1. The information below shows the assets, liabilities and net worth fo a small business. Arrange the items into a balance sheet format.

Retained earnings $78,000

Equipment 50,000

Accrued liabilities 9,000

Prepaid insurance 1,000

Accounts receivable 38,000

Cash 20,000

Land 28,000

Buildings 50,000

Common stock 100,000

Inventories 78,000

Accounts payable 18,000

Notes payable due 2007 45,000

Notes payable due 90 days 15,000

2. a. Calculate the indicated ratios for Mainframe

b. What are Mainframe's strengths and Weaknesses as revealed by this analysis?

Mainframe Balance Sheet as of Dec. 31, 2003

Cash $ 155,000 Accounts payable $ 258,000

Receivables 672,000 Notes payable 168,000

Inventory 483,000 Other current liabilities 234,000

________ __________

Total current assets $1,310,000 Total current liabilities $ 660,000

Net fixed assets 585,000 Long term debt 513,000

_________ Common Equity 722,000

_________

Total Assets $1,895,000 Total Claims $1,895,000

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Mainframe Income Statement for year ended Dec. 31, 2003

Sales $3,215,000

Cost of goods sold:

Material $1,434,000

Labor 906,000

Heat, Light & Power 136,000

Indirect labor 226,000

Depreciation 83,000 2,785,000

__________ __________

Gross Profit 430,000

Selling Expenses 230,000

General & administrative expenses 60,000

__________

Earnings before interest & tax $ 140,000

Interest expense 49,000

__________

Net Income before taxes 91,000

Federal & State taxes 36,400

__________

Net Income $ 54,000

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Answer 2. a

Ratio Mainframe Industry Average

Current ratio 2.0X

Average collection period 35 days

Inventory turnover 6.7X

Asset turnover 2.9X

Profitability 1.2%

ROA 3.4%

ROE 8.3%

Total Debt/ Total Assets 60.0%

Answer 2 b.

3. The Torrence Company is planning to request a line of credit from the bank. But they have to prepare a cash flow statement to find out how much they need. The following is the sales forecast and purchase information:

Month $Sales forecast $ Labor & Raw mtl.estimate

May 2004 150,000 75,000

June 150,000 75,000

July 300,000 105,000

Aug. 450,000 735,000

Sept. 600,000 255,000

Oct. 300,000 195,000

Nov. 300,000 135,000

Dec. 75,000 75,000

Jan. 2005 150,000

Collection estimates were obtained from the credit department as follows: Collected within the month of sale 5%; collected the month following the month of sale 80%; and collected the second month following the month of sale 15%. Payments for labor and raw material are made during the month following the month in which these costs are incurred.

General and administrative salaries are $22,500 a month; lease payments under long term lease contract will be $7,500 a month; depreciation charges will be $30,000 a month; miscellaneous expenses will be $2,250 a month; income tax payments will be $52,500 each due in September and December; a progress payment of $150,000 on a new research laboratory must be paid in October. Cash on hand on July 1 will amount to $110,000 and a minimum balance of $75,000 should be maintained throughout the cash budget period.

a. Prepare a monthly cash budget for the last six months of 2004 (july-Dec).

b. How much money will Torrence need to borrow each month?

4.

a.Find the accounting return on investment for a project that costs $10,000, will have no salvage value, and has expected annual after tax profits of $1000

b.Determine the payback period for a capital investment that costs $40,000 and has the following after tax profit. (The project outlay of $40,000 will be depreciated on a straight line basis to a zero salvage value.)

Year After-tax Profits

1 $4,000

2 5,000

3 6,000

4 6,500

5 6,500

6 6,000

7 5,000