Use the Information That Follows Taken from Carter Company's Financial

question 71

Essay

Use the information that follows taken from Carter Company's financial statements for the years ending December 31, 2017 and 2016.
$\begin{array}{lrr}\text { Balance Sheet Information }&2017&2016\\\hline \text { Assets}\\\text { Cash } & \$ 70 & \$ 80 \\\text { Accounts receivable } & 40 & 40 \\\text { Inventory } & 40 & 60 \\\text { Land, building, and equipment } & \underline{290} & \underline{310} \\\text { Total Assets } & \$ \underline{440} & \$ \underline{490} \\\end{array}$

$\begin{array}{l}\text { Liabilities and Shareholders' Equity }\\\hline \text { Accounts payable } & \$ 95 & \$ 245 \\\text { Common stock } & 210 & 210 \\\text { Retained earnings } & 135& 35\\\text { Total Liabilities \& Shareholders' Equity }& \underline{\$440} &\underline{ \$490} \\\end{array}$

$\begin{array}{lr}\text { Income Statement Information }\\\text { Sales (all sales are on credit) } & \$ 900 \\\text { Cost of goods sold } & \underline{300} \\\text { Gross profit } & {\$600}\\\text { Operating expenses } & \underline{ 500} \\\text { Net income } & \underline{ \$(100)} \end{array}$
The industry in which Carter is a member has an average debt/equity ratio of 0.83. Determine if, as measured by the debt/equity ratio on December 31, 2017, Carter is taking full advantage of investing borrowed capital in its operations relative to that of the average firm in its industry. Explain.

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Definitions:

Economic Profits

Profits calculated by subtracting both explicit and implicit costs from total revenue, showing the total return exceeding all opportunity costs.

Long-run Equilibrium

A state in which all factors of production and outputs are optimized, resulting in a stable economic environment without tendencies for change.

Competitive Market

A market structure characterized by a large number of buyers and sellers, free entry and exit, and products that are similar across sellers, leading to price competition and efficiency.

Marginal Revenue

The boost in income achieved by selling one more unit of a product or service.