PFIN 7:STUDENT EDITION-TEXT
7th Edition
ISBN: 9780357033616
Author: Billingsley
Publisher: CENGAGE L
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Question
Chapter 2, Problem 1LO
Summary Introduction
To discuss: The relationship between the financial statement and financial plans.
Expert Solution & Answer
Explanation of Solution
The relationship between the financial statement and financial plans:
Thus, these two elements establish the relationship and present a guideline to attain the financial goals. The plan is obviously impacted in the statement.
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Stevens Textile Corporation's 2019 financial statements are shown below
Balance Sheet as of December 31, 2019 (Thousands of Dollars)
Cash
$ 1,080
Accounts payable
$ 4,320
Receivables
6,480
Accruals
2,880
Inventories
9,000
Line of credit
0
Total current assets
$16,560
Notes payable
2,100
Net fixed assets
12,600
Total current liabilities
$ 9,300
Mortgage bonds
3,500
Common stock
3,500
Retained earnings
12,860
Total assets
$29,160
Total liabilities and equity
$29,160
Income Statement for December 31, 2019 (Thousands of Dollars)
Sales
$36,000
Operating costs
34,000
Earnings before interest and taxes
$ 2,000
Interest
160
Pre-tax earnings
$ 1,840
Taxes (25%)
460
Net income
$ 1,380
Dividends (40%)
$ 552
Addition to retained earnings
$ 828
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At year-end 2019, Wallace Landscaping’s total assets were $2.30 million, and its accounts payable were $430,000. Sales, which in 2019 were $2.9 million, are expected to increase by 20% in 2020. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to $630,000 in 2019, and retained earnings were $330,000. Wallace has arranged to sell $180,000 of new common stock in 2020 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2020. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 50% of earnings will be paid out as dividends.
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