ACC 358 Lecture Notes - Lecture 3: Financial Statement, Financial Ratio, Financial Accounting
This preview shows half of the first page of the document.
Unlock all 2 pages and 3 million more documents.
Document Summary
Get access
Related Documents
Related Questions
This term you have learned to understand a companyâs financial story using the language of accounting. The recording and reporting of information is essential to decision makers and other users of financial information; numbers on the various financial statements are used to help further understand the financial condition of the business. This process is known as financial ratio analysis and allows us to analyze the companyâs financial position in relation to other organizations in the industry. In this final assignment, you will apply the concepts you have learned throughout the term to perform financial statement analysis and to offer some recommendations.
Assume that you are a health care consultant hired by the Dependable DME Company. DME is Durable Medical Equipment and includes all equipment that benefits patients who have certain medical conditions. The owner of the company, David Smith, is interested in applying for a loan to expand his business; he desires to open a second location in another city. He is preparing to apply to a local bank for a loan.
The bank will base its decision on the following averages for the DME industry:
| Ratio | Industry Average |
| Current ratio | 1.50 |
| Quick ratio | 0.80 |
| Receivables turnover ratio | 18.0 |
| Inventory turnover ratio | 20.0 |
| Debt to assets ratio | 0.56 |
| Profit margin | 10.25% |
The balance sheet data for Dependable DME Company follows:
| December 31, 2017 | December 31, 2016 | |
| Cash | $75,000 | $60,000 |
| Accounts receivable | 40,000 | 20,000 |
| Inventory | 30,000 | 20,000 |
| Prepaid insurance | 5,000 | 5,000 |
| Total current assets | 140,000 | 105,000 |
| Property and equipment | 600,000 | 550,000 |
| Accumulated depreciation | 140,000 | 110,000 |
| Total property and equipment | 460,000 | 440,000 |
| Total assets | $600,000 | $545,000 |
| Accounts payable | $60,000 | $60,000 |
| Other current liabilities | 40,000 | 45,000 |
| Total current liabilities | 100,000 | 105,000 |
| Bonds payable | 150,000 | 150,000 |
| Total liabilities | 250,000 | 255,000 |
| Common stock | 250,000 | 250,000 |
| Retained earnings | 100,000 | 40,000 |
| Total stockholdersâ equity | 350,000 | 290,000 |
| Total liabilities and stockholdersâ equity | $600,000 | $545,000 |
The income statement data for Dependable DME Company follows:
| Sales | $600,000 |
| Cost of goods sold | 350,000 |
| Gross profit | $250,000 |
| Operating expenses | 100,000 |
| Operating income | $150,000 |
| Interest expense | 25,000 |
| Income before taxes | $125,000 |
| Income tax expense | 65,000 |
| Net income | $60,000 |
Required:
Calculate the following six (6) ratios: Current Ratio, Quick Ratio, Receivables Turnover Ratio, Inventory Turnover Ratio, Profit Margin Ratio and Debt to Assets Ratio. Be sure to show the actual calculation as well as your final answer.
You are only required to calculate the ratios for 2017; however, for two of the ratios (Receivables Turnover Ratio and Inventory Turnover Ratio), you will need data from 2016 for the formula. When calculating the Quick Ratio, please note that Short-Term Investments are $0 in this scenario. (24 points; 4 points for each ratio calculation)
Below each ratio, comment on the interpretation of the ratio. In other words, what does the result tell you, specifically? (8 points)
Based upon the industry averages upon which the bank relies, should they approve the loan to Mr. Smith? Why or why not? (7 points)
In one-half page, comment on what financial aspect of Dependable DME Company looks good and where can Mr. Smith make some improvements. Specifically identify at least two recommendations to Mr. Smith that can be made to improve the financial position of his business. (8 points)
I'll rate posting for sec times just do last parts likecost and balance sheet ( account balance and cost incurred ) that'sit ready question carefully then answer all last partthanks
Charles Maxwell is starting a cheesecake bakery, Able BakerCharlie Company, to produce and sell different flavored cheesecakesto restaurants and the general public. He has just begun his studyof accounting, and is a bit confused about the many types ofreports he has read about and how they will help him run hisbusiness. He asks you to help him clarify what the differencesbetween managerial accounting and financial accounting are. Heâsalso wondering how to set up his inventory, how to classify thecosts of his business, and how to fill in some missinginformation.
