Refer to the following financial statements and answer the questions:

Answer the following questions:

1. Determine which items varied in constant proportion to sales between 20x6 and 20x7.
2. Determine the rate of growth in sales that was achieved from year 20x6 to 20x7.
3. What was the firm’s return on equity for 20x7? Can you calculate for 20x6?
4. What was the firm’s external (additional) funding requirement determined to be for 20x? How was the funding obtained? (hint: compare the changes in debts and equities).

Income statement
			20x6	20x7
	Sales		$1,200,000	$1,500,000
	Cost of goods sold		$750,000	$937,500
	Gross margin		$450,000	$562,500
	Operating expense
		Advertising expense	$50,000	$62,500
		Rent expense	$72,000	$90,000
		Sales commission	$48,000	$60,000
		Utilities	$15,000	$18,750
	EBIT		$265,000	$331,250
	Interest expense		$106,000	$113,000
	Taxable income		$159,000	$218,250
	Tax (35%)		$55,650	$76,388
	Net Income		$103,350	$141,863
	Dividend (40% payout)		$41,340	$56,745
	Change in return earnings		$62,010	$85,118

Balance sheet
			20x6	20x7
	Assets
		Cash	$300,000	$375,000
		Receivables	$200,000	$250,000
		Inventory	$700,000	$875,000
		Property, plant and equipment	$1,800,000	$2,250,000
	Total assets		$3,000,000	$3,750,000
	Liabilities
		Payables	$300,000	$375,000
		Short-term debt (10 % interest)	$500,000	$989,882
		Long-term debt (7% interest)	$800,000	$900,000
	Shareholders' equity
		Common stock	$1,100,000	$1,100,000
		Retained earnings	$300,000	$385,118
	Total liabilities and equity		$3,000,000	$3,750,000

Answer rating: 100% (QA)

To answer the questions lets analyze the provided financial statements for the years 20x6 and 20x7 1 Determine which items varied in constant proporti... View the full answer