Mini-Case 12-2: Bowden Brake Service (Part B)

question 47

Essay

Mini-Case 12-2: Bowden Brake Service (Part B)
One day while you are in Bowden Brake Service getting your brakes repaired, Jim storms into his office, slamming doors and shouting about the local financial institutions. After a few minutes of building your courage, you approach Jim and ask him what the problem is. He shouts, "It's the financial institutions in this town! Not one of them will lend me the money I need to expand my business. They all said I needed to take a closer look at my financial position before I consider expanding. One of them said something about ratio analysis. I know a lot about cars and brakes, but what is ratio analysis?"
You tell Jim you will perform a ratio analysis for the business if he gives you a free brake job. Jim provides you with the following financial statements.
Bowden Brake Service
Income Statement
Year Ending December 31, 2007
Net Sales $780,000
Costs of Goods Sold:
Beginning Inventory $104,000
Purchases 526,480
Goods Available for Sale $630,480
Ending Inventory 134,400
Costs of Goods Sold 496,080
Gross Margin $283,920
Operating Expenses:
Rent 24,000
Insurance 5,250
Advertising 6,000
Travel 2,500
Interest 72,750
Taxes (Property, etc.) 2,500
Salaries & Admin. Expenses 97,000
Utilities 12,500
Supplies 1,360
Total Operating Expenses $223,860
Net Profit $60,060
Bowden Brake Service
Balance Sheet
December 31, 2007
Assets
Current Assets:
Cash $20,000
Accounts Receivable 10,000
Notes Receivable 5,000
Inventory 134,400
Total Current Assets $169,400
Fixed Assets:
Land 147,000
Machinery 73,000
Equipment 160,800
Less Accumulated Depreciation (30,200) 203,600
Total Fixed Assets 350,600
Total Assets $520,000
Liabilities & Owner's Equity
Current Liabilities:
Accounts Payable 40,500
Notes Payable 20,200
Accrued Salaries Payable 4,300
Total Current Liabilities: 65,000
Long-term Liabilities: Long-term Loan 325,000
Total Liabilities $390,000
Owner's Equity, Jim Bowden $130,000
Total Liabilities and Net Worth $520,000
-Were the bankers correct? Do you think Jim should expand the business?

---

Definitions:

Excise Taxes

Taxes imposed on specific goods, services, or activities, often used to discourage consumption of certain items or to raise revenue for targeted purposes.

Consumption Taxes

Taxes imposed on spending on goods and services, such as sales tax or Value Added Tax (VAT).

Average Tax Rate

The percentage of gross income that goes towards tax payments, determined by dividing the sum of taxes paid by the gross income.

Taxable Income

The amount of income used to calculate how much the government can tax an individual or a corporation.