Thursday, 2 August 2012

Comparative financial statements for Heritage Antiquing Services for the fiscal year ending

Comparative financial statements for Heritage Antiquing Services for the fiscal year ending December 31 appear on the following page. The company did not issue any new common or preferred stock during the year. A total of 600 thousand shares of common stock were outstanding. The interest rate on the bond payable was 14%, the income tax rate was 40%, and the dividend per share of common stock was $0.75. The market value of the company’s common stock at the end of the year was $26. All of the company’s sales are on account.

Heritage Antiquing Services
Comparative Balance Sheet
(dollars in thousands)
  This Year Last Year
  Assets            
  Current assets:            
     Cash $ 1,080   $ 1,210  
     Accounts receivable, net   9,000     6,500  
     Inventory   12,000     10,600  
     Prepaid expenses   600     500  
 





  Total current assets   22,680     18,810  
 





  Property and equipment:            
     Land   9,000     9,000  
     Buildings and equipment, net   36,800     38,000  
 





  Total property and equipment   45,800     47,000  
 





  Total assets $ 68,480   $ 65,810  
 











  Liabilities and Stockholders' Equity            
  Current liabilities:            
     Accounts payable $ 18,500   $ 17,400  
     Accrued payables   900     700  
     Notes payable, short term   -     100  
 





  Total current liabilities   19,400     18,200  
  Long-term liabilities:            
     Bonds payable   8,000     8,000  
 





  Total liabilities   27,400     26,200  
 





  Stockholders' equity:            
     Preferred stock   1,000     1,000  
     Common stock   2,000     2,000  
     Additional paid-in capital   4,000     4,000  
 





       Total paid-in capital   7,000     7,000  
       Retained earnings   34,080     32,610  
 





  Total stockholders' equity   41,080     39,610  
 





  Total liabilities and stockholders' equity $ 68,480   $ 65,810  
 













Heritage Antiquing Services
Comparative Income Statement and Reconciliation
(dollars in thousands)
  This Year Last Year
  Sales $ 66,000   $ 64,000  
  Cost of goods sold   43,000     42,000  
 





  Gross margin   23,000     22,000  
 





  Selling and administrative expenses:            
  Selling expenses   11,500     11,000  
  Administrative expenses   7,400     7,000  
 





  Total selling and administrative expenses   18,900     18,000  
 





  Net operating income   4,100     4,000  
  Interest expense   800     800  
 





  Net income before taxes   3,300     3,200  
  Income taxes   1,320     1,280  
 





  Net income   1,980     1,920  
  Dividends to preferred stockholders   60     400  
 





  Net income remaining for common stockholders   1,920     1,520  
  Dividends to common stockholders   450     450  
 





  Net income added to retained earnings   1,470     1,070  
  Retained earnings, beginning of year   32,610     31,540  
 





  Retained earnings, end of year $ 34,080   $ 32,610  
 













Required:
Compute the following financial ratios for long-term creditors for this year:

1. Times interest earned ratio. (Round your answer to 1 decimal place. )

  Times interest earned ratio  

2.
Debt-to-equity ratio. (Round your answer to 2 decimal places.)

  Debt-to-equity ratio  


Explanation:
1.
Calculation of the times interest earned ratio:

Times interest
  earned ratio
=
Earnings before interest
expense and income taxes
Interest expense

  =
$4,100
 = 5.1
  $800

2.
Calculation of the debt-to-equity ratio:

Debt-to-equity ratio =
Total liabilities
Stockholder's equity

  =
$27,400
 = 0.67
  $41,080