Question

Question 1

The following ratios have been computed for Cola Company for 2017.

                  Profit margin                                               12.5%

                  Times interest earned                                 8 times

                  Receivables turnover                                 4 times

                  Acid-test ratio                                                2 : 1

                  Current ratio                                                   3 : 1

                  Debt to assets ratio                                        20%

Mason Company’s 2017 financial statements with missing information follow:

MASON COMPANY

Comparative Balance Sheet

December 31,

———————————————————————————————————————————

Assets                                                                                                   2017                      2016  

Cash.............................................................................................    $ 30,000               $ 45,000

Short-term Investments...............................................................        10,000                   25,000

Accounts receivable (net)............................................................             ?        (6)           40,000

Inventory.....................................................................................             ?        (8)           50,000

Property, plant, and equipment (net)...........................................    200,000               160,000

        Total assets...........................................................................     $      ?         (9)       $320,000

Liabilities and stockholders' equity

Accounts payable.........................................................................     $     ?        (7)       $ 30,000

Short-term notes payable.............................................................        40,000                   35,000

Bonds payable.............................................................................             ?       (10)          20,000

Common stock.............................................................................      220,000                 200,000

Retained earnings........................................................................     60,000                 35,000

        Total liabilities and stockholders' equity..............................     $      ?        (11)      $320,000

MASON COMPANY

Income Statement

For the Year Ended December 31, 2017

———————————————————————————————————————————

Net sales.......................................................................................                            $200,000

Cost of goods sold.......................................................................                              75,000

Gross profit..................................................................................                              125,000

Expenses:

      Depreciation expense.............................................................          $     ?                             (5)

      Interest expense.....................................................................             5,000

      Selling expenses.....................................................................             8,000

      Administrative expenses........................................................         12,000

            Total expenses..................................................................                                   ?           (4)

Income before income taxes........................................................                                   ?           (2)

      Income tax expense...............................................................                                   ?           (3)

Net income...................................................................................                            $   ?           (1)

     Required

     Use the above ratios and information from the Mason Company financial statements to fill in   

     the missing information on the financial statements. Follow the sequence indicated. Show

     computations that support your answers.

Answer 1

Net Sales	200000
COGS	75000
Gross Profit	125000
Expenses:
Depreciation	65000
Interest	5000
Selling Expenses	8000
Administrative Expenses	12000
Total Expenses	90000
Income before Income Taxes	35000
Income Tax Expense	10000
Net Income	25000

ASSETS	2017	2016
Cash	30000	45000
Short Term Investments	10000	25000
Accounts receivables Net	60000	40000
Inventory	50000	50000
PPE	200000	160000
Total Assets	350000	320000
LIABILITIES & STOCKHOLDERS EQUITY
Accounts Payable	10000	30000
Short Term Notes Payable	40000	35000
Bonds Payable	20000	20000
Common Stock	220000	200000
Retained Earnings	60000	35000
Total Liabilities & Stockholders Equity	350000	320000

* 1 i.e. Net Income = Profit Margin * Net Sales = 12.5%*200000 = $25000

* EBIT = Times Interest Earned * Interest Expense = 8*5000 = 40000

* 2 i.e Income before Income taxes = EBIT - Interest = 40000-5000 = 35000

* 3 i.e. Income Tax expense = 35000-25000 = 10000

* 4 = Gross Profit - Income Before Taxes = 125000-35000 = 90000

* 5 i.e. Depreciation = Total Expenses - Interest - Sell. Exp. - Admn. Exp. = 90000-5000-8000-12000 = 65000

* Receivables Turnover = Net Sales / Average Receivables, 4 = 200000/[(6+40000)/2], From here 6 i.e. Accounts receivable = 60000

* Acid Test Ratio = Current Assets except Inventory / Current Liabilities = 30000+10000+60000/7+40000, 7=$10000

* Current Assets = Current Liabilities*3, Current Assets = $150000, 8i.e. Inventory = 50000

* 9 i.e. Total Assets = sum of all assets = 350000

* 9=11

* 10 = Bonds Payable = Total liabilities - other liabilities = 20000