(a)
Income statement shows that how much income and expense in the current a calendar or financial year.
To discuss:
Determine how much the Twisted’s company sale, net income and assets have grown during last in 3 years.
Answer to Problem 88PSB
This table shows that the change in the last 3 year in different item
| Particular | 2019 | 2017 | Total change |
| Sale | 54922 | 42893 | 35526 |
| Net income | 2285 | 1376 | 227 |
| Total assets | 16347 | 12501 | 10492 |
Explanation of Solution
Shows this table for Last year 3 sale, net income and fixed year
| Particular | 2019 | 2018 | 2017 |
| Sale | 54922 | 42893 | 35526 |
| Net income | 2285 | 1376 | 227 |
| Total assets | 16347 | 12501 | 10492 |
(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 88PSB
The company has increases its assets from 2017 to 2019. In the 2017 company assets, only $10492 but these assets in 2019 is $16347. Company’s resource fund has two types only first one is
Explanation of Solution
| Particular | 2019 | 2018 | 2017 |
| Property plant | 4912 | 3541 | 2937 |
| Other assets | 592 | 592 | 552 |
| Common stock | 4367 | 4598 | 4725 |
| Retain earning | 3169 | 1951 | 1255 |
(c)
In the liquidity there is two types of formula which on is
Current ratio shows that the relationship between current assets and current liabilities.
To compute:
Find the Twisted’s liquidate is adequate.
Answer to Problem 88PSB
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 1.23 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 =
Quick ratio =
Quick assets = Current assets − inventory − prepaid assets
= $10843 - $5673 =$5170
(Note: this data is related for 2019).
(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 88PSB
Company has two source of funds for taking the loan amount.
Company has little 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 | 1356 | 863 | 622 |
| Short-term notes payable | 4341 | 1731 | 463 |
| Long-term debt | 3241 | 3234 | 3266 |
(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 88PSB
The net income increase by the $3962.67
Twisted company
Income statement
| Particular | 2020 ($) |
| Sale (54922 +25% of 54922) | 68652.5 |
| Cost of goods sold (32936 + 25% of 32936) | 41170 |
| Gross margin | 27482.5 |
| Other income | 397 |
| Total income (A) | 27879.5 |
| Selling and expense | 17857 |
| Interest | 1356 |
| Total cost (B) | 19213 |
| Income before tax | 8666.5 |
| Tax | 2418.82 |
| Net income | 6247.67 |
Explanation of Solution
- Net income increase by the 25% of the last year.
- Other expense to same and other income also to be same.
- Cost of goods sold to be increase in the sale ratio as the sale increase.
| Particular | 2020 ($) |
| Sale (54922 +25% of 54922) | 68652.5 |
| Cost of goods sold (32936 + 25% of 32936) | 41170 |
| Gross margin | 27482.5 |
| Other income | 397 |
| Total income (A) | 27879.5 |
| Selling and expense | 17857 |
| Interest | 1356 |
| Total cost (B) | 19213 |
| Income before tax | 8666.5 |
| Tax | 2418.82 |
| Net income | 6247.67 |
(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 88PSB
Company assets in 2019 = $16347
Company want increase the assets by 25% of $16347 = $4086.75
Company paid the dividend 50% of net profit = 50% of $6247.67
= $3123.83
Company require total fund from capital = $4086.75- $3123.83 = $962.92.
Explanation of Solution
The net income increase by the 2769.22
Twisted company
Income statement
| Particular | 2020 ($) |
| Sale (54922 +25% of 54922) | 68652.5 |
| Cost of goods sold (32936 + 25% of 32936) | 41170 |
| Gross margin | 27482.5 |
| Other income | 397 |
| Total income (A) | 27879.5 |
| Selling and expense | 17857 |
| Interest | 1356 |
| Total cost (B) | 19213 |
| Income before tax | 8666.5 |
| Tax | 2418.82 |
| Net income | 6247.67 |
Company assets in 2019 = $16347
Company want increase the assets by 25% of $16347 = $4086.75
Company paid the dividend 50% of net profit = 50% of $6247.67
= $3123.83
Company require total fund from capital = $4086.75- $3123.83 = $962.92.
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Chapter 12 Solutions
Cornerstones of Financial Accounting
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