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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?

Short Answer

Expert verified

The average inventory is $125,000.

Step by step solution

01

Meaning Inventory Turnover Ratio

The inventory turnover ratio can be found by dividing the cost of goods sold by average inventory. It is a useful indicator of a company's ability to convert inventory into sales.

02

Determining the average inventory during the current year

Costofgoodssold=Averageinventory×Inventoryturnover=$200,000×5=$1,000,000Inventoryturnoverratio=CostofgoodssoldAverageinventory=$1,000,0008=$125,000

Hence, the average inventory = $125,000

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Most popular questions from this chapter

Your firm has been engaged to examine the financial statements of Almaden Corporation for the year 2017. The bookkeeper who maintains the financial records has prepared all the unaudited financial statements for the corporation since its organization on January 2, 2012. The client provides you with the following information.

ALMADEN CORPORATION

BALANCE SHEET

DECEMBER 31, 2017

Asset

Liabilities

Current assets

\(1,881,100

Current liabilities

\) 962,400

Other assets

5,171,400

Long-term liabilities

1,439,500


Capital

4,650,600

\(7,052,500

\)7,052,500

An analysis of current assets discloses the following.

Cash (restricted in the amount of \(300,000 for plant expansion)

\)571,000

Investments in Land

185,000

Accounts receivable less allowance of \(30,000

480,000

Inventories (LIFO flow assumption)

645,100

\)1,881,100

Other assets include:

Prepaid expenses

\( 62,400

Plant and equipment less accumulated depreciation of \)1,430,000

4,130,000

The cash surrender value of life insurance policy

84,000

Unamortized bond discount

34,500

Notes receivable (short-term)

162,300

Goodwill

252,000

Land

446,200

\(5,171,400

Current liabilities include:

Accounts payable

\) 510,000

Notes payable (due 2020

157,400

Estimated income taxes payable

145,000

Premium on common stock

150,000

\( 962,400

Long-term liabilities include

Unearned revenue

\) 489,500

Dividends payable (cash

200,000

8% bonds payable (due May 1, 2022)

750,000

\(1,439,500

Capital includes:

Retained earnings

\)2,810,600

Common stock, par value \(10; authorized 200,000 shares, 184,000 shares issued

1,840,000

\)4,650,600

The supplementary information below is also provided.

  1. On May 1, 2017, the corporation issued at 95.4, \(750,000 of bonds to finance plant expansion. The long-term bond agreement provided for the annual payment of interest every May 1. The existing plant was pledged as security for the loan. Use the straight-line method for discount amortization.
  2. The bookkeeper made the following mistakes.
    1. In 2015, the ending inventory was overstated by \)183,000. The ending inventories for 2016 and 2017 were correctly computed.
    2. In 2017, accrued wages in the amount of \(225,000 were omitted from the balance sheet, and these expenses were not charged on the income statement.
    3. In 2017, a gain of \)175,000 (net of tax) on the sale of certain plant assets was credited directly to retained earnings.
  3. A major competitor has introduced a line of products that will compete directly with Almaden’s primary line, now being produced in a specially designed new plant. Because of manufacturing innovations, the competitor’s line will be of comparable quality but priced 50% below Almaden’s line. The competitor announced its new line on January 14, 2018. Almaden indicates that the company will meet the lower prices that are high enough to cover variable manufacturing and selling expenses but permit recovery of only a portion of fixed costs.
  4. You learned on January 28, 2018, prior to completion of the audit, of heavy damage because of a recent fire to one of Almaden’s two plants; the loss will not be reimbursed by insurance. The newspapers described the event in detail.

Instructions

Analyze the above information to prepare a corrected balance sheet for Almaden in accordance with proper accounting and reporting principles. Prepare a description of any notes that might need to be prepared. The books are closed and adjustments to income are to be made through retained earnings.

