The Financial Statements of Snapit Company Are Given Below

question 58

Multiple Choice

The financial statements of Snapit Company are given below. $\begin{array}{c} \text { Snapit Company } \\\text { Income Statement (2009) }\\\begin{array}{lrr} \hline \text { Sales } & \$ 4,000,000 \\\text { Cost of goods sold } & \underline {3,040,000} \\\text { Gross profit } & 960,000 \\\text { Selling \& administrative expenses } & \underline { 430,000} \\\text { Operating profit } & 530,000 \\\text { Interest expense } & \underline {160,000 }\\\text { Income before tax } & 370,000 \\\text { Tax expense } & \underline {148,000} \\ \text { Net income } & \underline {\$ 222,000} \\\end{array} \end{array}$
$\begin{array}{c}\begin{array}{lll} \text { Balance Sheet } &2009\\\\ \text { Cash } &\$ 60,000 \\ \text { Accounts receivable } & 550,000 \\ \text { Inventory } & \underline {690,000} \\ \text {Total current assets } &\$ 1,300,000 \\ \text {Fixed assets } & \underline {1,300,000} \\ \text { Total assets } & \underline {\$ 2,600,000} \\\\ \text { Accounts Payable } &\$ 270,000 \\ \text { Bank loan } & \underline {580,000 } \\ \text { Total current liabilities } & \$ 850,000 \\ \text {Bond payable } & \underline { 900,000} \\ \text { Total liabilities } & \underline {\$ 1,750,000 }\\ \text { Common stock ( 130,000 shares) } & \$ 2500,000 \\ \text {Retained earnings } & \underline {600,000}\\ \text { Total liabilities \& equity } & \underline {\$ 2,600,000} \\\end{array}\begin{array}{lll}2008\\\\\$ 50,000 \\500,000 \\ \underline { 620,000 }\\ \$ 1,170,000 \\ \underline { 1,230,000} \\ \underline { \$ 2,400,000 }\\\\\$ 250,000 \\ \underline { 500,000 } \\ \$ 750,000 \\ \underline {1,000,000} \\ \underline {\$ 1,750,000 }\\\$ 250,000\\ \underline {400,000} \\ \underline { \$ 2,400,000 } \\\end{array}\end{array}$
Note: The common shares are trading in the stock market for $100 each. Refer to the financial statements of Snapit Company. The firm's leverage ratio for 2009 is

• A) 2.25.
• B) 3.53.
• C) 2.61.
• D) 3.06.
• E) None of the options are correct.

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Definitions:

Capital

The total value of assets owned by an individual or firm—physical assets plus financial assets.

Opportunity Cost

The cost of the next best alternative foregone as the result of making a decision.

Depreciation

The reduction in the value of an asset over time, often due to wear and tear or obsolescence.

Implicit Cost

The opportunity cost equal to what a firm must give up or forgo in order to use resources in its own operations, not directly paid in money.