Chapter 03: Financial Analysis
b. Medical Heavy
Supplies Machinery Electronics
3-29. (Continued)
c.
Corporate net income $1,700,000 $592,000 $402,000
Corporate total assets $8,340,000 $8,760,000 $3,570,000
$2, 694,000
$20, 670,000
13.03%
++
=
++
=
d. Return on redeployed assets in heavy machinery.
Return on assets for the entire corporation:
Corporate net income $1,700, 000 $1,785, 288 $402,000
Corporate total assets $20, 670,000
$3,887, 288
$20, 670,000
++
=
=
Chapter 03: Financial Analysis
31. Inflation and inventory accounting effect (LO5) The Canton Corporation shows the
following income statement. The firm uses FIFO inventory accounting.
CANTON CORPORATION
Income Statement for 20X1
Sales …………………………..………………………………. $272,800 (17,600 units at $15.50)
Cost of goods sold ………………………………………… 123,200 (17,600 units at $7.00)
Gross profit …………………………………………………. 149,600
Selling and administrative expense …………………. 13,640
Depreciation ………………………………………………… 15,900
Operating profit ……………………………………………. 120,060
Taxes (30%) ………………………………………………… 36,018
Aftertax income …………………………..………………. $ 84,042
a. Assume in 20X2 that the same 17,600-unit volume is maintained, but that the sales
price increases by 10 percent. Because of FIFO inventory policy, old inventory will
still be charged off at $7 per unit. Also assume selling and administrative expense
will be 5 percent of sales and depreciation will be unchanged. The tax rate is 30
percent. Compute aftertax income for 20X2.
b. In part a, by what percent did aftertax income increase as a result of a 10 percent
increase in the sales price? Explain why this impact took place.
c. Now assume that in 20X3 the volume remains constant at 17,600 units, but the sales
price decreases by 15 percent from its year 20X2 level. Also, because of FIFO
inventory policy, cost of goods sold reflects the inflationary conditions of the prior
year and is $7.50 per unit. Further, assume selling and administrative expense will be
5 percent of sales and depreciation will be unchanged. The tax rate is 30 percent.
Compute the aftertax income.
3-31. Solution:
Canton Corporation
a. 20X2
Sales ……………………………. $300,080 (17,600 units at
$17.05)
Cost of goods sold ………… 123,200 (17,600 units at $7)
Gross profit ……………….. $ 176,880
Chapter 03: Financial Analysis
Total assets ……….
$500,000
Total debt and
stockholders’
equity
$500,000
34. Using ratios to determine account balances (LO2) We are given the following
information for the Pettit Corporation.
Sales (credit) ……………………………………………………. $3,549,000
Cash ……………………………………………………………….. 179,000
Current assets are composed of cash, marketable securities, accounts receivable, and
inventory. Calculate the following balance sheet items.
a. Accounts receivable.
3-34. Solution:
Chapter 03: Financial Analysis
Pettit Corporation
a. Accounts receivable = Sales/Receivable turnover
Marketable securities = $2,324,600 – ($179,000 +
3-34. (Continued)
c. Fixed assets = Total assets – Current assets
Total assets = Sales/Asset turnover
Fixed assets = $2,535,000 – $2,324,600
Chapter 03: Financial Analysis
Long-term liabilities:
Bonds payable ……………………………….. $153,200
Total liabilities ………………………………. $334,200
Stockholders’ equity
Preferred stock, $50 per value …………. 100,000
Common stock, $1 par value …………… 80,000
Capital paid in excess of par ……………. 190,000
Retained earnings …………………………… 242,300
Total stockholders’ equity…………….. 612,300
Total liabilities and stockholders’ equity $946,500
SNIDER CORPORATION
Income statement
For the Year Ending December 31, 20X1
Sales (on credit)………………………………………………………………………
$2,064,000
Less: Cost of goods sold ………………………………………………………
1,313,000
Gross profit ……………………………………………………………………………
751,000
Less: Selling and administrative expenses ………………………………
496,000*
Operating profit (EBIT) …………………………………………………………..
255,000
Less: Interest expense ………………………………………………………….
26,900
Earnings before taxes (EBT) …………………………………………………….
228,100
Less: Taxes…………………………………………………………………………
83,300
Earnings after taxes (EAT)……………………………………………………….
$ 144,800
*Includes $36,100 in lease payments.
3-36. Solution:
Snider Corporation
Profitability ratios
Profit margin = $144,800/$2,064,000 = 7.02%
Assets utilization ratios
Chapter 03: Financial Analysis
Earnings before taxes ……………………………………………………….
185,000
Tax expense …………………………………………………………………………………
92,500
Net income ………………………………………………………………………………….
$ 92,500
*Use net fixed assets in computing fixed asset turnover.
†Includes $7,000 in lease payments.