A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31, 20Y9, is as follows: Sales $1,575,000 Cost of goods sold (891,000) Gross profit $684,000 Operating expenses (558,000) Operating income $126,000 Invested assets $1,050,000 Assume that the Electronics Division received no allocations from support departments. The president of Gihbli Industries Inc. has indicated that the division's return on a $1,050,000 investment must be increased to at least 20% by the end of the next year if operations are to continue. The division manager is considering the following three proposals: Proposal 1: Transfer equipment with a book value of $300,000 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would be less than the amount of depreciation expense on the old equipment by $31,400. This decrease in expense would be included as part of the cost of goods sold. Sales would remain unchanged. Proposal 2: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $180,000, reduce cost of goods sold by $119,550, and reduce operating expenses by $60,000. Assets of $112,500 would be transferred to other divisions at no gain or loss. Proposal 3: Purchase new and more efficient machinery and thereby reduce the cost of goods sold by $189,000 after considering the effects of depreciation expense on the new equipment. Sales would remain unchanged, and the old machinery, which has no remaining book value, would be scrapped at no gain or loss. The new machinery would increase invested assets by $918,750 for the year. Required: 1. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for the Electronics Division for the past year. If required, round your answers to one decimal place. Electronics Division Profit margin % Investment turnover ROI % 2. Prepare condensed estimated income statements and compute the invested assets for each proposal. Gihbli Industries Inc.-Electronics Division Estimated Income Statements For the Year Ended December 31, 20Y9 Proposal 1 Proposal 2 Proposal 3 Sales $ $ $ Cost of goods sold Gross profit $ $ $ Operating expenses Operating income $ $ $ Invested assets $ $ $ 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round investment turnover and percentages to one decimal place. Proposal Profit margin Investment turnover ROI Proposal 1 % % Proposal 2 % % Proposal 3 % % 4. Which of the three proposals would meet the required 20% return on investment? Proposal 1 Proposal 2 Proposal 3 5. If the Electronics Division were in an industry where the profit margin could not be increased, how much would the investment turnover have to increase to meet the president's required 20% return on investment? Enter your increase in investment turnover answer as a percentage of current investment turnover. Round interim calculations (including previously calculated) and final answer to one decimal place. %
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31, 20Y9, is as follows:
| Sales | $1,575,000 |
| Cost of goods sold | (891,000) |
| Gross profit | $684,000 |
| Operating expenses | (558,000) |
| Operating income | $126,000 |
| Invested assets | $1,050,000 |
Assume that the Electronics Division received no allocations from support departments.
The president of Gihbli Industries Inc. has indicated that the division's return on a $1,050,000 investment must be increased to at least 20% by the end of the next year if operations are to continue. The division manager is considering the following three proposals:
Proposal 1: Transfer equipment with a book value of $300,000 to other divisions at no gain or loss and lease similar equipment. The annual lease payments would be less than the amount of
Proposal 2: Reduce invested assets by discontinuing a product line. This action would eliminate sales of $180,000, reduce cost of goods sold by $119,550, and reduce operating expenses by $60,000. Assets of $112,500 would be transferred to other divisions at no gain or loss.
Proposal 3: Purchase new and more efficient machinery and thereby reduce the cost of goods sold by $189,000 after considering the effects of depreciation expense on the new equipment. Sales would remain unchanged, and the old machinery, which has no remaining book value, would be scrapped at no gain or loss. The new machinery would increase invested assets by $918,750 for the year.
Required:
1. Using the DuPont formula for
| Electronics Division | ||
| Profit margin | % | |
| Investment turnover | ||
| ROI | % |
2. Prepare condensed estimated income statements and compute the invested assets for each proposal.
| Gihbli Industries Inc.-Electronics Division | |||
| Estimated Income Statements | |||
| For the Year Ended December 31, 20Y9 | |||
| Proposal 1 | Proposal 2 | Proposal 3 | |
| Sales | $ | $ | $ |
| Cost of goods sold | |||
| Gross profit | $ | $ | $ |
| Operating expenses | |||
| Operating income | $ | $ | $ |
| Invested assets | $ | $ | $ |
3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round investment turnover and percentages to one decimal place.
| Proposal | Profit margin | Investment turnover | ROI |
| Proposal 1 | % | % | |
| Proposal 2 | % | % | |
| Proposal 3 | % | % |
4. Which of the three proposals would meet the required 20% return on investment?
| Proposal 1 | |
| Proposal 2 | |
| Proposal 3 |
5. If the Electronics Division were in an industry where the profit margin could not be increased, how much would the investment turnover have to increase to meet the president's required 20% return on investment? Enter your increase in investment turnover answer as a percentage of current investment turnover. Round interim calculations (including previously calculated) and final answer to one decimal place.
%
Trending now
This is a popular solution!
Learn your way
Includes step-by-step video
Step by step
Solved in 7 steps with 6 images
