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

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

Problem 1Q

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Question

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

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