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To provide a consistent frame of reference for the companys financial statements and ratios, assume that the following balance sheet and income statement reflect the

To provide a consistent frame of reference for the companys financial statements and ratios, assume that the following balance sheet and income statement reflect the companys pretransaction condition and performance.

International Imports Inc.s Pretransaction Statement of Financial Condition

Cash $15,000 Accounts payable $20,000
Marketable securities 10,000 Wages payable 20,000
Accounts receivable 470,000 Taxes payable 10,000
Inventory 500,000 Notes payable 50,000
Prepaid expenses 5,000 Total current liabilities 100,000
Total current assets 1,000,000 Long-term debt 500,000
Total liabilities 600,000
Gross plant and equipment 1,500,000 Common stock 150,000
Accumulated depreciation 500,000 Capital paid in excess of par 350,000
Net plant and equipment 1,000,000 Retained earnings 900,000
Total equity 1,400,000
Total assets $2,000,000 Total debt and equity $2,000,000

International Imports Inc.s Pretransaction Statement of Financial Performance

Sales $5,000,000
Less: Cost of goods sold 2,000,000
Gross profit 3,000,000
Less: Operating expenses 600,000
Operating profit (EBIT) 2,400,000
Less: Interest expense 33,000
Earnings before taxes (EBT) 2,367,000
Less: Tax expense 828,450
Net income $1,538,550

Cost of goods sold equals 40% of sales.

Interest expense equals 6% of the combined notes payable and long-term debt balances.

The average federal and state tax rate is 35%.

Indicate if any of the listed financial statement accounts is affected by the following business transactions and whether the listed ratios will increase, decrease, or remain unchanged as a result of the transaction. (Hint: Assume that the business transaction occurs exactly as stated without interpreting it further. Do not consider any related transactions that may occur before or after the specified transaction. Assume there are 365 days in a year.)

Business Transaction 1

International Imports Inc. (2I) sells 25,000 shares of new common stock ($1 per share par value) to new and existing shareholders for $20 per share.

Financial Account

Check if the Account Is Affected by the Specified Transaction

Cash

Operating income

Long-term debt

Common stock

Capital paid-in excess of par

Financial Ratio

Ratios Behavior

Inventory turnover
Debt ratio
Times interest earned
Operating profit margin
Basic earnings power
Current ratio

Business Transaction 2

A $500,000 10-year bank loan is initiated, and the funds are placed in International Imports Inc. (2I)s checking account.

Financial Account

Check if the Account Is Affected by the Specified Transaction

Long-term debt

Marketable securities

Common stock

Cash

Gross plant and equipment

Financial Ratio

Ratios Behavior

Fixed asset turnover
Debt ratio
Gross profit margin
Operating profit margin
Return on assets
Current ratio

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