Question

In: Accounting

Pinnacle Plus declared and paid a cash dividend of $7,600 in the current year. Its comparative...

Pinnacle Plus declared and paid a cash dividend of $7,600 in the current year. Its comparative financial statements, prepared at December 31, reported the following summarized information:

	Current Year		Previous Year
Income Statement
Sales Revenue	$	160,000	$	139,000
Cost of Goods Sold		72,000		68,000
Gross Profit		88,000		71,000
Operating Expenses		46,000		41,000
Interest Expense		5,000		5,000
Income before Income Tax Expense		37,000		25,000
Income Tax Expense (30%)		11,100		7,500
Net Income	$	25,900	$	17,500
Balance Sheet
Cash	$	82,550	$	28,000
Accounts Receivable, Net		27,000		22,000
Inventory		35,000		48,000
Property and Equipment, Net		105,000		115,000
Total Assets	$	249,550	$	213,000
Accounts Payable	$	52,000	$	34,000
Income Tax Payable		1,250		1,000
Note Payable (long-term)		50,000		50,000
Total Liabilities		103,250		85,000
Common Stock (par $10)		96,000		96,000
Retained Earnings		50,300		32,000
Total Liabilities and Stockholders’ Equity	$	249,550	$	213,000

Required:

Compute the gross profit percentage in the current and previous years. Are the current year results better, or worse, than those for the previous year?
Compute the net profit margin for the current and previous years. Are the current year results better, or worse, than those for the previous year?
Compute the earnings per share for the current and previous years. Are the current year results better, or worse, than those for the previous year?
Stockholders’ equity totaled $110,000 at the beginning of the previous year. Compute the return on equity (ROE) ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
Net property and equipment totaled $120,000 at the beginning of the previous year. Compute the fixed asset turnover ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
Compute the debt-to-assets ratios for the current and previous years. Is debt providing financing for a larger or smaller proportion of the company’s asset growth?
Compute the times interest earned ratios for the current and previous years. Are the current year results better, or worse, than those for the previous year?
After Pinnacle Plus released its current year’s financial statements, the company’s stock was trading at $28. After the release of its previous year’s financial statements, the company’s stock price was $25 per share. Compute the P/E ratios for both years. Does it appear that investors have become more (or less) optimistic about Pinnacle’s future success?

Expert Solution

1. Gross Profit Percentage = Gross Profit/ Total Sales x100

Current Year = 88000/160000 = 0.55x100 = 55%

Previous Year = 71000/139000 = 0.5107x100 = 51.07 %

Clearly, the current year is better as the profit percentage has increased.

2. Net Profit Percentage = Net Profit/ Total Sales x100

Current Year = 25900/160000 = 0.1618x100 = 16.18%

Previous Year = 17500/139000 = 0.1259x100 = 12.59 %

Clearly, the current year is better as the profit percentage has increased.

3. earnings per share = Net Income/ No. of Common stock Outstanding

No. of Common stock = 96000/10 = 9600 Shares

Therefore

Current Year

earnings per share = Net Income/ No. of Common stock Outstanding

= 25900/9600 = $2.6979 per share

Previous Year

earnings per share = Net Income/ No. of Common stock Outstanding

= 17500/9600 = $1.8229 per share

The EPS is better in current year v/s precious year as shareholder's earnings have increased.

4. Shareholder' s equity = Net Income/ Average Shareholders' equity

For current year (end)

share holders equity = Common stock + Retained Earnings =96000+50300 =$146300

For Previous Year (end) or For current year (beginning)

share holders equity = Common stock + Retained Earnings =96000+32000 =$128,000

For previous (begining) as given = $110,000

Therefore,

Average Shareholders' equity (Current Year) = Current Year share holders equity at end+ Current Year share holders equity at beginning / 2

= 146300+128000/2 = $137150

Average Shareholders' equity (Previous Year) = Previous Year share holders equityat end + Previous Year share holders equity at beginning /2

= 128000+ 110000/2 = $119000

Current Year Shareholder' s equity = Net Income/ Average Shareholders' equity

Shareholder' s equity = 25900/ 137150 = 18.88%

Previous Year Shareholder' s equity = Net Income/ Average Shareholders' equity

Shareholder' s equity = 17500/ 119000 = 14.71%

Clearly Current Year Shareholder's Equity is better than Previous Year because, as the shareholder's worth have increased over the years.

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