Okay. Last fall, someone with a long memory and an even longer arm reached into that bureau drawer and came out with a moldy cheese sandwich and the equally moldy notion of corporate forecasts. We tried to find out what happened to the cheese sandwich—but, rats!, even recourse to the Freedom of Information Act didn’t help. However, the forecast proposal was dusted off, polished up and found quite serviceable. The SEC, indeed, lost no time in running it up the old flagpole—but no one was very eager to salute. Even after some of the more objectionable features—compulsory corrections and detailed explanations of why the estimates went awry—were peeled off the original proposal.

Seemingly, despite the Commission’s smiles and sweet talk, those craven corporations were still afraid that an honest mistake would lead them down the primrose path to consent decrees and class action suits. To lay to rest such qualms, the Commission last week approved a “Safe Harbor” rule that, providing the forecasts were made on a reasonable basis and in good faith, protected corporations from litigation should the projections prove wide of the mark (as only about 99% are apt to do).

Instructions

  1. What is the purpose of the “safe harbor” rule?

Snider Corporation, a publicly-traded company, is preparing the interim financial data which it will issue to its shareholders at the end of the first quarter of the 2017–2018 fiscal year. Snider’s financial accounting department has compiled the following summarized revenue and expense data for the first quarter of the year.

Sales revenue \(60,000,000

Cost of goods sold 36,000,000

Variable selling expenses 1,000,000

Fixed selling expenses 3,000,000

Included in the fixed selling expenses was the single lump-sum payment of \)2,000,000 for television advertisements for the entire year.

Instructions

a) Snider Corporation must issue its quarterly financial statements in accordance with IFRS regarding interim financial reporting.

2. State how the sales revenue, cost of goods sold, and fixed selling expenses would be reflected in Snider Corporation’s quarterly report prepared for the first quarter of the 2017–2018 fiscal year. Briefly y justify your presentation.

Picasso Company is a wholesale distributor of packaging equipment and supplies. The company’s sales have averaged about \(900,000 annually for the 3-year period 2015–2017. The firm’s total assets at the end of 2017 amounted to \)850,000.

The president of Picasso Company has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past 3 years. This report will be presented to the board of directors at their next meeting.

In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios which can assist in the identification and interpretation of trends. At the request of the controller, the accounting staff has calculated the following ratios for the 3-year period 2015–2017.

2015

2016

2017

Current ratio

1.80

1.89

1.96

Acid-test (quick) ratio

1.04

0.99

0.87

Accounts receivable turnover

8.75

7.71

6.42

Inventory turnover

4.91

4.32

3.42

Debt to assets ratio

51.0%

46.0%

41.0%

Long-term debt to assets ratio

31.0%

27.0%

24.0%

Sales to fixed assets (fixed asset turnover)

1.58

1.69

1.79

Sales as a percent of 2015 sales

1.00

1.03

1.07

Gross margin percentage

36.0%

35.1%

34.6%

Net income to sales

6.9%

7.0%

7.2%

Return on assets

7.7%

7.7%

7.8%

Return on common stockholders’ equity

13.6%

13.1%

12.7%

In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the 3-year period.

Instructions

b) In terms of the ratios provided, what conclusion(s) can be drawn regarding the company’s use of financial leverage during the 2015–2017 period?

(Dividend Policy Analysis) Matheny Inc. went public 3 years ago. The board of directors will be meeting shortly after the end of the year to decide on a dividend policy. In the past, growth has been financed primarily through the retention of earnings. A stock or a cash dividend has never been declared. Presented below is a brief financial summary of Matheny Inc.’s operations.

(\(000 omitted)

2018

2017

2016

2015

2014

Sales revenue

\)20,000

\(16,000

\)14,000

\(6,000

\)4,000

Net income

2,400

14,000

800

700

250

Average total assets

22,000

19,000

11,500

4,200

3,000

Current assets

8,000

6,000

3,000

1,200

1,000

Working capital

3,600

3,200

1,200

500

400

Common shares:

Number of shares

Outstanding (000)

Average market price

2,000

\(9

2,000

\)6

2,000

$4

20

-

20

-

Instructions

  1. Comment on the appropriateness of declaring a cash dividend at this time, using the ratios computed in part (b) as a major factor in your analysis.
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