Question

In: Accounting

Cadux Candy Company’s income statement for the year ended December 31, 2021, reported interest expense of $2 million and income tax expense of $12 million.

Cadux Candy Company’s income statement for the year ended December 31, 2021, reported interest expense of $2 million and income tax expense of $12 million. Current assets listed in its balance sheet include cash, accounts receivable, and inventory. Property, plant, and equipment is the company’s only noncurrent asset. Financial ratios for 2021 are listed below. Profitability and turnover ratios with balance sheet items in the denominator were calculated using year-end balances rather than averages.

Debt to equity ratio ......................................1.0
Current ratio ..................................................2.0
Acid-test ratio ................................................1.0
Times interest earned ratio .....................17 times
Return on assets ...........................................10%
Return on equity ............................................20%

Profit margin on sales .....................................5%
Gross profit margin ........................................40%
(gross profit divided by net sales)
Inventory turnover .......................................8 times
Receivables turnover ...................................20 times

Required:
Prepare a December 31, 2021, balance sheet for the Cadux Candy Company.

Expert Solution

a.

Times interest earned ratio = (Net income + Interest + Taxes) ÷ Interest = 17

(Net income + $2 + 12) ÷ $2 = 17
Net income + $14 = 17 × $2
Net income = $20

b.

Return on assets = Net income ÷ Total assets = 10%
Total assets = $20 ÷ 10% = $200

c.

Profit margin on sales = Net income ÷ Net sales = 5%
Net sales = $20 ÷ 5% = $400

d.

Gross profit margin = Gross profit ÷ Net sales = 40%
Gross profit = $400 × 40% = $160
Cost of goods sold = Net sales – Gross profit = $400 – 160 = $240

e.

Inventory turnover ratio = Cost of goods sold ÷ Inventory = 8
Inventory = $240 ÷ 8 = $30

f.

Receivables turnover ratio = Net sales ÷ Accounts receivable = 20
Accounts receivable = $400 ÷ 20 = $20

g.

Current ratio = Current assets ÷ Current liabilities = 2.0
Acid-test ratio = Quick assets ÷ Current liabilities = 1.0

Current assets ÷ 2 = Current liabilities
Quick assets ÷ 1 = Current liabilities

Current assets ÷ 2 = Quick assets ÷ 1

Current assets = 2 × Quick assets

Cash + Accts. rec. + Inventory = 2 × (Cash + Accounts receivable)

Cash + $20 + 30 = (2 × Cash) + (2 × $20)

Cash + $50 = Cash + Cash + $40

Cash = $10

h.

Acid-test ratio = (Cash + Accounts receivable) ÷ Current liabilities = 1.0

Current liabilities = ($10 + 20) ÷ 1.0 = $30

i.

Noncurrent assets = Total assets – Current assets
= $200 – ($10 + 20 + 30) = $140

j.

Return on equity = Net income ÷ Shareholders’ equity = 20%
Shareholders’ equity = $20 ÷ 20% = $100

k.

Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1.0
Total liabilities = $100 × 1.0 = $100
Long-term liabilities = Total liabilities – Current liabilities = $100 – 30 = $70

CADUX CANDY COMPANY

Balance Sheet

At December 31, 2021

Assets

Current assets:

Cash $ 10
   Accounts receivable (net) 20
   Inventory    30
   Total current assets 60
   Property, plant, and equipment (net)   140
Total assets   $200

  Liabilities and Shareholders’ Equity
   Current liabilities $ 30
   Long-term liabilities 70
Shareholders’ equity    100
Total liabilities and shareholders' equity $200

Total liabilities and shareholders' equity $200

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