Financial Management Assets Current Assets

Financial Management

Assets

Current Assets

Cash 3,000

Receivables, less allowance 3,000

Inventory

Prepaid expenses 2,000

Non-current/Fixed Assets

Buildings

Machinery and equipment

Less: Accumulated depreciation

Other assets (long-term) 7,000

Liabilities

Current Liabilities

Accounts payable

Non-current Liabilities

Long-term debt

Deferred income tax liability (long-term)

Accrued income taxes 3,000

Other accrued expenses

Current portion of long-term debt 7,000

Stockholders' Equity

Common stock, no par value, 10,000 shares authorized, 5,724 shares issued $3,180

Retained earnings

Annual Depreciation Expense = ($100,000 - $10,000)/10 yrs = $9,000 for each of the first three years b. We will use the double declining method, which means that the depreciation rate used will be (100%)/10 yrs times 2 = 20%

Book Value

Beginning of Year

Depreciation

Rate

Depreciation

Expense

Accumulated

Depreciation

Book Value

End of Year

100,000 (Original Cost)

The depreciation in the first three years according to this method is $20,000, $16,000 and $8,800.

c. Depreciable Cost = $90,000

The sum of the digits = 55.

Depreciation rates are: 10/55 for the first year, 9/55 for the second year and 8/55 for the thirds. Thus, 1 yrs - $16,363 yrs - $14,727 yrs - $13,090

P4-1.

a. Operating Revenues

Sales

Selling expenses

Operating Expenses

Administrative expense $

Income taxes

Interest expense

Flood loss (net of tax)

Purchases

Merchandise inventory, 1/1

Merchandise inventory 12/31

Non-operating Revenues

Dividend income b. Earnings per share = $9.57 c. Revenues & Gains $967,000

Expenses & Losses $1,762,000

Net Income - $795,000

5-1. a. The current assets proportion of total assets in 2006 was 67.3%, while in 2007 this figure was 66.9%. As we can see, there is a slight, but not significant decrease from 2006 to 2007, mainly explainable through an increase in total assets at a more accelerated pace than current assets.

At the same time, long-term debt to total assets was 4.29% in 2007 and 1.5% in 2006, marking a significant increase of almost three times from one year to the other. The explanation is justified by a significant increase in the long-term debt, which, despite being at reasonable levels in absolute terms, has grown significantly as a proportion of the long-term debt.

b. If 2006 is considered 100%, the total current assets in 2007 amounted to 137%, a 37% increase from the previous year. At the same times, with 2006 as 100, 2007 total assets were 114%, a small increase compared to the previous year. The same is noticeable for total liabilities.

c. The trend showed gradual increases for all components of the balance sheet, showing a regular and sustained development of the company. Some of these however had a more sustained ascending trend.

5-4. a.

Revenue from services

Net earnings b. As compared to the 2004 base, net earnings have increased in 2006 with almost 200%, similar figures being noticeable in comparison with 2004 to many of the other figures on the statement of earnings.

6-2. a. days' sales in receivables 2007 =

220,385/$3,233 = 68.17 days' sales in receivables 2006 =

240,360/$6,027 = 39.88 b. accounts receivables turnover 2007 =

1,180,178/220,385 = 5.355 accounts receivables turnover 2006 =

2,200,000/240,360 = 9.15 c. Both ratios show that the company's liquidity has decreased, mainly due to bad collection policies.

6-6. a. The days' sales in inventory = ($360,500/$2,100,000) * 365 = 62.65 b. This is probably just a preliminary measure in actually evaluating the real days' sales in inventory and the liquidity of the company in terms of policies. However, it is probably a good reflection of the actual days' sales in inventory.

c. As mentioned, it would be a good starting point and an initial helpful guide in the process.

6-13. a. Company D - current ratio = 2

Company E - current ratio = 1.29

Company D's current ratio is higher than Company E's, however, the general principle in case of the current ratio is that this needs to be equal or higher than 1. In this particular case, it is likely that Company D. is proving too prudent in its short-term financial policy, which will tend to block some of the funds it could use for further developing the company.