Question

In: Accounting

A firm’s balance sheets for the last two years are as follows: Year 2019 Assets

A firm’s balance sheets for the last two years are as follows:

Year 2019

Assets Liabilities and Equity

Cash $19,000 Accounts payable $12,000

Market securities 10,000 Accruals 10,000

Accounts receivable 21,000 Current bank note 10,000

Inventory 10,000 Long-term debt 30,000

Plant 40,000 Common stock 14,000

Retained earnings 24,000

$100,000 $100,000

Year 2020

Assets Liabilities and Equity

Cash $12,000 Accounts payable $12,000

Market securities 8,000 Accruals 10,000

Accounts receivable 18,000 Current bank note 30,000

Inventory 20,000 Long-term debt 10,000

Plant 42,000 Common stock 18,000

Retained earnings 20,000

$100,000 $100,000

Sales in 2019 were $400,000. Sales in 2020 were $400,000.

Answer the following questions in 20 words or less. Be certain to refer to the above financial statements (Asserting an answer without verification using the financial statements will earn you no credit.)

Has inventory turnover improved?

Has the firm’s risk exposure decreased?

Did the firm issue new stock during 2020?

If the firm bought $4,000 in new plant, what was the implied depreciation expense during 2020?

A Firm with sales of $3,650,000 has account receivable of $600,000. The industry average for days sales outstanding is 40 days. What is the potential savings in interest expense if the cost of credit is 10 percent and the firm achieves the industry average?

Why does times-interest-earned use operating income, but the return on equity uses net income instead of operating income?

In the Altman Z calculation one of the ratios was retained earnings/total assets. What is the impact on the numerical value of the ratio if

a) Accounts receivable are collected? Briefly explain.

b) The firm breaks even but maintains its dividend? Briefly explain.

Expert Solution

Inventory turnover ratio of year 2019 is 2.5% while for the yare 2020 is 5%. so , we can say that Inventory turnover ratio is improved.

Firms risk exposure is decided on the basis of firms dabts paying capacity. in 2020 dabts paying capacity is improve as compare to 2019.

Yes, firms issue additional shares of 4000

As we can chack the plant of 2019 was 40000 and in year 2020 it was 42000. so , for additional plant of 4000 we can say that , the net increse is only 2000. so , it may 50% depreciation on plant.

As per the present dabtors turnover is 60 days ( 600000 /365000 *365 = 60 days ). If it will reduce to 40 days then account recevable must be 400000. so as per 10% of cost of capital we can save 20,000 .

Time intrest earning is coscider as revenue / oprating income because , it genrate regular income to business. while return on equity is not certain. in case of loss by company or in case of low profit also they are not declared divident . so may or may not be regular . so , it should not consider oprating income.

In case of retain earning / total assets, it may be decresed. as compared to 2019.

a) no, total assets of both the year is same but , retain earning is decresed.

ekkarill92 answered 1 year ago

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