| Required: | |
| 1. | Choose whether thecharacteristics on the Managerial vs. Financial panel are mostoften associated with managerial accounting or financialaccounting. |
| 2. | Charles has provided some ofthe costs he expects to incur on the Cost Classification panel.Decide on the classifications that could be applied to each ofthese costs using the table provided. The cost object in each caseis the cheesecake. |
| 3. | Charles found some sampleincome statements and balance sheets on the Internet, and askedwhich of them might be most appropriate for a manufacturingbusiness like his. Review income statements A and B on the IncomeStatements panel, and balance sheets C and D on the Balance Sheetspanel. Determine which income statement and balance sheet would bemost appropriate for a manufacturing business like Able BakerCharlie. Then, on the Financial Statements panel, denote whichincome statement and balance sheet would be most appropriate for amanufacturing business. |
| 4. | At the end of February, afterthe second month of operations of Able Baker Charlie Company,Charles shows you the data heâs collected, but he was unable tofigure out some of the amounts. On the Costs and Balances panel,determine the missing amounts. Note: It may behelpful to use T accounts to map the flow of the amounts throughthe manufacturing accounts and solve for the missing dollarvalues. |
Managerial vs. Financial
Choose whether the following characteristics are most oftenassociated with managerial accounting or financial accounting.
Managerial Accounting | Financial Accounting | ||
|---|---|---|---|
| Primarily used for internal decision making | |||
| Generally Accepted Accounting Principles (GAAP) must beused | |||
| Prepared statements usually pertain to the company as a wholerather than individual departments or products | |||
| Information provided will often be subjective, such asestimated future results | |||
| Often prepared on an as-needed basis rather than at fixedintervals | |||
| Use principles of the Sustainability Accounting Standards Board(SASB) to provide sustainability information to external financialstatement users | |||
| Consideration of sustainability practices to contribute to thecompanyâs long-term success | |||
| Using eco-efficiency measures to reduce expenses |
Cost Classification
Charles has provided some of the costs he expects to incur asfollows. Decide on the classifications that could be applied toeach of these costs using the table provided. The cost object ineach case is the cheesecake.
Cost | Product | Period | Direct | Direct | Factory | Selling | Administrative | Direct | Indirect | Prime | Conversion | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|
Cost | Cost | Materials | Labor | Overhead | Expense | Expense | Cost | Cost | Cost | Cost | ||
| Eggs used to make cheesecakes | ||||||||||||
| Bakerâs wages | ||||||||||||
| Delivery driver wages | ||||||||||||
| Depreciation of office computers | ||||||||||||
| Power to run the cheesecake ovens | ||||||||||||
| Presidentâs salary | ||||||||||||
| Sales commissions | ||||||||||||
| Factory supervisor salary |
Financial Statements
Charles found some sample income statements and balance sheetson the Internet, and asked which of them might be most appropriatefor a manufacturing business like his. Review income statements Aand B on the Income Statements panel, and balance sheets C and D onthe Balance Sheets panel. Determine which income statement andbalance sheet would be most appropriate for a manufacturingbusiness like Able Baker Charlie Company.
Which income statement is most appropriate for a manufacturingbusiness?
Income statement A
Income statement B
Which balance sheet is most appropriate for a manufacturingbusiness?
