Comparative Financial Statements for Bent Stew Enterprises Are Shown Below

question 13

Multiple Choice

Comparative financial statements for Bent Stew Enterprises are shown below: $\begin{array}{lrrr}&\text { December } 31\\&2018&2017\\\text { Assets }\\\text { Current assets: }\\\text { Cash } & \$ 3,000 & \$ 800 \\\text { Accounts receivable } & 8,500 & 6,000 \\\text { Inventory } & 12,000 & 8,200 \\\text { Prepaid expenses } & 1,400 & 900 \\\text { Total current assets } & 24,900 & 15,900 \\\quad \text { Property, plant, and equipment, net } & 103,600 & 123,300 \\\text { Intangible assets, net } & \mathbf{6 4 , 0 0 0} & \underline{47,000} \\\text { Total assets } & \$ 192,500 & \$ 186,200 \\\text { Liabilities and Stockholders' Equity }\\\text { Current liabilities: }\\\text { Accounts payable } & \$ 11,000 & \$ 12,000 \\\text { Other current liabilities } & 11,800 & 3,200 \\\text { Total current liabilities } & 22,800 & 15,200 \\\text { Long-term debt } & \underline{120,000} & 128,000 \\\text { Total liabilities }& \underline{142,800}& \underline{143,200}\\\text { Stockholders' equity: }\\\text { Common stock } & 15,000 & 15,000 \\\text { Additional paid-in capital } & 20,000 & 20,000 \\\text { Retained earnings } & 14,700 & 8,000 \\\text { Total stockholders' equity }&{49,700}&43,000 \\\text { Total liabilities and stockholders' equity } &\$192,500&\$186,200\\&\text { Year Ended December } 31\\&2018&2017\\\text { Sales } & \$ 250,000 & \$ 230,000 \\\text { Cost of goods sold } & 164,000 & 142,300 \\\text { Gross margin } & 86,000 & 87,700 \\\text { Operating expenses } & 64,000 & 54,000 \\\text { Operating income } & 22,000 & 33,700 \\\text { Interest expense } & \underline{7,500} & 5,900 \\\text { Earnings before income taxes } & 14,500 & 27,800 \\\text { Income taxes } & 7,800 & 7,140 \\\text { Net earnings }&\$6,700&\$20,680\end{array}$ The income tax rate is 54%.How would you best describe the company's use of financial leverage in 2018?

• A)The company is highly leveraged and is using leverage well to generate a high return for stockholders.
• B)The company is poorly leveraged.
• C)The company is highly leveraged, but the leverage has a negative impact on stockholders.
• D)The company has no financial leverage.

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Definitions:

Glucose

A fundamental sugar, essential for powering living creatures and forming part of various carbohydrates.

Plant Polysaccharide

Complex carbohydrates found in plants, consisting of long chains of monosaccharide units, and are important for energy storage and structural components.

Cellulose

A complex carbohydrate that forms the primary structural component of plant cell walls and is incapable of being digested by humans.

Carbohydrate

Organic compounds consisting of carbon, hydrogen, and oxygen, usually in a ratio of 1:2:1, serving as a major energy source for the body.