Question
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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