Question
HRM732 Introduction to Financial & Management Accounting Case #4 Total Marks 40 (worth 10%) Due Date: Sunday, April 18, 2021 at 11:59 pm Empire Labs
HRM732
Introduction to Financial & Management Accounting
Case #4 Total Marks 40 (worth 10%)
Due Date: Sunday, April 18, 2021 at 11:59 pm
Empire Labs Inc. was organized several years ago to produce and market several new miracle drugs. The following data on the company are available for the past two years:
EMPIRE LABS INC. Comparative Income Statement For the Years Ended December 31 | ||
This Year | Last Year | |
Sales | $20,000,000 | $15,000,000 |
Less: Cost of goods sold | 13,000,000 | 9,000,000 |
Gross margin | 7,000,000 | 6,000,000 |
Less: Operating expenses | 5,260,000 | 4,560,000 |
Net operating income | 1,740,000 | 1,440,000 |
Less: Interest expense | 240,000 | 240,000 |
Net income before taxes | 1,500,000 | 1,200,000 |
Less: Income taxes (30%) | 450,000 | 360,000 |
Net income | $ 1,050,000 | $ 840,000 |
EMPIRE LABS INC. Comparative Retained Earnings Statement For the Years Ended December 31 | ||
This Year | Last Year | |
Retained earnings, January 1 | $2,400,000 | $1,960,000 |
Add: Net income (above) | 1,050,000 | 840,000 |
Total | 3,450,000 | 2,800,000 |
Deduct: Cash dividends paid: | ||
Preferred dividends | 120,000 | 120,000 |
Common dividends | 360,000 | 280,000 |
Total dividends paid | 480,000 | 400,000 |
Retained earnings, December 31 | $2,970,000 | $2,400,000 |
EMPIRE LABS INC. Comparative Balance Sheet December 31 | ||
This Year | Last Year | |
Assets | ||
Current assets: | ||
Cash | $ 200,000 | $ 400,000 |
Accounts receivable, net | 1,500,000 | 800,000 |
Inventory | 3,000,000 | 1,200,000 |
Prepaid expenses | 100,000 | 100,000 |
Total current assets | 4,800,000 | 2,500,000 |
Plant and equipment, net | 5,170,000 | 5,400,000 |
Total assets | $9,970,000 | $7,900,000 |
Liabilities and Shareholders Equity | ||
Liabilities: | ||
Current liabilities | $2,500,000 | $1,000,000 |
Bonds payable, 12% | 2,000,000 | 2,000,000 |
Total liabilities | 4,500,000 | 3,000,000 |
Shareholders equity: | ||
Preferred shares, 8%, $10 par | 1,500,000 | 1,500,000 |
Common shares, no par (200,000 @ $5) | 1,000,000 | 1,000,000 |
Retained earnings | 2,970,000 | 2,400,000 |
Total shareholders equity | 5,470,000 | 4,900,000 |
Total liabilities and shareholders equity | $9,970,000 | $7,900,000 |
The president of Empire Labs Inc. is deeply concerned. Sales increased by $5 million from last year to this year, yet the companys net income increased by only a small amount. Also, the companys operating expenses went up this year, even though a major effort was launched during the year to cut costs.
Required:
- For both last year and this year, prepare the income statement and the balance sheet in common-size format. Round computations to one decimal place.
- From your work in part (1), explain to the president why the increase in profits was so small this year. Were any benefits realized from the companys cost-cutting efforts? Explain.
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