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P18-4 Financial information for Hanshew Company is presented below.

Price: $3.99


P18-4 Financial information for Hanshew Company is presented below.

HANSHEW COMPANY
Balance Sheets
December 31
Assets 2011 2010

Cash $ 70,000 $ 65,000
Short-term investments 52,000 40,000
Receivables (net) 98,000 80,000
Inventories 125,000 135,000
Prepaid expenses 29,000 23,000
Land 130,000 130,000
Building and equipment (net) 180,000 175,000
$684,000 $648,000

Liabilities and Stockholders’ Equity
Notes payable $100,000 $100,000
Accounts payable 48,000 42,000
Accrued liabilities 50,000 40,000
Bonds payable, due 2012 150,000 150,000
Common stock, $10 par 200,000 200,000
Retained earnings 136,000 116,000
$684,000 $648,000

HANSHEW COMPANY
Income Statement
For the Years Ended December 31

2011 2010
Sales $850,000 $790,000
Cost of goods sold 620,000 575,000
Gross profit 230,000 215,000
Operating expenses 187,000 173,000
Net income $ 43,000 $ 42,000

Additional information:

1. Inventory at the beginning of 2010 was $118,000.

2. Receivables (net) at the beginning of 2010 were $88,000.The allowance for doubtful accounts
was $4,000 at the end of 2011, $3,800 at the end of 2010, and $3,700 at the beginning of 2010

3. Total assets at the beginning of 2010 were $630,000.

4. No common stock transactions occurred during 2010 or 2011.

5. All sales were on account.

Instructions

(a) Indicate, by using ratios, the change in liquidity and profitability of Hanshew Company from
2010 to 2011. (Note: Not all profitability ratios can be computed.)

(b) Given below are three independent situations and a ratio that may be affected. For each situation,
compute the affected ratio (1) as of December 31, 2011, and (2) as of December 31,
2012, after giving effect to the situation. Net income for 2012 was $50,000. Total assets on
December 31, 2012, were $700,000.
Situation Ratio

(1) 18,000 shares of common stock were sold Return on common stockholders’
at par on July 1, 2012. equity

(2) All of the notes payable were paid in 2012. Debt to total assets
The only change in liabilities was that the
notes payable were paid.

(3) Market price of common stock was $9 Price-earnings ratio
on December 31, 2011, and $12.80 on
December 31, 2012.

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