Question

Use the following information from Ricko Corporation to find its net income.

Dividends = $24,000

Year-end stock price = $12 per share

Quick ratio = 1.2

Net working capital = $200,000

Inventory turnover ratio = 5.5

Receivables turnover= 10

Total liabilities to stockholders' equity ratio = 1.75

Monthly levels of accounts receivable, inventory, and accounts payable have not changed.

Balance Sheet as of December 31. 20XX

Assets

Cash                                                                                                               ?

Marketable securities                                                                         $ 70,000

Accounts receivable                                                                                       ?

Inventory                                                                                                       ?

            Total current assets                                                                            ?

Plant and equipment (net)                                                                              ?

            Total assets                                                                                        ?

Liabilities and Owners' Equity

Accounts payable                                                                                          ?

Notes payable – bank (12%)                                                           $ 100,000

Accrued expenses                                                                              $ 20,000

            Total current liabilities                                                                       ?

Common stock (80,000 shares at $1 par)                                        $ 80,000

Long-term debt (10%)                                                                      $ 360,000

Retained earnings                                                                            $ 240,000

Total liabilities and owners' equity                                                                 ?

Income Statement for Year Ended December 31, 20XX

Sales (all credit sales)                                                                     $1,200,000

Cost of goods sold                                                                                         ?

            Gross profit                                                                                        ?

Selling and administrative expense                                                  $ 200,000

Operating income                                                                                           ?

Interest expense                                                                                $  48,000

Income before taxes                                                                                      ?

Income tax (34% tax rate)                                                                              ?

Net income                                                                                                    ?

Hint: This is to help you get started:

Step 1: Find Stockholders Equity: Stockholders' equity = Common stock + Retained earnings

Step 2: Find Total Liablities: Since total liabilities to stockholders' equity ratio is 1.75, then Total liabilities =

Step 3: Find Total Current Liablities: Total current liabilities = Total liabilities – Long-term debt

Answer 1

Solution:

Calculation of Missing amounts

-Stockholders’ Equity = Common stock + Retained earnings

                                   = $ 80,000 + $ 240,000

                                   = $ 3, 20,000

-Total liabilities to stockholders' equity ratio = Total liabilities / stockholders' equity

                                                                                  1.75 = Total liabilities / $ 3, 20,000

                                                               Total liabilities = $ 5, 60,000

-Total current liabilities = Total liabilities - Long-term debt

                                           = $ 5, 60,000 - $ 3, 60,000

                                            = $ 2, 00,000

-Net working capital = Total current Assets - Total current liabilities

                                    $ 2, 00,000 = Total current Assets - $ 2, 00,000

                   Total current Assets =$ 2, 00,000 + $ 2, 00,000

                                                    = $ 4, 00,000

-Quick ratio = (Total current Assets – Inventory – Prepaid expenses) / Total current liabilities

                       1.2 = $ (4, 00,000 – Inventory -0) / $ 2, 00,000

          1.2 X $ 2, 00,000 = $ 4, 00,000 – Inventory

                $ 2, 40,000 = $ 4, 00,000 – Inventory

                Inventory = $ 4, 00,000 - $ 2, 40,000

                    Inventory = $ 1, 60,000

- Inventory turnover ratio = Cost of goods sold / Inventory

                                         5.5 = Cost of goods sold / $ 1, 60,000

                        Cost of goods sold =$ 8, 80,000

Note: Generally in inventory turnover ratio average inventory is used in denominator but when last year inventory is not given average inventory could not be calculated, in that case instead of using average inventory in formula, we can use amount of closing inventory.

- Receivables turnover= Net credit sales / Average accounts receivable

                                     10 =$ 12, 00,000 / Accounts receivable

                        Accounts receivable = $ 1, 20,000

Note: Generally in receivable turnover ratio average account receivable is used in denominator but when last year receivable is not given average receivable could not be calculated, in that case instead of using average receivable in formula, we can use amount of closing receivable.

- Total current Assets = Cash   + Marketable securities + Accounts receivable + Inventory

                    $ 4, 00,000 = Cash + $ 70,000 + $ 1, 20,000 + $ 1, 60,000

                    $ 4, 00,000 = Cash + $ 3, 50,000

                                 Cash = $ 50,000

- Total current liabilities = Accounts payable       + Notes payable bank + Accrued expenses

                        $ 2, 00,000 = Accounts payable + $ 1, 00,000 + $ 20,000

                        $ 2, 00,000 = Accounts payable + $ 1, 20,000

                      Accounts payable = $ 80,000

- Total liabilities and owners' equity = Total liabilities + Shareholders’ equity

                                                                   = $ 5, 60,000 + $ 3, 20,000

                                                                   = $ 8, 80,000

-Total Assets = Total current Assets + Plant and equipment (net)   

                      $ 8, 80,000 = $ 4, 00,000 + Plant and equipment (net)   

                   Plant and equipment (net)   = $ 4, 80,000

Note: AS per balance sheet Total liabilities and owners' equity is equal to total assets, so total assets will be $ 8, 80,000.

Income Statement for Year Ended December 31, 20XX

Particulars	Amount ($)
Sales (all credit sales)	1,200,000
Less: Cost of goods sold	(8,80,000)
Gross profit	3,20,000
Less: Selling and administrative expense	(2,00,000)
Operating income	1,20,000
Less: Interest expense	(48,000)
Income before taxes	72,000
Less: Income tax (34% of 72,000=24,480)	(24,480)
Net income	47,520