Problem 2-8: Statement of Cost of Goods Sold; Income Statement; Balance Sheet; Ratio Analysis.

On September 30, 20XB the trial balance of The Kearney Company appeared as follows:

THE KEARNEY COMPANY

TRIAL BALANCE
September 30, 20XB

Cash in Banks and on Hand ....... $ 234,000

Notes Receivable .......... 21,800
Accounts Receivable ........ 444,000
Raw Materials Inventory, October 1, 20XA ....... 282,000
Work in Process Inventory, October 1, 20XA ........ 345,000
Finished Goods Inventory, October 1, 20XA .......... 500,000
Prepaid Expenses .......... 35,500
Land ........... 150,000
Buildings . .......... 1,250,000
Accumulated Depreciation - Buildings ................. $ 150,000
Machinery ........ 1,650,000
Accumulated Depreciation - Machinery .... 660,000
Office Furniture and Fixtures ........... 26,000
Accumulated Depreciation - Office Furniture and Fixtures .................... 5,000
Notes Payable ....... 500,000
Accounts Payable ......... 100,000
Accrued Wages Payable ....... 50,000
Accrued Interest on Mortgage ........ 5,000
Mortgage on Plant ....... 750,000
Capital Stock ..... 1,000,000
Earnings Retained in Business ....... 1,308,300
Sales ...... 3,600,000
Sales Allowances ....... 60,000
Raw Materials Purchased .... 500,000
Direct Labor ...... 1,000,000
Patterns and Drawings Expenses .......... 35,000
Miscellaneous Factory Overhead ............ 900,000
Freight and Postage on Sales .... 10,000
Miscellaneous Marketing Expenses ......... 350,000
Miscellaneous Administrative Expenses ....... 250,000
Interest Earned ......... 25,000
Interest Paid ...... 60,000
Discount on Sales .......... 50,000
Totals .... $ 8,153,300 $ 8,153,300

The following information is also available:

Inventories on September 30, 20XB: Allowances for depreciation:

Raw materials, $ 280,000 3 % on buildings (80 % to factory, 20 % to administration)
Work in process, $ 380,000 10 % on machinery
Finished goods, $ 720,000 5 % on office furniture and fixtures

Required: (1) A cost of goods sold statement for the year ended September 30, 20XB.
(2) An income statement for the year ended September 30, 20XB.
(3) A balance sheet as of September 30, 20XB.
(4) The following ratios and percentages:
(a) Current ratio.
(b) Acid-test ratio.
(c) Net income to sales percentage.
(d) Ratio of gross profit to sales.
(e) Rate of return on capital employed.
DISCOUNT CUSTOMER

37,500.00
 The Keaney Company
SCHEDULE 1
STATEMENT OF COST OF GOODS SOLD
September 30, 20XB

Direct materials:
Materials inventory, October 1, 20XY $ 282,000
Purchases $ 500,000
Less puchases returns and allowances 0 500,000
Materials available for use $ 782,000
Less materials inventory,September 30 280,000
Direct materials consumed $

Direct labor

Factory overhead:
Miscellaneous Factory Overhead $ 900,000
Patterns and Drawings Expenses 35,000
Depreciation - factory building 30,000
Depreciation - machinery 165,000
Total factory overhead
Total manufacturing costs $
Add work in process inventory, october 1, 20XY
$
Less work in process inventory, September 30, 20XY
Cost of goods manufactured $
Add inventory finished goods, October 1 20XY
$
Less inventory finished goods, September 30 20XY
Cost of goods sold $
y

ODS SOLD

502,000

1,000,000

1,130,000
2,632,000
345,000
2,977,000
380,000
2,597,000
500,000
3,097,000
720,000
2,377,000
 The Keaney Company
INCOME STATEMENT
September 30, 20XB

%
Sales $ 3,490,000 100.0
Less cost of goods sold 2,377,000 68.1
Gross profit on sales $ 1,113,000 31.9
Less operating expenses:
Administrative expenses 10,000
Depreceation - Building & Office 8,800
Miscellaneous Administrative expenses 250,000
Miscellaneous Marketing Expenses, Etc 350,000 618,800 17.7
Net income from operations $ 494,200 14.2
Other income and expense items:
Interest and debt expenses 35,000
Net income before estimated tax $ 459,200 13.2
Less income tax:
Net income After estimated tax $ 459,200 13.2
 THE KEARNEY COMPANY
BALANCE SHEET
For Year Ended September 31, 20XB

ASSETS

Current assets:
Cash $
Note Receivable
Accounts receivable (net)
Inventories (materials, work in process, finished goods)
Prepaid insurances, taxes and mescellaneous expenses
Total current assets $

Property, plant, and equipment:

Land $ 150,000
Buildings $ 1,250,000
Office Furniture and Fixtures 26,000
Machinery and equipment 1,650,000
$ 2,926,000
Less accumulated depreciation 1,018,800 1,907,200
Total property, plant, and equipment
Total Assets $

LIABILITIES
Current liabilities:
Accounts payable $
Note Payable
Accrued payroll, taxes, interst, etc.
Estimated income taxes
Due on lang-term debt
Total current liabilities $

Long-term debt
Total liabilities $

STOCKHOLDERS' EQUITY
Commen stock $ 1,000,000
Retained earnings 1,308,300
Net Income 459,200
Total stockholders' equity
Total liabilities and stockholders' equity $
PANY

31, 20XB

234,000
21,800
444,000
1,380,000
35,500
2,115,300

2,057,200
4,172,500

100,000
500,000
805,000
0
0
1,405,000

0
1,405,000

UITY

2,767,500
4,172,500 0
The more prevalent ratios are:

Current Assets 2,115,300

1. Current Ratio = = = 1.506
Current Liabilities 1,405,000

Current Assets - Inventories - Prepaid Items 699,800

2. Acid-Test ratio = = = 0.4981
Current Liabilities 1,405,000

Net Income (before estimated income tax)

3.a. Net Income (before estimated income tax) as a Percentage of Sales =
Sales

Net Income (after estimated income tax)

3.b. Net Income (after estimated income tax) as a Percentage of Sales = =
Sales

Gross Profit 1,113,000

4. Ratio of Gross Profit to Sales = = = 0.319
Sales 3,490,000

Net income (after estimated income tax) 459,200

5. Rate of Return on Capital Employed = = = 0.110
Capital Employed (Total Assets) 4,172,500
 459,200
= = 0.132
3,490,000

459,200
= 0.132
3,490,000