Complete the balance sheet and sales information in the table that follows for H

Question

Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial data: Debt ratio: 60% Quick ratio: 0.95 Total assets turnover: 2.1 Days sales outstanding: 29 days* Gross profit margin on sales: (Sales - Cost of goods sold)/Sales = 30% Inventory turnover ratio: 6.0 * Calculation is based on a 365-day year. Round your answers to the nearest whole dollar. Balance Sheet Cash $ Accounts payable $ Accounts receivable $ Long-term debt $ 60,000 Inventories $ Common stock $ Fixed assets $ Retained earnings $ 97,500 Total assets $ 300,000 Total liabilities and equity $ Sales $ Cost of goods sold $

Explanation / Answer

FOLLOW THIS You have to walk through the ratios, one step at a time. Once you do, all the answers reveal themselves. The formula for Asset Turnover is Revenue / Total Assets. Total Assets = $300,000. Since the Asset Turnover rate is 1.5, Revenue = ($300,000 X 1.5) $450,000 The formula for Debt Ratio is Total Liabilities / Total Assets. Total Assets = $300,000. Since the Debt Ratio os 0.50, Total Liabilities = ($300,000 X .50) $150,000 Since Total Liabilities = $150,000 and the only two liability accounts are Accounts Payable (the balance of which is unknown) and Long Term Debt of $60,000, you can solve for Accounts Payable. Accounts payable = ($150,000 - $60,000) $90,000 Days Sales Outstanding = 36.5 days. The formula for that is Accounts Receivable Balance / Sales X 365 Since DSO = 36.5, then Accounts Receivable = 10% of the Sales. 10% of $450,000 = $45,000 Gross Profit Margin is 25%. Therefore Costs of Goods Sold = (.75 X $450,000) $337,500 The formula for Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities. Since the ratio = .80, you use this to calculate the total amount of cash and A/R. Since you've previously determined that current liabilities = $90,000, the total of cash and A/R = ($90,000 X .80) $72,000 Since you know that A/R = $45,000, then Cash = ($72,000 - $45,000) $27,000 The only kicker here is that the formula for Inventory Turnover is Costs of Goods Sold / Average Inventory. Since they don't tell us the figure for beginning inventory (so we can use this to calculate the ending inventory) we have to assume that we should just use ending inventory in the calculation. But see my last comment below also, since some books use a different formula for Inventory Turnover. Since the Inventory Turnover Ratio is 5.0, the inventory balance = ($337,500 / 5) $67,500 Since you now have all of the other asset accounts identified, you can calculate the Fixed Asset balance. It is ($300,000 - $27,000, - $45,000 - $67,500) $169,500 Since Total Assets = $300,000 then Total Liabilities and Equity must also equal $300,000. Since you have now identified the balance of all the other liability and equity accounts, you can now calculate the balance of Common Stock. This number = ($300,000 - $150,000 - $97,500) $52,500 You have now filled in all the missing amounts. See my numbers shown below. The only other issue here is that some books use a different formula for the inventory turnover ratio. Some use the formula of Sales / Inventory. You should check your book. If it uses this formula, then the Inventory Balance will be ($450,000 / 5) $90,000 instead of $67,500, and the Fixed Asset Balance will therefore be ($300,000 - $27,000 - $45,000 - $90,000) $138,000 Again, check your book to see how they calculate the Inventory Turnover Ratio Here's the Balance Sheet with the missing numbers shown: Cash $? $27,000 Accounts Receivables $? $45,000 Inventories $? $67,500 (or $90,000) Fixed Assets $? $169,500 (or $138,000) Total assets $300,000 Accounts Payable $? $90,000 Long-term debt $60,000 Total liabilities $? $150,000 Common stock $? $52,500 Retained earnings $97,500 Total Liabilities and Equity $300,000 Sales $? $450,000 Cost of goods sold $? $337,500

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