The following data pertain to Pavilion Products Inc. (PPI):
PPI has outstanding debt in the form of accounts payable, 6-month notes payable, and long-term bonds. The notes carry a 10% interest rate and the bonds carry an 8.5% rate. Both the notes and bonds were outstanding for the entire year.
Retained earnings at the beginning of the year was $15,000.
The dividend payout ratio is 25%.
The net profit margin is 6%.
The return on equity (ROE) is 5.5%.
The inventory turnover ratio is 6 times.
The days sales outstanding is 102 days.
Hint: New retained earnings = old retained earnings + (new sales) * (net profit margin) * (1 – dividend payout ratio)
Given the information above and below, complete PPI's balance sheet and income statement. Submit your answers to your instructor for evaluation.
Pavilion Products Inc. Balance Sheet at Dec. 31, 200X
Cash $7,500 Accounts Payable _____
Inventories _____ Notes Payable $10,000
Accounts Receivable _____
Total Current Assets _____ Total Current Liabilities _____
Net Fixed Assets $54,000 Bonds Payable $30,000
Total Debt _____
Common Stock _____
Retained Earnings _____
Total Assets _____ Total Lia. & Eq _____
Pavilion Products Inc. Income Statement for Year Ended Dec. 31, 200X
Sales $25,000
Cost of Goods Sold ______
Gross Profit ______
Selling Expenses $2,700
General & Administrative Expenses $1,900
EBIT ______
Interest Expense ______
Net Profit before Taxes ______
Taxes $1,200
Net Profit ______
To complete Pavilion Products Inc.'s balance sheet and income statement, we need to calculate the missing values based on the given information. Let's break it down step by step:
1. Calculate Accounts Payable:
We don't have the direct value for Accounts Payable, but we can find it by using the inventory turnover ratio and cost of goods sold (COGS) formula. The formula for COGS is:
COGS = Sales - Gross Profit
Since we don't have the Gross Profit, we'll use the net profit margin to calculate it. The formula for Gross Profit is:
Gross Profit = Sales * (1 - net profit margin)
Given that the inventory turnover ratio is 6 times, we can calculate the average inventory by dividing COGS by the turnover ratio:
Average Inventory = COGS / Inventory Turnover Ratio
Finally, we can calculate Accounts Payable based on the Average Inventory and the number of days in a year:
Accounts Payable = (Average Inventory / 365) * Days Sales Outstanding
2. Calculate Inventories:
We already have the value for Net Fixed Assets, which is $54,000. To find the value of Inventories, we can use the equation:
Total Assets = Total Current Assets + Net Fixed Assets
Given that Cash is $7,500, Notes Payable is $10,000, and Accounts Receivable and Accounts Payable need to be calculated, we can rearrange the equation to solve for Inventories:
Inventories = Total Assets - Total Current Assets - Net Fixed Assets
3. Calculate Accounts Receivable:
Using the formula for Days Sales Outstanding (DSO):
DSO = (Accounts Receivable / Sales) * 365
We can rearrange the formula to solve for Accounts Receivable:
Accounts Receivable = (DSO / 365) * Sales
4. Calculate Total Current Assets:
Total Current Assets can be calculated by summing the values of Cash, Inventories, and Accounts Receivable.
5. Calculate Total Current Liabilities:
Total Current Liabilities can be calculated by summing the values of Accounts Payable and Notes Payable.
6. Calculate Total Debt:
Total Debt is the sum of Notes Payable and Bonds Payable.
7. Calculate Common Stock:
Common Stock is not provided in the information given, so we need additional information to determine its value.
8. Calculate Retained Earnings:
Using the hint provided, we can calculate New Retained Earnings:
New Retained Earnings = Old Retained Earnings + (New Sales) * (Net Profit Margin) * (1 - Dividend Payout Ratio)
9. Calculate Total Assets:
Total Assets can be calculated by summing the values of Cash, Inventories, Net Fixed Assets, and Accounts Receivable.
10. Calculate Total Liabilities & Equity:
Total Liabilities & Equity can be calculated by summing the values of Total Current Liabilities, Total Debt, Common Stock, and Retained Earnings.
Now, let's use the given information and calculate the missing values.