The following information is available about the company:

Problem 15-19 Incomplete Statements; Analysis of Ratios [LO2, LO3, LO4]

The following information is available about the company:

a.	Selected financial ratios computed from the statements above are given below:

Current ratio		2.40
Acid-test ratio		1.12
Accounts receivable turnover		15.0
Inventory turnover		6.0
Debt-to-equity ratio		0.875
Times interest earned		7.0
Earnings per share	$	4.05
Return on total assets		14	%

b.	All sales during the year were on account.
c.	The interest expense on the income statement relates to the bonds payable; the amount of bonds outstanding did not change throughout the year.
d.	There were no changes in the number of shares of common stock outstanding during the year.

e.	Selected balances at the beginning of the current year (January 1) were as follows:

Accounts receivable	$	160,000
Inventory	$	280,000
Total assets	$	1,200,000

Required:

Compute the missing amounts on the company's financial statements. (Input all amounts as positive values. Round your final answers to the nearest dollar amount. Omit the "$" sign in your response.)

Tanner Company Income Statement For the Year Ended December 31
Sales	$2,700,000
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
Interest expense	45,000
Net income before taxes
Income taxes (40%)
Net income	$

Tanner Company Balance Sheet December 31
Current assets:
Cash	$
Accounts receivable, net
Inventory
Total current assets
Plant and equipment, net
Total assets	$
Current liabilities	$250,000
Bonds payable, 10%
Total liabilities
Stockholders' equity:
Common stock, $2.50 par value
Retained earnings
Total stockholders' equity
Total liabilities and stockholders’ equity	$

Explanation:

Computation of missing amounts:

a.
Net operating income:

Times interest earned =	Earnings before interest and taxes
	Interest expense

=	Earnings before interest and taxes
	$45,000

=

7.0

Therefore, the earnings before interest and taxes for the year must be $315,000 ( = $45,000 × 7.0).

b.

Net income before taxes = $315,000 − $45,000 = $270,000.

c.

Income taxes = $270,000 × 40% tax rate = $108,000.

d.

Net income = $270,000 − $108,000 = $162,000.

e.

Accounts receivable turnover =	Sales on account
	Average accounts receivable balance

=	$2,700,000
	Average accounts receivable balance

=

15.0

Therefore, the average accounts receivable balance for the year must have been $180,000. The beginning balance was $160,000, so the ending balance must have been $200,000.

f.

Acid test ratio =	Cash + Marketable securities + Accounts receivable + Short-term notes
	Current liabilities

=	Cash + Marketable securities + Accounts receivable + Short-term notes
	$250,000

=

1.12

Cash + $0 + $200,000 + $0 = $250,000 × 1.12 = $280,000

Cash = $80,000

g.

Current ratio    =	Current assets
	Current liabilities

=	Current assets
	$250,000

=

2.4

Current assets = $250,000 × 2.4 = $600,000

Current assets = Cash + Accounts receivable + Inventory

$600,000 = $80,000 + $200,000 + Inventory

Inventory = $600,000 − $80,000 − 200,000 = $320,000

h.

Inventory turnover    =	Cost of goods sold
	Average inventory

=	Cost of goods sold
	($280,000 + $320,000)/2

=	Cost of goods sold
	$300,000

=

6.0

Cost of goods sold = $300,000 × 6.0 = $1,800,000.

i.  Gross margin = $2,700,000 − $1,800,000 = $900,000.

j.

Net operating income = Gross margin − Selling and administrative expenses

$315,000 = $900,000 − Selling and administrative expenses

Selling and administrative expenses = $900,000 − $315,000 = $585,000

k.

The interest expense for the year was $45,000 and the interest rate was 10%, so the bonds payable must total $450,000.

l.

Total liabilities = $250,000 + $450,000 = $700,000.

m.

Earnings per share  =	Net income-Preferred dividends
	Average number of common shares outstanding

=	$162,000
	Average number of common shares outstanding

=	4.05  per share

Average number of common shares outstanding = $162,000 ÷ 4.05  per share = 40,000 shares

The stock is $2.50 par value per share, so the total common stock must be $100,000.

n.

Debt-to-equity ratio   =	Total liabilities
	Stockholders' equity

=	$700,000
	Stockholders' equity

=

0.875

Stockholders' equity = $700,000 ÷ 0.875 = $800,000

o.

Total stockholders' equity = Common stock + Retained earnings

$800,000 = $100,000 + Retained earnings

Retained earnings = $800,000 − $100,000 = $700,000

p.

Total assets = Total Liabilities + Total Stockholders' equity                    = $700,000 + $800,000                    =  $1,500,000.

This answer can also be obtained through the return on total assets ratio:

Return on total assets  =	Net income + [Interest expense × (1-Tax rate)]
	Average total assets

=	$162,000 + [$45,000 × (1 - 0.40)]
	Average total assets

=	$189,000
	Average total assets

=

14.0%

Average total assets = $189,000 ÷ 0.14 = $1,350,000

Therefore the average total assets must be $1,350,000. Since the total assets at the beginning of the year were $1,200,000, the total assets at the end of the year must have been $1,500,000 (which would also equal the total of the liabilities and the stockholders’ equity).

q.

Total assets = Current assets + Plant and equipment

$1,500,000 = $600,000 + Plant and equipment

Plant and equipment = $1,500,000 − $600,000 = $900,000