financial statements

The following financial statements were prepared for the management of Morgan Ltd. The statements contain some information that will be disclosed in note form in the general purpose external financial statements to be issued to the investors.

Morgan Ltd
Income Statement
For the year ended 30 June 2018
Revenues (Note 2)$850,500
Expenses, excluding finance costs (Note 4)686,700
Finance costs6,300
Profit before income tax157,500
Income tax expense63,000
Profit$94,500
Morgan Ltd
Statement of Financial Position
As at 30 June 2018
Current assets
Cash and cash equivalents$37,800
Accounts receivables$299,250
Less: Allowance for doubtful debts18,900
280,350
Inventories252,000
Total current assets570,150
Non-current assets
Land63,000
Building$189,000
Less: Accumulated Depreciation37,800
151,200
Store equipment47,250
  Less: Accumulated Depreciation22,050
25,200
Total Non-current assets239,400
Total assets809,550
Current liabilities
Accounts payables270,900
Preference dividends payable3,780
Ordinary dividends payable25,200
Other current liabilities12,600
 Total current liabilities312,480
Non-current liabilities
Long-term borrowings (Note 5)63,000
Total Non-current liabilities63,000
Total liabilities375,480
Net assets434,070
Equity
Share capital$315,000
Retained earnings119,070
Total equity434,070
Morgan Ltd
Statement of Changes in Equity
For the year ended 30 June 2018
Share capital
Ordinary:
Balance at start of period$252,000
Balance at end of period252,000
Preference (Note 6):
Balance at start of period63,000
Balance at end of period63,000
Total share capital$315,000
Retained earnings
Balance at start of period$53,550
Total profit for the period94,500
Dividends – preferences($3,780)
Dividends – ordinary($25,200)
Balance at end of period$119,070
Notes to the financial statements
Note 2: Revenue
Sales$850,500
Note 4: Expenses
Cost of sales567,000
Selling and distribution expenses89,000
Administration expenses30,700
Note 5: Long-term borrowings
10% mortgage payable63,000
Note 6: Preference shares
6% preference shares63,000

Additional information:

  1. The balance of certain accounts at the beginning of the year are:

Accounts receivables                     $315,000

Allowance for doubtful debts     (26,350)

Inventories                                         220,500

  1. Total assets and total equity at the beginning of the year were $756,000 and $368,550 respectfully.

Required:

A. Name the ratios that a financial analyst might calculate to give some indication of the following cases:

  1. A company’s earning power
  2. The extent to which internal resources have been used to finance acquisition of assets
  3. Rapidity with which accounts receivables are collected
  4. The ability of the entity’s earnings to cover its interest commitments
  5. The length of time taken by the business to sell its inventories

B. Calculate and briefly discuss the suitability of the ratios mentioned for each of the above cases.

C. Given the above financial statements, comment on the company’s profitability and liquidity.

Question-2

Koala Bear Day-care provides day-care for children from Mondays through Fridays. Its monthly variable costs per child are:

Lunch$100
Educational supplies75
Other supplies (paper products, toiletries, etc.)25
Total$200
Monthly fixed costs consist of:
Rent$2,000
Utilities (electricity, water, telephone expenses)300
Insurance300
Salaries2,500
Miscellaneous500
Total$5,600

Koala Bear charges each parent $600 per child.

Required:

  1. Calculate the break-even point.
  2. Koala Bear’s target profit is $10,400 per month, calculate the number of children who must be enrolled to achieve the target profit
  3. Koala Bear lost its lease and had to move to another building. Monthly rent for the new building is $3,000. At the suggestion of parents, Koala Bear plans to take children on field trips. Monthly costs of the field trips are $1,000. By how much should Koala Bear increase fees per child to meet the target profit of $10,400, assuming the same number of children as in requirement B?
  4. How can a company with multiple products calculate its break-even point? Discuss and support your discussion by readings and research.

Question-3

Lennox Company uses a job costing system. The company uses predetermined overhead rates in applying manufacturing overhead costs to individual jobs. The predetermined overhead rate in Department A is based on machine-hours, and the rate in Department B is based on direct labour cost. At the beginning of 2018, the company’s management has made the following estimates for the year:

Department ADepartment B
Direct labour-hours15,00030,000
Machine-hours50,00012,000
Direct labour cost$80,000$172,000
Manufacturing overhead162,500215,000

Job 145 was initiated into production on August 1 and completed on September 15. The company’s cost records show the following information on the job:

Department ADepartment B
Direct labour-hours2240
Machine-hours8020
Direct material used$450$250
Direct labour cost120

Leave a Reply

Your email address will not be published. Required fields are marked *