Question

Sutton Inc.'s underlying economic reality is a perfectly stable business that began in Year 0 (see excel Drill 5 Accruals.xlsx D). Every year, they generate $500,000 in sales, half of which are in cash, the other half are credit sales that are collected the following year. All other items of revenue and expense (including tax expense) are identical each year (see Years 1 and 2 in excel). However, you noticed that they accelerated some revenue into Year 3 (remember: they can't accelerate cash collection). Forecast Year 4's: 1. Earnings per share (rounded to the nearest penny) 2. Return on assets (rounded to 2 decimal places. For example, enter.28176 as 28.18). (Guidance: it might be helpful to prepare the statement of cash flows and remember to adjust assets as necessary)

If you can please provide an explanation, I'll make sure to upvote, thanks!

Answer 1

		Year 0	Year 1	Year 2	Year 3	Year 4
Cash		700,000	589,000	728,000	867,000	1,081,000
Accounts Receivable		-	250,000	250,000	325,000	325,000
Inventory		400,000	400,000	400,000	400,000	400,000
PP&E		800,000	800,000	800,000	800,000	800,000
Accumulated Depreciation		-	(40,000.00)	(80,000.00)	(120,000.00)	(160,000.00)
Total Assets		1,900,000	1,999,000	2,098,000	2,272,000	2,446,000
Accounts Payable		150,000	150,000	150,000	150,000	150,000
Notes Payable		750,000	750,000	750,000	750,000	750,000
Common Stock		250,000	250,000	250,000	250,000	250,000
Additional Paid-in Capital		750,000	750,000	750,000	750,000	750,000
Retained Earnings			99,000	198,000	372,000	546,000
Total L&E		1,900,000	1,999,000	2,098,000	2,272,000	2,446,000
Revenue			500,000	500,000	575,000	575,000
Cost of Goods Sold			(220,000)	(220,000)	(220,000)	(220,000)
Operating Expenses			(100,000)	(100,000)	(100,000)	(100,000)
Operating Income			180,000	180,000	255,000	255,000
Interest Expense			(30,000)	(30,000)	(30,000)	(30,000)
Income Tax Expense			(51,000)	(51,000)	(51,000)	(51,000)
Net Income			99,000	99,000	174,000	174,000
	EPS		$3.96	$3.96	$6.96	$6.96
	ROA		5.08%	4.83%	7.96%	7.38%

Cash Flow:

Cash flow	Year 1	Year 2	Year 3	Year 4
Opening Cash	700000	589000	728000	867000
Revenue in cash-current year	250000	250000	250000	250000
Last year's Credit sales	0	250000	250000	325000
Total Cash	950000	1089000	1228000	1442000
COGS	(220000)	(220000)	(220000)	(220000)
Operating Expense	(100000)	(100000)	(100000)	(100000)
Interest Expense	(30000)	(30000)	(30000)	(30000)
Income Tax Expense	(51000)	(51000)	(51000)	(51000)
Total Cash	549000	688000	827000	1041000
Less:Depreciation(non cash)	40000	40000	40000	40000
Closing Cash	589000	728000	867000	1081000