Chapter 12 Supplemental Financial Analysis Steve\'s World of Two Wheels complete

Question

Chapter 12 Supplemental Financial Analysis Steve's World of Two Wheels completed its first year of operations on December 31, 2016· The owner, Steve Garrott, s attempting to assess the financial implications of his first year in business. He has gathered the following information: Net sales totaled $460,000. His beginning inventory was $200,000 and he purchased $275,000 of additional inventory during the year. He sold 60% of the inventory that was available for sale. Operating expenses totaled $95,000 and selling expenses (advertising and sales commissions) were 10% of sales. On December 31, 2016 Steve had $11,500 in cash and S2500 in accounts receivables along with his inventory. His land and buildings were valued at $225,000 and his equipment and fixtures were valued at $52,000. Steve owed $3,600 on a short-term loan and owed his vendors (suppliers) an additional $31,000. The remaining balance on his mortgage (long-term loan) was $175,000. A. Prepare the following statements for the business: 1. Income statement 2. Balance shect B. Compute the following 1. ending inventory 2. cost of goods sold 3. gross profit margin 4. net profit margin 5. net worth (owner's equity) 6, return on net worth (RO) 7, current ratio 8. quick ratio 9. collection period

Explanation / Answer

1. Ending inventory = 40% of total inventory available for sale (opening + purcahse)

= 40%*475000

= 190000

2. Cost of goods sold = opening + purchase - closing

= 200000+275000 -190000

= 285000

3. Gross profit margin = (sales - cost of goods sold) /sales*100

= (460000 - 285000)/460000

= 175000/460000

= 38.04

4. Net profit margin = net profit / sales

= 34000/460000

= 7.39%

5. net worth = equity capital + reserve and surplus

= 237400 + 34000

= 271400

6. Return on net worth = return / net worth

= 34000/271400

= 12.52%

7. Current ratio = Current assets / current liabilities

Current asests = cash + Accounts receivable + closing stock

= 11500+2500+190000

= 204000

current liabilities = short term loan + creditors

= 3600+31000

= 34600

Current ratio = 204000 /34600

= 5.89

quick ratio = quick assets / current liabilities

quick assets = Cash + accounts receivables

= 11500+2500

= 14000

quick ratio = 14000/34600

= 0.40

9. collection period = 365/accounts receivable turnover

where accounts receivable turnover = net credit sales / average accounts receivable

= 460000 / 2500

= 184

collection period = 365/184

= 1.98

here assumes all sales are in credit basis.

Please note all values are in $.

in case of further clarification required please comment.

Income statement Amt. $ Revenue form operation 460000 Cost of goods sold opening inventory 200000 purchased 275000 inventory availale for sale 475000 285000 operating expense 95000 sellin expense 46000 Toal expenses 426000 Net income form operation 34000 Balance sheet Equity Share capital (B.F) 237400 Reserve and surplus P & L 34000 Long term loan 175000 Current liabilities short term loan 3600 Creditors 31000 481000 Non current assets Land & Building 225000 Equipment and fixture 52000 Current assets Cash 11500 accounts receivable 2500 Closing Stock 190000 481000

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