BTB110 – Assignment 1- due Thursday, November 17, 2011

Question 1

Leadfoot Al decided to retire from stock car racing and invest all his winnings in a fish farm. He had majored in genetics in college and experimented with many different species of fish before coming up with a catfish that had the texture and taste of ocean trout. Moreover, contacts from his previous profession made it possible for him to acquire feed for his unique form of fish at very low prices. After operating for two years, Al decided to explore expansion possibilities. He talked with his banker about getting a loan and presented an income statement for the past year based solely on cash flows, as follows:

CashCash

ReceiptsPayments

Cash collected from sale of Al’s Gourmet Fish$520,00

Feed purchases$470,000

Purchase of new fish tank 40,000

Wages paid 70,000

Sale of Land 110,000

$630,000$580,000

Cash Balance 50,000

$630,000$630,000

From discussions with Al, the banker learned the following:

  • $120,000 of the cash collected from the sale of fish in the current period was for shipments delivered prior to the start of the year. All the sales this year were paid for prior to year end.
  • The feed can be stored indefinitely, and about 40% of this year’s purchases remain on hand at year end.
  • Two fish tanks were purchased the previous year at a total cost of $80,000. These tanks, along with the one purchased at the beginning of the year, were used all year. All tanks are expected to last five years.
  • The land that was sold for $110,000 had been purchased two years earlier for $65,000.

Required: Provide Al and his banker responses to the following:

a)Why is the matching concept important in this case

b)What amount of revenue from the sale of merchandise should be included this period?

c)What amount of expense for fish food should be reported this period? How should the remainder of the food purchased be reported?

d)Should some amount for the fish tanks be included in calculating income for the current period? How much?

e)The land was sold for more than its original purchase price. This difference is called a gain and is usually included in the income statement. What is the amount of the gain on the sale of the land that should be included in income this period?

f)Prepare the Income Statement on the accrual basis that Al should have produced for his banker at the end of his second year of operations.

Question 2

The following information is available for Johnson Ltd. for the year ended December 31, 2005:

  • Net Sales were $1,918,500
  • Gross Profit for 2005 was $913,000
  • Net income for the year was $709,500
  • The company’s assets totaled $852,800 at December 31, 2004 and $990,200 at December 31, 2005
  • Total stockholders’ equity totaled $465,400 at December 31, 2004 and $710,700 at December 31, 2005
  • Average number of common shares outstanding during the year was 56,000 shares
  • Average market price of the common stock was $5 per share

Calculate the following ratios for the company:

a)Net profit margin ratio

b)Rate of return on assets ratio

c)Gross profit margin ratio

d)Debt ratio

e) Debt to equity ratio