Given is the Income Statement for the year ended December 31, 2015, Statement of Retained Earnings for the year ended December 31, 2015 and Comparative Balance Sheets for 2014 and 2015 of Maris Corporation:
Maris Corporation
Income Statement
Year Ended December 31, 2015
Sales
$3,300,000
Cost of goods sold
1,950,000
Gross profits
1,350,000
Selling and administrative expense
650,000
Amortization expense
230,000
Operating income
470,000
Interest expense
80,000
Earnings before taxes
390,000
Taxes
140,000
Earnings after taxes
250,000
Preferred stock dividends
10,000
Earnings available to common shareholders
$240,000
Shares outstanding
150,000
Earnings per share
$1.60
Statement of Retained Earnings
For the Year Ended December 31, 2015
Retained earnings, balance, January 1, 2015
$800,000
Add: Earnings available to common shareholders, 2015
240,000
Deduct: Cash dividends declared and paid in 2015
140,000
Retained earnings, balance, December 31, 2015
$900,000
Comparative Balance Sheets
For 2014 and 2015
December 31, 2015
December 31, 2014
Assets
Current assets:
Cash
$120,000
$100,000
Accounts receivable (net)
510,000
500,000
Inventory
640,000
610,000
Prepaid expenses
30,000
60,000
Total current assets
1,300,000
1,270,000
Investments (long-term securities)
80,000
90,000
Plant and equipment
2,600,000
2,000,000
Less: Accumulated amortization
1,230,000
1,000,000
Net plant and equipment
1,370,000
1,000,000
Total assets
$2,750,000
$2,360,000
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
$550,000
$300,000
Notes payable
500,000
500,000
Accrued expenses
50,000
70,000
Total current liabilities
1,100,000
870,000
Long-term liabilities:
Bonds payable, 2021
160,000
100,000
Total liabilities
1,260,000
970,000
Shareholders’ equity:
Preferred stock
90,000
90,000
Common stock
500,000
500,000
Retained earnings
900,000
800,000
Total shareholders’ equity
1,490,000
1,390,000
Total liabilities and shareholders’ equity
$2,750,000
$2,360,000
Has the buildup in plant and equipment been financed in a satisfactory manner? Briefly discuss
To determine if the buildup in plant and equipment has been financed in a satisfactory manner, we need to analyze the comparative balance sheets for 2014 and 2015.
First, let's look at the change in net plant and equipment. In 2014, the net plant and equipment were $1,000,000, while in 2015, it increased to $1,370,000. This indicates that there has been a buildup in plant and equipment.
Next, we need to examine how this buildup has been financed. We can calculate the change in long-term liabilities to see if it has increased alongside the increase in net plant and equipment. In 2014, long-term liabilities were $100,000, and in 2015, they increased to $160,000. This suggests that a portion of the buildup in plant and equipment has been financed through long-term borrowing.
Additionally, we should evaluate the change in shareholders' equity. In 2014, shareholders' equity was $1,390,000, and in 2015, it increased to $1,490,000. This indicates that the company has also used internally generated funds (including retained earnings) to finance the buildup in plant and equipment.
Based on these findings, the buildup in plant and equipment seems to have been financed in a satisfactory manner. The increase in long-term liabilities and retained earnings demonstrates a balanced approach to financing the expansion. However, it is important to consider other factors such as the company's ability to generate future cash flows and the impact of these investments on profitability.
To determine whether the buildup in plant and equipment has been financed in a satisfactory manner, we need to assess the changes in the relevant figures and their impact on the financial position of Maris Corporation.
Comparing the Comparative Balance Sheets for 2014 and 2015, we can see the following changes related to the plant and equipment:
- Plant and equipment increased from $2,000,000 in 2014 to $2,600,000 in 2015.
- Accumulated amortization increased from $1,000,000 in 2014 to $1,230,000 in 2015.
- Net plant and equipment increased from $1,000,000 in 2014 to $1,370,000 in 2015.
These changes indicate that Maris Corporation has invested in additional plant and equipment during the year. However, to determine whether the financing of this buildup has been satisfactory, we need to consider the source of funds used to finance the increase.
Looking at the Balance Sheet, we can see that the source of funding can come from two main categories: liabilities and shareholders' equity.
Liabilities:
- Notes payable remained unchanged at $500,000 from 2014 to 2015.
- Bonds payable increased from $100,000 in 2014 to $160,000 in 2015.
Shareholders' Equity:
- Preferred stock remained unchanged at $90,000 from 2014 to 2015.
- Common stock remained unchanged at $500,000 from 2014 to 2015.
- Retained earnings increased from $800,000 in 2014 to $900,000 in 2015.
From this analysis, it can be concluded that the buildup in the plant and equipment has been financed in a satisfactory manner. The increase in the net plant and equipment value suggests that the additional investments in plant and equipment have been funded by an increase in retained earnings. This indicates that the company was able to generate sufficient profits to reinvest in its assets without relying heavily on external debt financing.
However, without further information on the company's financial strategy, debt levels, and overall financial health, a more comprehensive analysis would be required to make a definitive judgment.