Question

In: Accounting

Cocoa Company * 2016 2017 Cash 100 75 Cost of Goods Sold 1000 1100 Debt (LT)...

Cocoa Company *

2016 2017

Cash 100 75

Cost of Goods Sold 1000 1100

Debt (LT) 10000 12000

Depreciation 2000 2200

Equity (total) 5300 5125

Interest Expense 600 720

Inventories 400 400

Payables 1200 1350

Property, Plant, Equipment 16000 18000

Revenues 6500 7500

Salaries 2200 2100

Share Capital 4964 4491

* All values given are in 1000s of dollars.

1. Construct a statement of comprehensive income for Cocoa Co. up through Earnings-Before- Taxes (EBT) for both 2016 and 2017. Use three columns: The left column should list the relevant accounts, the middle column should show the appropriate values for each account in 2016, and the right column should show the appropriate values for 2017.

2. Compute full (combined federal and provincial) corporate taxes for Cocoa Co. for both 2016 and 2017. Cocoa is a small corporation based in New Brunswick. As such it pays only 15.5% (i.e., 11% federal and 4.5% provincial tax) on the first $425,000 it earns, and then pays 27.0% (i.e., 15% federal and 12% provincial tax) on the remainder.

3. What was net income for both years?

4. If Cocoa’s payout ratio is always 40%, what was the addition to retained earnings for both years?

5. Construct a statement of financial position for Cocoa Co. for both 2016 and 2017. (In constructing the SFP, please use three columns: The left column should list the relevant accounts that appear on the SFP, the middle column should show the appropriate values for each account in 2016, and the right column should show the appropriate values for each account in 2017.)

6. Calculate Cocoa’s current ratio for 2017. Explain what it means, and state whether you think it’s good news or bad news for Cocoa’s managers.

7. If the value of Cocoa’s assets are to remain unchanged for the foreseeable future, and its profits are expected to increase, what do you expect will happen to its ROA.

Solutions

Expert Solution

income statement

2016

2017

revenue

6500000

7500000

less cost of goods sold

1000000

1100000

gross profit

5500000

6400000

salaries expense

2200000

2100000

depreciation expense

2000000

2200000

interest expense

600000

720000

EBT

700000

1380000

less taxes

167125

323725

net income

532875

1056275

taxes-2016

(425000*15.5%)+(375000*27%)

167125

taxes-2017

(425000*15.5%)+(955000*27%)

323725

addition to net income = net income*(1-payoutratio)

532875*(1-40%)

319725

addition to net income = net income*(1-payoutratio)

1056275*(1-40%)

633765

statement of financial position

Assets

2016

2017

current assets

cash

100000

75000

inventories

400000

400000

total current assets

500000

475000

plant and equipment

16000000

18000000

total of assets

16500000

18475000

liabilities and shareholders equity

current liabilities

payable

1200000

1350000

total current liabilities

1200000

1350000

debt

10000000

12000000

total of liabilities

11200000

13350000

shareholders equity

equity

5300000

5125000

total of liabilites and shareholders equity

16500000

18475000

current ratio = current assets/current liabilities

0.42

0.35

it measures the short term solvency of the company and it is reducing over the year so it is a bad news for the company as company's short term solvency is decreasing

ITS ROA will increase as value of assets are constant and profits are increasing ROA = net profit/total of assets


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