Chapter 17 Answers 17-7 Current assets = $930,000 Fixed assets = $320,000 Depreciation on fixed assets = $108,000 Total worth of fixed asset after depreciation = Fixed assets – Depreciation on fixed assets = $320,000 – $108,000 = $212,000 Current liabilities = $350,000 Long-term liabilities = $185,000 (a) Firm’s equity = Assets – Liabilities = (Current + Fixed assets) – (Current + Long-term liabilities) = ($930,000 + $212,000) – ($350,000 + $185,000) = $1,142,000 $535,000 = $607,000 (b) Retained earning = Equity – (Capital surplus + Stock) = $607,000 – $402,000 = $205,000

17-13

Balance Sheet Data Amount Assets Cash $1,740 Accounts receivable $2,500 Inventories $900 Bad debt provision $75Liabilities Accounts payable $1,050 Notes payable $500 Accrued expenses $125 (a) Current ratio = Current assets/Current liabilities For J&W Graphics Supply, the current ratio = $5,065/$1,675 = 3.02 Such a high current ratio indicates that J&W Graphics Supply does not have any liquidity problems, and its accounts payable are covered by the accounts receivable just over three times. The company is in a healthy financial position. (b)

Balance Sheet for J&W Graphics Supply (all amounts in thousands) Assets Amount Liabilities Amount

Current assets Current liabilities Cash $1,740 Accounts payable $1,050 Accounts receivable $2,500 Accrued expenses $500 Inventories $900 Notes payable $125 (minus) bad debt provision $75 Total current liabilities $1,675

Total of current assets $5,065 Long-term liabilities $950Fixed assets Total liabilities $2,625 Land $475 Equity Plant and equipment $3,100 Stock $680 (minus) accumulated depreciation $1,060 Capital surplus $45

Total fixed assets $2,515 Retained earnings $4,230 Total equity $4,955 Total assets $7,580 Total liabilities and equity $7,580

(c) Total assets = $7,580,000 Total liabilities = $2,625,000 Total earnings = $4,230,000

17-15 The answer depends on the industry as well as the individual firm’s management practices and philosophies. For a full assessment, we would need to examine the company’s values from previous periods and the broad-based industry standards. However, if a firm has a current ratio less than 2.0 and an acid-test ratio less than 1.0, it indicates that the company is not in good financial health. These two ratios are known as the liquidity ratios and are used to measure the liquidity of the firm. The acid-test ratio is used to measure the firm’s capacity to repay its debts at any given time. An acid-test ratio of less than 1.0 suggests that the firm does not have the ability to pay its debts at this time. However, since most firms pay their debts over a longer period of time, such low current and acid-test ratios may not spell immediate trouble. If these trends continue over a sustained period of time (and if the industry benchmarks are higher than those of this firm), the firm will run into liquidity problems in the future. 17-21 Computation of net income before taxes and net profit after taxes of Fly-Buy-Nite Engineering Company:

Income Statement for Fly-Buy-Nite (amounts in thousands)

Operating revenues Sales $30,000.00

Total operating income $30,000.00

Operating expenses Subcontracted services $18,000.00 Development expenses $900.00 Administrative expenses $2,750.00 Sales expenses $4,500.00

Total operating expenses $26,150.00 Total operating income $3,850.00 Non-operating expenses Interest $200.00 Total non-operating expenses $200.00

Net income before taxes $3,650.00 Taxes $985.50 Net profit for the year $2,664.50

17-23 Interest coverage = Total income/Interest payment Total income = Total revenue – Earning/Income before tax and interest = $455 – $372 = $83 Interest payment = $22 Therefore: Interest coverage = 83/22 = 3.77 Net profit ratio = Net profit/Net sales revenue Net profit = $31 Net sales revenue = Sales – Returns = $395 $15 = $380 Therefore: Net profit ratio = 31/380 = 0.0815 We cannot fully assess the health of Andrew’s business by referring to the net profit percentage as a stand-alone measure. An individual value of the net profit ratio assumes significance only when it is compared with other time periods for the same firm and with industry benchmarks in the same time period. An interest coverage ratio above 3 is always considered to be adequate. With an interest coverage ratio of 3.77, Andrew’s business can be considered a safe business as far as interest payments are concerned. The company’s revenue would have to decrease by a little over two-thirds (unlikely) before it becomes impossible for the firm to pay the interest on its debts.

17-25 (a) Entries on the balance sheet for plant and equipment: Plant = $5 million Equipment = $3 million Therefore: Total plant and equipment without depreciation = $15 million+ $3 million = $18 million (b)

Accumulated depreciation: Depreciation on plant = $8 million Depreciation on equipment = $2 million Total accumulated depreciation = $8 million + $2 million = $10 million (c) Retained earnings (RE): REend = REbegin + Net income or loss + New stock – Dividends REbegin = $60 million From question 17–22: Net income = Total revenues – Total expenses = ($81 million + $5 million) – ($70 million + $7 million) = $9 million (Note: the question does not refer to any new stock being bought; therefore, new stock = $0) REend = $60 million + $9 million = $69 million

17-29 (a) Using direct-labour cost to allocate indirect cost: Amount

Cost Component Standard Deluxe

Direct labour cost $50,000.00 $65,000.00 Direct material cost $35,000.00 $47,500.00 Indirect cost** $15,217.39 $19,782.61 Total cost $100,217.39 $132,282.61

Units produced 1,800.00 1,400.00 Per unit cost (A) $55.68 $94.49 Per unit selling price (B) $60.00 $95.00 Net revenue per unit (BA) $4.32 $0.51

**For standard: $35,000 $50,000/($50,000 + $65,000) = $15,217.39 For deluxe: $35,000 $65,000/($50,000 + $65,000) = $19,782.61 (b) Using direct-materials cost to allocate indirect cost: Amount

Cost Component Standard Deluxe Direct labour cost $50,000.00 $65,000.00 Direct material cost $35,000.00 $47,500.00 Indirect cost ** $14,848.48 $20,151.52 Total cost $99,848.48 $132,651.52

Units produced 1,800.00 1,400.00 Per unit cost (A) $55.47 $94.75 Per unit selling price (B) $60.00 $95.00 Net revenue per unit (BA) $4.53 $0.25

**For standard: $35,000 $35,000/($35,000 + $47,500) = $14,848.48 For deluxe: $35,000 $47,500/($35,000 + $47,500) = $20,151.52