Rainbow Paint Co.'s comparative financial statements for the years ending December 31, 2006 and 2005 are as follows. The market price of Rainbow Paint Co.'s common stock was $30 on December 31, 1999 and $25 on December 31, 2006. Rainbow Paint Co. Comparative Income Statement For the Years Ended December 31, 2006 and 2005       2006     2005 Sales     $ 5,125,000     $ 3,257,600 Sales returns and allowances     125,000     57,600 Net sales     $ 5,000,000     $ 3,200,000 Cost of goods sold     3,400,000     2,080,000 Gross profit     $ 1,600,000     $ 1,120,000 Selling expenses     $ 650,000     $ 464,000 Administrative expenses     325,000     224,000 Total operating expenses     $ 975,000     $ 688,000 Income from operations     $ 625,000     $ 432,000 Other income     25,000     19,200       $ 650,000     $ 451,200 Other expense (interest)     105,000     64,000 Income before income tax     $ 545,000     $ 387,200 Income tax expense     300,000     176,000 Net income     $ 245,000     $ 211,200               Rainbow Paint Co. Comparative Retained Earnings Statement For the Years Ended December 31, 2006 and 2005       2006     2005 Retained earnings, January 1     $ 723,000     $ 581,800 Add net income for year     245,000     211,200 Total     $ 968,000     $ 793,000 Deduct dividends:                  On preferred stock     $ 40,000     $ 40,000      On common stock     45,000     30,000           Total     $ 85,000     $ 70,000 Retained earnings, December 31     $ 883,000     $ 723,000               Rainbow Paint Co. Comparative Balance Sheet December 31, 2006 and 2005 Assets     2000     1999 Current assets:                  Cash     $ 175,000     $ 125,000      Marketable securities     150,000     50,000      Accounts receivable (net)     425,000     325,000      Inventories     720,000     480,000      Prepaid expenses     30,000     20,000           Total current assets     $ 1,500,000     $ 1,000,000 Long-term investments     250,000     225,000 Property, plant, and equipment (net)     2,093,000     1,948,000 Total assets     $ 3,843,000     $ 3,173,000 Liabilities             Current liabilities     $ 750,000     $ 650,000 Long-term liabilities:                  Mortgage note payable, 10%, due 2009     $ 410,000     -      Bonds payable, 8%, due 2012     800,000     $ 800,000           Total long-term liabilities     $ 1,210,000     $ 800,000 Total liabilities     $ 1,960,000     $ 1,450,000 Stockholders' Equity             Preferred 8% stock, $100 par     $ 500,000     $ 500,000 Common stock, $10 par     500,000     500,000 Retained earnings     883,000     723,000      Total stockholders' equity     $ 1,883,000     $ 1,723,000 Total liabilities and stockholders' equity     $ 3,843,000     $ 3,173,000 Instructions Determine the following measures for both 20Y8 and 20Y9, rounding percentages and ratios other than per-share amounts to one decimal place. Briefly explain how or why management would use this information and comment on the trend from 20Y8 and 20Y9.  Number of days’ sales in inventory Ratio of fixed assets to long-term liabilities Ratio of liabilities to stockholders’ equity

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
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Rainbow Paint Co.'s comparative financial statements for the years ending December 31, 2006 and 2005 are as follows. The market price of Rainbow Paint Co.'s common stock was $30 on December 31, 1999 and $25 on December 31, 2006.

Rainbow Paint Co.
Comparative Income Statement
For the Years Ended December 31, 2006 and 2005

      2006     2005
Sales     $ 5,125,000     $ 3,257,600
Sales returns and allowances     125,000     57,600
Net sales     $ 5,000,000     $ 3,200,000
Cost of goods sold     3,400,000     2,080,000
Gross profit     $ 1,600,000     $ 1,120,000
Selling expenses     $ 650,000     $ 464,000
Administrative expenses     325,000     224,000
Total operating expenses     $ 975,000     $ 688,000
Income from operations     $ 625,000     $ 432,000
Other income     25,000     19,200
      $ 650,000     $ 451,200
Other expense (interest)     105,000     64,000
Income before income tax     $ 545,000     $ 387,200
Income tax expense     300,000     176,000
Net income     $ 245,000     $ 211,200
             

Rainbow Paint Co.
Comparative Retained Earnings Statement
For the Years Ended December 31, 2006 and 2005

      2006     2005
Retained earnings, January 1     $ 723,000     $ 581,800
Add net income for year     245,000     211,200
Total     $ 968,000     $ 793,000
Deduct dividends:            
     On preferred stock     $ 40,000     $ 40,000
     On common stock     45,000     30,000
          Total     $ 85,000     $ 70,000
Retained earnings, December 31     $ 883,000     $ 723,000
             

Rainbow Paint Co.
Comparative Balance Sheet
December 31, 2006 and 2005

Assets     2000     1999
Current assets:            
     Cash     $ 175,000     $ 125,000
     Marketable securities     150,000     50,000
     Accounts receivable (net)     425,000     325,000
     Inventories     720,000     480,000
     Prepaid expenses     30,000     20,000
          Total current assets     $ 1,500,000     $ 1,000,000
Long-term investments     250,000     225,000
Property, plant, and equipment (net)     2,093,000     1,948,000
Total assets     $ 3,843,000     $ 3,173,000
Liabilities            
Current liabilities     $ 750,000     $ 650,000
Long-term liabilities:            
     Mortgage note payable, 10%, due 2009     $ 410,000    

-

     Bonds payable, 8%, due 2012     800,000     $ 800,000
          Total long-term liabilities     $ 1,210,000     $ 800,000
Total liabilities     $ 1,960,000     $ 1,450,000
Stockholders' Equity            
Preferred 8% stock, $100 par     $ 500,000     $ 500,000
Common stock, $10 par     500,000     500,000
Retained earnings     883,000     723,000
     Total stockholders' equity     $ 1,883,000     $ 1,723,000
Total liabilities and stockholders' equity     $ 3,843,000     $ 3,173,000


Instructions

  • Determine the following measures for both 20Y8 and 20Y9, rounding percentages and ratios other than per-share amounts to one decimal place. Briefly explain how or why management would use this information and comment on the trend from 20Y8 and 20Y9. 
  1. Number of days’ sales in inventory
  2. Ratio of fixed assets to long-term liabilities
  3. Ratio of liabilities to stockholders’ equity
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