,000 | \)1,752,000 |
Liabilities and Stockholders’ Equity | ||
Current liabilities | \( 305,000 | \) 350,000 |
Long-term liabilities | 400,000 | 500,000 |
Capital stock and retained earnings | 705,000 | 902,000 |
Total liabilities and stockholders’ equity | \(1,410,000 | \)1,752,000 |
Annual sales | \(930,000 | \)1,500,000 |
Rate of gross profit t on sales | 30% | 40% |
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Because your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Instructions
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
Madrasah Corporation issued its financial statements for the year ended December 31, 2017, on March 10, 2018. The following events took place early in 2018.
Instructions
Discuss how the preceding post-balance-sheet events should be reflected in the 2017 financial statements.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
