Question

Baxter Equipment Company - Income Statement for Years Ending December 31st

Note: All figures add 3 zeros ($000)

	2019	2018
Net Sales	$3,000	$2,850
Costs & Expenses
Labor and Materials	$2,544	$2,413
Depreciation	$100	$90
Selling	$22	$20
G & A	$40	$35
Leases	$28	$28
Total Costs	$2,734	$2,586
Operating Profit	$266	$264
Interest Expense	$66	$47
Federal & State Taxes	$80	$87
Net Income	$120	$130
Preferred Dividends	$8	$8
Earnings	$112	$122

Baxter Equipment Company - Balance Sheet for Years Ending December 31st

Note: All figures add 3 zeros ($000)

	2019	2018
Assets
Cash	$50	$55
Marketable Securities	$0	$25
Accounts Receivable	$350	$315
Inventories	$300	$215
Total Current Assets	$700	$610
Plant & Equipment (at cost)	$1,800	$1,470
Less Ac. Depreciation	$500	$400
Net Plant & Equipment	$1,300	$1,070
Total Assets	$2,000	$1,680
Liabilities & Stockholder Equity
Accounts Payable	$60	$30
Notes Payable	$100	$60
Accruals	$140	$130
Total Current Liabilities	$300	$220
Long-Term Debt (loans) Total	$800	$580
Total Liabilities	$1,100	$800
Preferred Stock [20,000 shares, ($1 par)]	$20	$20
Common Stock [50,000 shares, ($1 par)]	$50	$50
Paid in Capital in excess of Par	$80	$80
Retained Earnings	$750	$730
Total Stockholders Equity	$900	$880
Total Liabilities & Stockholder's Equity	$2,000	$1,680

a. What was the company's depreciation expense for 2019?

b. What were the company's current ratios for both 2018 and 2019?

c. Was the current ratio for year 2019 better or worse compared to 2018 (a one word answer please)

d. What was the company's inventory turnover for 2019?

e. What was the average collection period (2019) for their accounts receivable?

f. What was their marginal tax rate?

g. How many shares of common stock did they sell in 2019?

h. What was their EPS?

i. How much did they pay in common stock dividends?

j. What was their "TIE" (times interest earned) for 2019?

Answer 1

Ans (a) : The company's Ac Depreciation (in the Balance Sheet) has increased from $400 in 2018 to $500 in 2019. Also, the company has shown Depreciation expense of $100 in its income statement for the year 2019. Thus, the depreciation expense for the year 2019 is $100.

Ans b: Current Ratio = Current Assets / Current Liabilities

So, Current ratio for the years 2019 and 2018 is as under:

Ans c: Better

* A current ratio of 2 is considered optimum. A level considerably above 2 indicates inefficient use of working capital whereas a level considerably below 2 indicates shortage of working capital. Thus, the current ratio of 2.33 is better that 2.77 as it moved closer to the optimum level of 2.

Ans d: Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

1) Cost of Goods sold = Opening inventory + Purchases + Direct labor - Closing inventory

= $215 + $ 2544 - $300 (Material purchased+ labor = $2544 as per income statement)

= $2459

2) Average Inventory = ($215 + $300) / 2

= $257.5

So, Inventory Turnover Ratio = $2459 / $257.5 = 9.55