Financial Statement Presentation and Ratios The Horizon Company is listed on the New York Stock Exchange. The market value of its common stock was quoted at $18 per share at both December 31, 2007 and December 31, 2006. Horizon’s balance sheets at December 31, 2007 and December 31, 2006, and statements of income and retained earnings for the years then ended are as follows:
Balance Sheets
|
December 31, |
||
|
2007 |
2006 |
|
|
Assets |
||
|
Current assets |
||
|
Cash |
$3,500 |
$3,600 |
|
Marketable securities, at market |
13,000 |
11,000 |
|
Accounts receivable, net of allowance for doubtful accounts |
105,000 |
95,000 |
|
Inventories at lower of cost or market |
126,000 |
154,000 |
|
Prepaid expenses |
2,500 |
2,400 |
|
Total current assets |
$250,000 |
$266,000 |
|
Property, plant and equipment, net of accumulated depreciation |
311,000 |
308,000 |
|
Other assets |
29,000 |
34,000 |
|
Total Assets |
$590,000 |
$608,000 |
|
Liabilities |
||
|
Current liabilities |
||
|
Notes payable |
$5,000 |
$15,000 |
|
Accounts payable and accrued expenses |
62,500 |
74,500 |
|
Income taxes payable |
1,000 |
1,000 |
|
Payments due within one year on long term debt |
6,500 |
7,500 |
|
Total current liabilities |
$75,000 |
$98,000 |
|
Long term debt |
169,000 |
180,000 |
|
Deferred income taxes |
74,000 |
67,000 |
|
Other liabilities |
9,000 |
8,000 |
|
Stockholders’ Equity |
||
|
Common stock, par value $1.00 per share; authorized 20,000 shares; issued |
||
|
and outstanding 10,000 shares |
10,000 |
10,000 |
|
Additional paid in capital |
110,000 |
110,000 |
|
Retained earnings |
142,000 |
134,000 |
|
Accumulated other comprehensive income |
||
|
Unrealized increase in value of marketable securities |
1,000 |
1,000 |
|
Total stockholders’ equity |
263,000 |
255,000 |
|
Total Liabilities and Stockholders’ Equity |
$590,000 |
$608,000 |
Statement of Income and Retained Earnings
|
Year Ended December 31, |
||
|
2007 |
2006 |
|
|
Net sales |
$600,000 |
$500,000 |
|
Costs and expenses |
||
|
Cost of goods sold |
480,000 |
400,000 |
|
Selling, general and administrative expenses |
74,200 |
68,000 |
|
Other, net |
17,000 |
6,000 |
|
Total costs and expenses |
571,200 |
474,000 |
|
Income before income taxes |
$28,800 |
$26,000 |
|
2007 |
2006 |
|
|
Income taxes |
8,600 |
7,800 |
|
Net income |
$20,200 |
$18,200 |
|
Retained earnings at beginning of period, as previously reported |
141,000 |
132,000 |
|
Adjustment required for correction of an error |
7,000 |
6,000 |
|
Retained earnings at beginning of period, as restated |
$134,000 |
$126,000 |
|
Dividends on common stock |
12,200 |
10,200 |
|
Retained earnings at end of period |
$142,000 |
$134,000 |
Additional facts are as follows:
a. “Selling, general and administrative expenses” for 2007 included a usual but infrequently occurring charge of $9,000.
b. “Other, net” for 2007 included an extraordinary item (charge) of $10,000. If the extraordinary item (charge) had not occurred, income taxes for 2007 would have been $11,600, instead of $8,600.
c. “Adjustment required for correction of an error” was a result of a change from an accounting principle that is not generally accepted to one that is generally accepted.
d. Horizon Company has a simple capital structure and has disclosed earnings per common share for net income in the Notes to the Financial Statements.
Required
1. Determine from the preceding additional facts whether or not the presentation of those facts in the Horizon Company statements of income and retained earnings is appropriate. If the presentation is appropriate, discuss the theoretical rationale for the presentation. If the presentation is not appropriate, describe the appropriate presentation and discuss its theoretical rationale. Do not discuss disclosure requirements for the notes to the financial statements.
2. Describe the general significance of the following financial analysis tools:
(a) quick (acid test) ratio, (b) inventory turnover, and (c) return on stockholders” equity.
3. Based on the Horizon Company balance sheets, statements of income and retained earnings, and additional facts, describe how to determine each of the above financial analysis tools (for the year 2007 only).