Question

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The following questions pertain to Cline Custom Bikes income statement and balance sheet.  

Income Statement Cline Custom Bikes Income Statement ($000) For year ended December 31, 2000 $2,200 $1,420 $ 780 Sales revenue Less Cost of goods sold Gross profit Less operating expenses Selling expense G&A Depreciation Total operating expenses Operating profits Less interest expense Net profit before tax Less taxes (30%) Net profit after tax $300 $270 $ 30 $ 600 $ 180 $ 29 $ 151 $ 45 $ 106 Statement of Retained Earnings Retained Earnings balance (Jan 1 2000) Plus: net profit after tax (for 2000) Less cash dividends on common $ 80 106 (76) Retained Earnings balance (Dec 31, 2000) $ 110

A. What was their depreciation expense for 2000?

B. What were the current ratios for BOTH 1999 and 2000?

C. Was their current ratio for year 2000 better or worse compared to 1999 - a one word answer please!

D. What was their inventory turnover ratio of 2000?

E. What was the average collection period ( year 2000) for accounts receivable?

F. What was their marginal tax rate?

G. How many shares of common stock did they issue (sell) in year 2000?

H. What was their earnings per share?

I. How much did they pay in preferred stock dividends?

J. What was their "TIE" (times interest earned) ratio

Answer 1

A. What was their depreciation expense for 2000?

Ans: Depreciation expense fro 2000 is $30,000

(This is directly taken from the Income statement for the year 2000 )

B.What were the current ratios for BOTH 1999 and 2000?

Current Ratio = Total Current Assets / Total Current Liabilities

Particulars	2000	1999
a. Total Current Assets	$820	$740
b. Total Current Liabilities	$520	$430
c. Curent Ratio (a/b)	1.58	1.72

C.Was their current ratio for year 2000 better or worse compared to 1999 - a one word answer please!

1. A rate of more than 1 suggests financial well-being for the company.

2. The current ratio for the year 2000 is worse than year 1999. The company has very good financial position in the year 1999 when compared to year 2000.

D.What was their inventory turnover ratio of 2000?

Inventory Turnover ratio = Cost of goods sold / Average Inventory

* Average inventory is the mean value of inventory throughout a certain period.

(We can use either average or end-of-period inventory values.)

Inventory Turnover ratio for the Year 2000

Cost of goods sold = $1,420

Average Inventory = (Opening inventory + Closing Inventory ) / 2 = ($320 + $460 ) / 2 = $390

Closing Inventory = $460

Inventory turnover ratio (using average inventory) = $1,420 / $390 = 3.64

Inventory turnover ratio (using Closing inventory) = $1,420 / $460 = 3.09

* The above two are correct, but calculation using average inventory is recommended by many experts.)

E.What was the average collection period ( year 2000) for accounts receivable?

Average collection period = 365 days X (Average Accounts receivable / Sales Revenue)

Average Accounts receivable = (Opening balance + Closing balance) / 2 = ($350 + $320 )/2 = $335

Sales Revenue = $2,200 (Assumption: Total sales are credit sales)

Average collection period for the Year 2000 = 365 X ( $335 / $2,200) = 55.58 = 56 days (Appx.)

F.What was their marginal tax rate?

Marginal tax Rate = 30%

(This is directly given in the income statement)

A marginal tax rate is the rate at which tax is incurred on an additional dollar of income. In the given problem, the tax rate is flat rate i.e., 30%. Therefore this the marginal tax rate.

G.How many shares of common stock did they issue (sell) in year 2000?

Pariculars	2000	1999	Difference
Common Stock	$100	$100	0

The difference in common stock is 0, therefore no shares were issued or sold in the year 2000.

H.What was their earnings per share?

Earnings per share = net profit after tax / Total oustanding Shares

Net profit after tax = $106,000

Total Outstanding Shares = 500,000

Earnings per share = $106,000 / 500,000 Shares = $0.212 per share

I.How much did they pay in preferred stock dividends?

a.Preferred Stock dividends are the dividends that are accrued paid on a company's preferred stock.

b. In the given problem, there is no preferred stock and therefore there is no payment in this regard.

J.What was their "TIE" (times interest earned) ratio

The times interest earned (TIE) ratio is a measure of a company's ability to meet its debt obligations based on its current income.

TIE Ratio = EBIT / Total interest payable

EBIT = Operating profit = $180

Interest payable for the period (Interest expense) = $29

TIE Ratio = $180 / $ 29 = 6.21