Exercise 13-19 PHAROAH INC. BALANCE SHEET DECEMBER 31, 2017 PHAROAH INC. INCOME

Question

Exercise 13-19

PHAROAH INC.
BALANCE SHEET
DECEMBER 31, 2017

PHAROAH INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017

Exercise 13-19

Presented below is information related to Pharoah Inc.

PHAROAH INC.
BALANCE SHEET
DECEMBER 31, 2017

Cash $45,000 Notes payable (short-term) $50,400 Receivables $110,900 Accounts payable 31,800    Less: Allowance 14,900 96,000 Accrued liabilities 5,100 Inventory 169,400 Common stock (par $5) 258,800 Prepaid insurance 8,100 Retained earnings 140,900 Land 19,800 Equipment (net) 148,700    $487,000 $487,000

PHAROAH INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017

Sales revenue $1,391,500 Cost of goods sold    Inventory, Jan. 1, 2017 $199,400    Purchases 784,500    Cost of goods available for sale 983,900    Inventory, Dec. 31, 2017 (169,400 )    Cost of goods sold 814,500 Gross profit on sales 577,000 Operating expenses 171,700 Net income $405,300

Explanation / Answer

(a)Compute the following ratios or relationships of Pharoah Inc. Assume that the ending account balances are representative unless the information provided indicates differently

1.Current ratio

= Current Assets/ Current Liabilities

= [$45000 + $96000 + $169400 + $8100 ] / [ $50400 + $31800 + $5100 ]

= $318500 / $87300

= 3.65 Times

2. Inventory turnover

= Cost of goods sold / Average Inventory

= $814500 / [ ($199400 +$169400) / 2]

= $814500 / $184400

= 4.42 Times

3. Accounts receivable turnover

= Net Sales / Accounts Receivables

= $1391500 / $96000

= 14.50 Times

4. Earnings per share

= $405300 / [ $258800/$5 ]

= $405300 / 51760

= $7.83 per share

6. Profit margin on sales         

= (Net Income/Sales)x100

= ($405300 / $1391500) x 100

= 29.13%

7. Return on assets on December 31, 2017

= (Net Income/Total Assets) x 100

= ($405300/$487000) x 100

= 83.22%

Indicate for each of the following transactions whether the transaction would improve, weaken, or have no effect on the current ratio of Pharoah Inc. at December 31, 2017.

(1) Write off an uncollectible account receivable, $2,200 = No effect

(2) Purchase additional capital stock for cash = Improve

(3)Pay $40,000 on notes payable (short-term). = Improve- reducing current assets and current liabilities by the same amount

(4) Collect $23,000 on accounts receivable = No effect

(5)Buy equipment on account = Weaken- increases current liabilities.             

(6)Give an existing creditor a short-term note in settlement of account = No effect

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