Balance sheet C
Balance sheet D
Income Statements
Income Statement A (scroll down for Income StatementB):
Sample Company A |
Income Statement |
For the Year Ended December 31, 20Y8 |
1 | Sales | $42,000.00 | |
2 | Beginning finished goods inventory | $5,250.00 | |
3 | Plus cost of goods manufactured | 6,400.00 | |
4 | Cost of finished goods available for sale | $11,650.00 | |
5 | Less ending finished goods inventory | 400.00 | |
6 | Cost of goods sold | 11,250.00 | |
7 | Gross profit | $30,750.00 | |
8 | Operating expenses: | ||
9 | Selling expenses | $6,400.00 | |
10 | Administrative expenses | 5,250.00 | |
11 | Total operating expenses | 11,650.00 | |
12 | Net income | $19,100.00 |
Income Statement B:
Sample Company B |
Income Statement |
For the Year Ended December 31, 20Y8 |
1 | Sales | $42,000.00 | |
2 | Beginning merchandise inventory | $5,250.00 | |
3 | Plus net purchases | 6,400.00 | |
4 | Merchandise available for sale | $11,650.00 | |
5 | Less ending merchandise inventory | 400.00 | |
6 | Cost of merchandise sold | 11,250.00 | |
7 | Gross profit | $30,750.00 | |
8 | Operating expenses: | ||
9 | Selling expenses | $6,400.00 | |
10 | Administrative expenses | 5,250.00 | |
11 | Total operating expenses | 11,650.00 | |
12 | Net income | $19,100.00 |
Balance Sheets
Balance Sheet C (scroll down for Balance SheetD):
Sample Company C |
Balance Sheet |
December 31, 20Y8 |
1 | Assets | ||
2 | Cash | $20,800.00 | |
3 | Accounts receivable (net) | 10,000.00 | |
4 | Merchandise inventory | 6,000.00 | |
5 | Supplies | 2,100.00 | |
6 | Land | 17,000.00 | |
7 | Total assets | $55,900.00 | |
8 | Liabilities | ||
9 | Accounts payable | $17,800.00 | |
10 | Stockholdersâ Equity | ||
11 | Common stock | $19,000.00 | |
12 | Retained earnings | 19,100.00 | |
13 | Total stockholdersâ equity | 38,100.00 | |
14 | Total liabilities and stockholdersâ equity | $55,900.00 |
Balance Sheet D:
Sample Company D |
Balance Sheet |
December 31, 20Y8 |
1 | Assets | ||
2 | Cash | $20,800.00 | |
3 | Accounts receivable (net) | 10,000.00 | |
4 | Inventories: | ||
5 | Finished goods | $2,000.00 | |
6 | Work in process | 1,500.00 | |
7 | Materials | 2,500.00 | 6,000.00 |
8 | Supplies | 2,100.00 | |
9 | Land | 17,000.00 | |
10 | Total assets | $55,900.00 | |
11 | Liabilities | ||
12 | Accounts payable | $17,800.00 | |
13 | Stockholdersâ Equity | ||
14 | Common stock | $19,000.00 | |
15 | Retained earnings | 19,100.00 | |
16 | Total stockholdersâ equity | 38,100.00 | |
17 | Total liabilities and stockholdersâ equity | $55,900.00 |
Costs and Balances
At the end of February, after the second month of operationsof Able Baker Charlie Company, Charles shows you the data heâscollected, but he was unable to figure out some of the amounts.Review the following data and fill in the missing amounts on thechart for Able Baker Charlie Company. Note: It maybe helpful to use T accounts to map the flow of the amounts throughthe manufacturing accounts and solve for the missing dollar values.It may also be helpful to review the steps for determining the costof materials used, total manufacturing cost incurred, and cost ofgoods manufactured.
| Data forFebruary | |
|---|---|
| Decrease in materialsinventory | $3,300 |
| Materials inventory on Feb. 28 | 50% of materials inventory on Jan.31 |
| Direct materials purchased | $12,600 |
| Direct materials used | 3 times the direct laborincurred |
| Total manufacturing costs incurredin period | $29,400 |
| Total manufacturing costs incurredin period | 70% of Cost of GoodsManufactured |
| Total manufacturing costs incurredin period | $7,000 less than Cost of GoodsSold |
| Account | Account Balances | Costs Incurred | ||
|---|---|---|---|---|
| Jan.31 | Feb.28 | |||
| Materials Inventory | DirectMaterials Used | |||
| Work inProcess Inventory | $27,000 | DirectLabor Incurred | ||
| FinishedGoods Inventory | $16,000 | FactoryOverhead Incurred | ||
| Cost ofGoods Sold | ||||
