Problem Set 1

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Group Problem Set 1: This problem Set is based on materials covered in module 1/week 1. It is designed for you to demonstrate your understanding of basic financial statements, financial statement analysis, break-even concepts, financial and operating leverages. Before you start this assignment, please review weeks 1 and 2 materials thoroughly.

Finance date of Adams Stores, Inc. for the year ending 2016 and 2017.

Items Sales Cash

Other Expenses Retained Earnings Long-term debt Cost of goods sold Depreciation

Short-term investments Fixed Assets

Interest Expenses

Shares outstanding (par value

= $4.60)

Market Price of stock Accounts Receivable Accounts payable Inventory

Notes Payable Accumulated Depreciation

Accruals

2016

2017

$3,432,000

$5,834,400

9,000

7,282

340,000

720,000

203,768

97,632

323,432

1,000,000

2,864,000

4,980,000

18,900

116,960

48,600

20,000

491,000

1,202,950

62,500

176,000

100,000

100,000

8.50

6

351,200

632,160

145,600

324,000

715,200

1,287,360

200,000

720,000

146,200

263,160

136,000

284,960

Tax Rate40%40%

Instructions:

As a group, complete the following activities using the financial information above:

Part 1: Financial Statements

  • Prepare the income statement for 2016 and 2017. Include statement of retained earnings for 2017
  • Prepare the balance sheet for 2016 and 2017
  • Prepare Common-Size financial statements of income statement and balance sheet.
  • Prepare Statement of Cash Flows

  • Based on your financial statements (from Part 1), calculate the following ratios for the two years. Show all your calculations in good form. Show your formulas. If you use excel, each calculation need to show the excel formula
  • Comments on the ratios by comparing 2016 to 2017 ratios.
  • Assume Adams Stores, Inc. is a retail company similar to WalMart, Myers, or Target. Compare 2017 ratios to the industry average. Please note that Adams Stores, Inc. is not a real company. To find comparable industry ratios, you need to search for industry ratios for retail. See information on Moodle for instructions on how to find industry ratios. Based on the industry average, how is Adams Stores, Inc. doing financially?
    • Break-even in units (in dollars and units). Explain what your numbers mean. As a manager, how would you use the numbers in financial planning?
    • What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?
    • What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?

Current ratio Quick ratio

Inventory turnover (times) Average collection period (days) Total asset turnover (times) Debt ratio

Times interest earned Gross profit margin Net profit margin Return on total assets Return on equity

P/E ratio

Return on equity using DuPont Analysis

Johnson Products, Inc.

Income Statement

For the Year Ended December 31, 2018

Sales (40,000 bags at $50 each) …………………………….

$2,000,000

Less: Variable costs (40,000 bags at $25)…………….

1,000,000

Fixed costs……………………………………………………..

600,000

Earnings before interest and taxes …………………………

400,000

Interest expense …………………………………………………..

120,000

Earnings before taxes ………………………………………….

280,000

Income tax expense (20%) ……………………………………

56,000

Net income …………………………………………………………

$ 224,000

Based on the information above, calculate (show all calculations and responses in good form):

Specific Instructions:

  • You may use Excel or Word. Please DO NOT use any other format such PDF, etc.

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