A condensed income statement for the Electronics Division of Gihbli Industries Inc. for the year ended December 31 is as follows: Sales $3,920,000 Cost of goods sold 2,625,200 Gross profit $ 1,294,800 Operating expenses 746,000 Income from operations $ 548,800 Invested assets $2,800,000 Assume that the Electronics Division received no charges from service departments. The president of Gihbli Industries Inc. has indicated that the division’s return on a $2,800,000 investment must be increased to at least 22.4% 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 $560,000 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 $100,800. 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 $595,000, reduce cost of goods sold by $397,600, and reduce operating expenses by $175,000. Assets of $1,417,600 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 $369,600 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 $1,400,000 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. Round your answers to one decimal place. Electronics Division Profit margin fill in the blank 741d4afa002905c_1% Investment turnover fill in the blank 741d4afa002905c_2 ROI fill in the blank 741d4afa002905c_3% 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 Proposal 1 Proposal 2 Proposal 3 Sales $fill in the blank 827dcb029067fdf_1 $fill in the blank 827dcb029067fdf_2 $fill in the blank 827dcb029067fdf_3 Cost of goods sold fill in the blank 827dcb029067fdf_4 fill in the blank 827dcb029067fdf_5 fill in the blank 827dcb029067fdf_6 Gross profit $fill in the blank 827dcb029067fdf_7 $fill in the blank 827dcb029067fdf_8 $fill in the blank 827dcb029067fdf_9 Operating expenses fill in the blank 827dcb029067fdf_10 fill in the blank 827dcb029067fdf_11 fill in the blank 827dcb029067fdf_12 Income from operations $fill in the blank 827dcb029067fdf_13 $fill in the blank 827dcb029067fdf_14 $fill in the blank 827dcb029067fdf_15 Invested assets $fill in the blank 827dcb029067fdf_16 $fill in the blank 827dcb029067fdf_17 $fill in the blank 827dcb029067fdf_18 3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round your answers to one decimal place. Proposal Profit Margin Investment Turnover ROI Proposal 1 fill in the blank d0e19700300a01c_1% fill in the blank d0e19700300a01c_2 fill in the blank d0e19700300a01c_3% Proposal 2 fill in the blank d0e19700300a01c_4% fill in the blank d0e19700300a01c_5 fill in the blank d0e19700300a01c_6% Proposal 3 fill in the blank d0e19700300a01c_7% fill in the blank d0e19700300a01c_8 fill in the blank d0e19700300a01c_9% 4. Which of the three proposals would meet the required 22.4% return on investment. Proposal 1 Proposal 2 Proposal 3 5. If the Golf 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 22.4% return on investment? Enter your increase in investment turnover answer as a percentage of current investment turnover. If required, round your answer to one decimal place. fill in the blank d0e19700300a01c_13%
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 is as follows:
| Sales | $3,920,000 |
| Cost of goods sold | 2,625,200 |
| Gross profit | $ 1,294,800 |
| Operating expenses | 746,000 |
| Income from operations | $ 548,800 |
| Invested assets | $2,800,000 |
Assume that the Electronics Division received no charges from service departments.
The president of Gihbli Industries Inc. has indicated that the division’s return on a $2,800,000 investment must be increased to at least 22.4% 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 $560,000 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 $595,000, reduce cost of goods sold by $397,600, and reduce operating expenses by $175,000. Assets of $1,417,600 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 $369,600 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 $1,400,000 for the year.
Required:
1. Using the DuPont formula for
| Electronics Division | ||
| Profit margin | fill in the blank 741d4afa002905c_1% | |
| Investment turnover | fill in the blank 741d4afa002905c_2 | |
| ROI | fill in the blank 741d4afa002905c_3% |
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 | |||
| Proposal 1 | Proposal 2 | Proposal 3 | |
| Sales | $fill in the blank 827dcb029067fdf_1 | $fill in the blank 827dcb029067fdf_2 | $fill in the blank 827dcb029067fdf_3 |
| Cost of goods sold | fill in the blank 827dcb029067fdf_4 | fill in the blank 827dcb029067fdf_5 | fill in the blank 827dcb029067fdf_6 |
| Gross profit | $fill in the blank 827dcb029067fdf_7 | $fill in the blank 827dcb029067fdf_8 | $fill in the blank 827dcb029067fdf_9 |
| Operating expenses | fill in the blank 827dcb029067fdf_10 | fill in the blank 827dcb029067fdf_11 | fill in the blank 827dcb029067fdf_12 |
| Income from operations | $fill in the blank 827dcb029067fdf_13 | $fill in the blank 827dcb029067fdf_14 | $fill in the blank 827dcb029067fdf_15 |
| Invested assets | $fill in the blank 827dcb029067fdf_16 | $fill in the blank 827dcb029067fdf_17 | $fill in the blank 827dcb029067fdf_18 |
3. Using the DuPont formula for return on investment, determine the profit margin, investment turnover, and return on investment for each proposal. Round your answers to one decimal place.
| Proposal | Profit Margin | Investment Turnover | ROI |
| Proposal 1 | fill in the blank d0e19700300a01c_1% | fill in the blank d0e19700300a01c_2 | fill in the blank d0e19700300a01c_3% |
| Proposal 2 | fill in the blank d0e19700300a01c_4% | fill in the blank d0e19700300a01c_5 | fill in the blank d0e19700300a01c_6% |
| Proposal 3 | fill in the blank d0e19700300a01c_7% | fill in the blank d0e19700300a01c_8 | fill in the blank d0e19700300a01c_9% |
4. Which of the three proposals would meet the required 22.4% return on investment.
| Proposal 1 | |
| Proposal 2 | |
| Proposal 3 |
5. If the Golf 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 22.4% return on investment? Enter your increase in investment turnover answer as a percentage of current investment turnover. If required, round your answer to one decimal place.
fill in the blank d0e19700300a01c_13%
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