Presented here are a statement of income and retained earnings and comparative b
ID: 2755654 • Letter: P
Question
Presented here are a statement of income and retained earnings and comparative balance sheets for McCutcheon, Inc., which operates a national chain of home improvement stores.
McCutcheon, Inc.
Statement of Income and Retained Earnings
For the Year Ended December 31, 2014
(all amounts in thousands of dollars)
Net sales $48,000
Cost of goods sold 36,000
Gross Profit $12,000
Selling, general, and administrative expense 6,000
Operating income $ 6,000
Interest expense 280
Income before tax $ 5,720
Income tax expense 2,280
Net income $ 3,440
Preferred dividends 100
Income available to common $ 3,340
Common dividends 500
To retained earnings $ 2,840
Retained earnings, 1/1 12,000
Retained earnings, 12/31 $14,840
McCutcheon, Inc.
Comparative Balance Sheets
December 31, 2014 and 2013
(all amounts in thousands of dollars)
December 31
2014 2013
Cash $ 840 $ 2,700
Accounts receivable 12,500 9,000
Inventory 8,000 5,500
Prepaid insurance 100 400
Total current assets $ 21,440 $17,600
Land $ 4,000 $ 4,000
Buildings and equipment 12,000 9,000
Accumulated depreciation (3,700) (3,000)
Total long-term assets $ 12,300 $ 10,000
Total assets $ 33,740 $ 27,600
Accounts payable $ 7,300 $ 5,000
Taxes payable 4,600 4,200
Notes payable 2,400 1,600
Current portion of bonds 200 200
Total current liabilities $ 14,500 $ 11,000
Bonds payable 1,400 1,600
Total liabilities $ 15,900 $ 12,600
Preferred stock, $5 par $ 1,000 $ 1,000
Common stock, $1 par 2,000 2,000
Retained earnings 14,840 12,000
Total stockholders’ equity $ 17,840 $ 15,000
Total liabilities and stockholders’ equity $33,740 $ 27,600
Required:
1. Prepare a statement of cash flows for McCutcheon, Inc., for the year ended December 31, 2014, using the indirect method in
the Operating Activities section of the statement.
2. McCutcheon’s management is concerned with its short-term liquidity and its solvency over the long run. To help management
evaluate these, compute the following ratios, rounding all answers to the nearest one tenth of a percent.
a. Current ratio
b. Acid-test ratio
c. Accounts receivable turnover ratio
d. Number of days’ sales in receivables
e. Inventory turnover ratio
f. Number of days’ sales in inventory
g. Debt-to-equity ratio
3. Comment on McCutcheon’s liquidity and its solvency. What additional information do you need to fully evaluate the
company?
Explanation / Answer
Current ratio- ideal ratio being 2: 1 - is low in both years. It has gone down in 2014- despite increase in overall current assets.
Acid-test ratio (Ideal 1:1) good in 2013 has slightly decreased in 2014. due to increase in Current liabilities.
So, short-term liquidity needs improvement - Inventory is turned once in 68 days and receivables take an average 82 days to be realised.So, short-term funds are locked up -in inventory and credit sales. Collection needs to be improved.
Debt to Equity - below 1 -suggests that for every $1 total equity(owner) funding, outside funding contributes only 0.84 & 0.89 - which is recommendable.
Credit taken from vendors(Accounts Payables T.O. & No.of days' purchases o/s) need to be assessed to see optimum utilisation of trade credit available -to improve oprting cash flow/ short-term liquidity.
Cash flow statement as per Indirect method Net Income after tax 3440 Add:Adjustment for non-cash item Depreciation 700 Add: Decrease inPre-paid Insurance 300 Increase in Accounts Payables 2300 Increase in Taxes Payables 400 Increase in Notes Payables 800 3800 Less: Increase in Accounts Receivables 3500 Increase in Inventory 2500 -6000 Net Cash generated from Operating activities 1940Related Questions
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