Chapter 12, Problem 88PSA

To determine

(a)

Income statement shows that how much income and expense in the current a calendar or financial year.

Balance sheet shows that what is the position of the company in a particular date. Balance sheet also shows that the how much company has working capital for day to day transaction.

To discuss:

Determine how much the Twisted’s company sale, net income and assets have grown during last in 3 years.

Answer to Problem 88PSA

This table shows that the change in the last 3 year in different item

Particular	2019	2017	Total change
Sale	51638	34425	17213
Net income	2279	1603	676
Total assets	16516	10281	6235

Explanation of Solution

Shows this table for Last year 3 sale, net income and fixed year

Particular	2019	2018	2017
Sale	51638	41310	34425
Net income	2279	1920	1603
Total assets	16516	12646	10281

To determine

(b)

Increase in assets means the company increases the production for the expand the business so that the company finance the find from the different source and use for the purchase of different kind of assets.

To discuss:

Explain how twisted has financed the increase in assets.

Answer to Problem 88PSA

The company has increases its assets from 2017 to 2019. In the 2017 company assets, only $10281 but these assets in 2019 is $16516. Company’s resource fund has two types only first one is retained earnings and the second one is the issue the common stock in the market because the company has yet no increase the debt since last 3 year.

Explanation of Solution

Particular	2019	2018	2017
Property plant	4860	3600	2756
Other assets	574	585	562
Common stock	7989	6863	5961
Retain earning	3264	2138	1236

To determine

(c)

Liquidity ratio means that this formula’s shows that company is able to pay its own debt on timely or not.

In the liquidity there is two types of formula which on is current ratio and second one is the quick ratio.

Current ratio shows that the relationship between current assets and current liabilities.

To compute:

Find the Twisted’s liquidate is adequate.

Answer to Problem 88PSA

As per the current ratio the company is able to pay the all short-term debt because the standard ratio of current ratio is 1:1, and in this question the current ratio is 2.061 which shows the goods ratio.

But as per the quick ratio the company needs to improve the assets because due to heavy inventory in the hands of company shows the negative effect for the company.

Explanation of Solution

Current ratio shows that the company ability to cover its short-term obligation with its current assets.

Current ratio = $\frac{\text{current assets}}{\text{current liabilities}}$ = $\frac{\$11082}{\$5377}=2.061$

Quick ratio = $\frac{\text{quick assets}}{\text{current liabilities}}$ = $\frac{\$5018}{\$5377}=0.93$

Quick assets = Current assets − inventory − prepaid assets

= $11082 - $6064 =$5018

(Note: this data is related for 2019).

To determine

(d)

Interest expense means if company taking the loan amount from the outside the business then the company pay the interest on the particular debt. Interest expense shows in the income statement and this expense reduce the company profit.

To discuss:

Define why interest expense increase.

Answer to Problem 88PSA

Company has two source of funds for taking the loan amount.

Company has not increase the long-term loan but company increase the company increase the short-term note payable so that the company increase the interest expense which shows in the income statement.

Explanation of Solution

This table shows that the increase the different amount in last 3 years

Particular	2019	2018	2017
Interest expense	1237	765	554
Short-term notes payable	4230	1620	450
Long-term debt	3150	3150	3150

To determine

(e)

The company wants to increase the sale proportion then definitely the company’s increase the variable expense in the same proportion, and net profit increase as per their ratio.

To compute:

Twisted company increase the sale proportion then what effect in the net profit.

Answer to Problem 88PSA

The net income increase by the $3705.75

Twisted company

Income statement

Particular	2020 ($)
Sale (51638 +25% of 51638)	64547.5
Cost of goods sold (31050 + 25% of 31050)	38812.5
Gross margin	25735
Other income	383
Total income (A)	26118
Selling and expense	16570
Interest	1237
Total cost (B)	17807
Income before tax	8311
Tax	2326.24
Net income	5984.75

Explanation of Solution

1. Net income increase by the 25% of the last year.
2. Other expense to same and other income also to be same.
3. Cost of goods sold to be increase in the sale ratio as the sale increase.

Particular	2020 ($)
Sale (51638 +25% of 51638)	64547.5
Cost of goods sold (31050 + 25% of 31050)	38812.5
Gross margin	25735
Other income	383
Total income (A)	26118
Selling and expense	16570
Interest	1237
Total cost (B)	17807
Income before tax	8311
Tax	2326.24
Net income	5984.75

To determine

(f)

Company wants that company increase the shareholder worth and also increase the company earning per share and also increase the production for increase the sale so increase the net income.

To discuss:

Company want increase the 25% assets by the support the increase the 25% sale and also company wants that the dividend paid to the shareholder 50% of net income, the how much company take borrow by the capital or any other sources.

Answer to Problem 88PSA

Company assets in 2019 = $16516

Company want increase the assets by 25% of $16516 = $4129

Company paid the dividend 50% of net profit = 50% of $5984.75

= $2992.37

Company require total fund from capital = $4129 - $2992.37 = $1136.63.

Explanation of Solution

The net income increase by the 2769.22

Twisted company

Income statement

Particular	2020 ($)
Sale (51638 +25% of 51638)	64547.5
Cost of goods sold (31050 + 25% of 31050)	38812.5
Gross margin	25735
Other income	383
Total income (A)	26118
Selling and expense	16570
Interest	1237
Total cost (B)	17807
Income before tax	8311
Tax	2326.24
Net income	5984.75

Company assets in 2019 = $16516

Company want increase the assets by 25% of $16516 = $4129

Company paid the dividend 50% of net profit = 50% of $5984.75

= $2992.37

Company require total fund from capital = $4129 - $2992.37 = $1136.63.