Edinburgh Exports Inc.’s Pretransaction Statement of Financial Condition Cash $15,000 Accounts payable $20,000 Marketable securities 10,000 Wages payable 20,000 Accounts receivable 470,000 Taxes payable 10,000 Inventory 500,000 Notes payable 50,000 Prepaid expenses 5,000 Total current liabilities 100,000 Total current assets 1,000,000 Long-term debt 500,000 Total liabilities 600,000 Gross plant and equipment 1,500,000 Common stock 150,000 Accumulated depreciation 500,000 Capital paid in excess of par 350,000 Net plant and equipment 1,000,000 Retained earnings 900,000 Total equity 1,400,000 Total assets $2,000,000 Total debt and equity $2,000,000 Edinburgh Exports Inc.’s Pretransaction Statement of Financial Performance Sales $5,000,000 Less: Cost of goods sold¹ 2,000,000 Gross profit 3,000,000 Less: Operating expenses 600,000 Operating profit (EBIT) 2,400,000 Less: Interest expense² 33,000 Earnings before taxes (EBT) 2,367,000 Less: Tax expense³ 828,450 Net income $1,538,550 ¹Cost of goods sold equals 40% of sales. ²Interest expense equals 6% of the combined notes payable and long-term debt balances. ³The average federal and state tax rate is 35%. Indicate if any of the listed financial statement accounts is affected by the following business transactions and whether the listed ratios will increase, decrease, or remain unchanged as a result of the transaction. (Hint: Assume that the business transaction occurs exactly as stated without interpreting it further. Do not consider any related transactions that may occur before or after the specified transaction. Assume there are 365 days in a year.) Business Transaction 1 Edinburgh Exports Inc. (EEI) sells 25,000 shares of new common stock ($1 per share par value) to new and existing shareholders for $20 per share. Financial Account Check if the Account Is Affected by the Specified Transaction Cash Operating income Long-term debt Common stock Capital paid-in excess of par Financial Ratio Ratio’s Behavior Inventory turnover No change Debt ratio Decreases Times interest earned No change Operating profit margin No change Basic earnings power Decreases Current ratio Increases Business Transaction 2 A $500,000 10-year bank loan is initiated, and the funds are placed in Edinburgh Exports Inc. (EEI)’s checking account. Financial Account Check if the Account Is Affected by the Specified Transaction Long-term debt Marketable securities Common stock Cash Gross plant and equipment Financial Ratio Ratio’s Behavior Fixed asset turnover No change Debt ratio Increases Gross profit margin No change Operating profit margin No change Return on assets No change Current ratio Increases

Edinburgh Exports Inc.’s Pretransaction Statement of Financial Condition Cash $15,000 Accounts payable $20,000 Marketable securities 10,000 Wages payable 20,000 Accounts receivable 470,000 Taxes payable 10,000 Inventory 500,000 Notes payable 50,000 Prepaid expenses 5,000 Total current liabilities 100,000 Total current assets 1,000,000 Long-term debt 500,000 Total liabilities 600,000 Gross plant and equipment 1,500,000 Common stock 150,000 Accumulated depreciation 500,000 Capital paid in excess of par 350,000 Net plant and equipment 1,000,000 Retained earnings 900,000 Total equity 1,400,000 Total assets $2,000,000 Total debt and equity $2,000,000 Edinburgh Exports Inc.’s Pretransaction Statement of Financial Performance Sales $5,000,000 Less: Cost of goods sold¹ 2,000,000 Gross profit 3,000,000 Less: Operating expenses 600,000 Operating profit (EBIT) 2,400,000 Less: Interest expense² 33,000 Earnings before taxes (EBT) 2,367,000 Less: Tax expense³ 828,450 Net income $1,538,550 ¹Cost of goods sold equals 40% of sales. ²Interest expense equals 6% of the combined notes payable and long-term debt balances. ³The average federal and state tax rate is 35%. Indicate if any of the listed financial statement accounts is affected by the following business transactions and whether the listed ratios will increase, decrease, or remain unchanged as a result of the transaction. (Hint: Assume that the business transaction occurs exactly as stated without interpreting it further. Do not consider any related transactions that may occur before or after the specified transaction. Assume there are 365 days in a year.) Business Transaction 1 Edinburgh Exports Inc. (EEI) sells 25,000 shares of new common stock ($1 per share par value) to new and existing shareholders for $20 per share. Financial Account Check if the Account Is Affected by the Specified Transaction Cash Operating income Long-term debt Common stock Capital paid-in excess of par Financial Ratio Ratio’s Behavior Inventory turnover No change Debt ratio Decreases Times interest earned No change Operating profit margin No change Basic earnings power Decreases Current ratio Increases Business Transaction 2 A $500,000 10-year bank loan is initiated, and the funds are placed in Edinburgh Exports Inc. (EEI)’s checking account. Financial Account Check if the Account Is Affected by the Specified Transaction Long-term debt Marketable securities Common stock Cash Gross plant and equipment Financial Ratio Ratio’s Behavior Fixed asset turnover No change Debt ratio Increases Gross profit margin No change Operating profit margin No change Return on assets No change Current ratio Increases

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Edinburgh Exports Inc.’s Pretransaction Statement of Financial Condition

Cash	$15,000	Accounts payable	$20,000
Marketable securities	10,000	Wages payable	20,000
Accounts receivable	470,000	Taxes payable	10,000
Inventory	500,000	Notes payable	50,000
Prepaid expenses	5,000	Total current liabilities	100,000
Total current assets	1,000,000	Long-term debt	500,000
		Total liabilities	600,000
Gross plant and equipment	1,500,000	Common stock	150,000
Accumulated depreciation	500,000	Capital paid in excess of par	350,000
Net plant and equipment	1,000,000	Retained earnings	900,000
		Total equity	1,400,000
Total assets	$2,000,000	Total debt and equity	$2,000,000

Edinburgh Exports Inc.’s Pretransaction Statement of Financial Performance
Sales	$5,000,000
Less: Cost of goods sold¹	2,000,000
Gross profit	3,000,000
Less: Operating expenses	600,000
Operating profit (EBIT)	2,400,000
Less: Interest expense²	33,000
Earnings before taxes (EBT)	2,367,000
Less: Tax expense³	828,450
Net income	$1,538,550

¹Cost of goods sold equals 40% of sales.

²Interest expense equals 6% of the combined notes payable and long-term debt balances.

³The average federal and state tax rate is 35%.

Indicate if any of the listed financial statement accounts is affected by the following business transactions and whether the listed ratios will increase, decrease, or remain unchanged as a result of the transaction. (Hint: Assume that the business transaction occurs exactly as stated without interpreting it further. Do not consider any related transactions that may occur before or after the specified transaction. Assume there are 365 days in a year.)

Business Transaction 1

Edinburgh Exports Inc. (EEI) sells 25,000 shares of new common stock ($1 per share par value) to new and existing shareholders for $20 per share.

Financial Account	Check if the Account Is Affected by the Specified Transaction
Cash
Operating income
Long-term debt
Common stock
Capital paid-in excess of par

Financial Ratio	Ratio’s Behavior
Inventory turnover	No change
Debt ratio	Decreases
Times interest earned	No change
Operating profit margin	No change
Basic earnings power	Decreases
Current ratio	Increases

Business Transaction 2

A $500,000 10-year bank loan is initiated, and the funds are placed in Edinburgh Exports Inc. (EEI)’s checking account.

Financial Account	Check if the Account Is Affected by the Specified Transaction
Long-term debt
Marketable securities
Common stock
Cash
Gross plant and equipment

Financial Ratio	Ratio’s Behavior
Fixed asset turnover	No change
Debt ratio	Increases
Gross profit margin	No change
Operating profit margin	No change
Return on assets	No change
Current ratio	Increases

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