Question

Problem 13-03A (Essay) Condensed balance sheet and income statement data for Jergan Corporation are presented here, JERGAN CORPORATION Balance Sheets December 31 2022 2021 Cash $ 30,000 $ 20,000 Accounts receivable (net) 50,000 45,000 Other current assets 90,000 95,000 Investments 55,000 70,000 Plant and equipment (net) 500,000 370,000 $725,000 $600,000 Current liabilities $ 85,000 $ 80,000 Long-term debt 145,000 85,000 Common stock, $10 par 320,000 310,000 Retained earnings 175,000 125,000 $725,000 $600,000 2020 $ 18,000 48,000 64,000 45,000 358,000 $533,000 $70,000 50,000 300,000 113,000 $533,000 JERGAN CORPORATION Income Statements For the Years Ended December 31 2022 Sales revenue $740,000 Less: Sales returns and allowances 40,000 Net sales 700,000 Cost of goods sold 425,000 Gross profit 275,000 Operating expenses (including income taxes) 180,000 Net income $ 95,000 2021 $600.000 30,000 570,000 350,000 220,000 150,000 $ 70,000 Additional information: 1. The market price of Jergan's common stock was $7.00, $7.50, and 58.50 for 2020, 2021, and 2022, respectively. 2. You must compute dividends paid. All dividends were paid in cash. Discuss briefly the improvement or lack thereof in the financial position and operating results from 2021 to 2022 of Jergan Corporation using the following ratios, profit margin, gross profit rate, asset turnover, earnings per share, price-earnings ratio, payout ratio and debt to assets ratio. Click if you would like to Show Work for this question: Open Show Work

Answer 1

Jernigan Corporation (a)(1) Profit margin =Net Income / Net Sales 2022 Net income $95,000 Net sales $7,00,000 Profit margin 13.6% 2021 $70,000 The profitability of the corporation improved based on the profit margin $5,70,000 in 2021 versus 2022, Profit margin increased 12.3% (a)(2) Gross profit rate = Gross Profit / Net Sales 2022 Gross profit $2,75,000 Net sales $7,00,000 Gross profit rate 39.3% 2021 $2,20,000 $5,70,000 38.6% (a)(3) 2021 Asset turnover = Net Sales / Avg. Total Assets 2022 Total assets, 2022 $7,25,000 Total assets, 2021 $6,00,000 Total assets, 2012 Average total assets $6,62,500 $6,00,000 $5,33,000 $5,66,500 Net sales Average total assets Asset turnover 2022 $7,00,000 $6,62,500 1.1 2021 $5,70,000 $5,66,500 1.0 (a)(4) Earnings per share - (Net Income - Prefrred dividends) / Avg. no. of outstanding shares 2022 2021 Common shares outstanding, 32,000 Common shares outstanding, 31,000 31,000 Common shares outstanding, 2012 30,000 Average common shares out 31,500 30,500 Net income - Pfd. Dividends Average common shares outs Earnings per share 2022 $95,000 31,500 $3.02 2021 $70,000 earnings per share is increased accordingly, which means company's profitability 30,500 increased in 2022 $2.30 (a)(5) Price-earnings ratio = Market price/ Earning per share 2022 Stock price per share $8.50 Earnings per share $3.02 Price-earnings ratio 2.8 2021 $7.50 $2.30 3.3 In addition, the corporation's price earnings ratio has decreased which suggests that investors may be looking less favorably at the corporation. (a)(6) Payout ratio = Cash Dividends common stock / (Net Income - Preferred Dividends) 2022 2021 Prior year's retained earnings $1,25,000 $1,13,000 Plus: current year net income 95,000 70,000 Less: current year's retained 1,75,000 1,25,000 Cash dividends declared $45,000 $58,000 Cash dividends declared (con Net income Payout ratio 2022 $45,000 $95,000 47% 2021 $58,000 the payout ratio has decreased $70,000 which should help its overall solvency. 83% (a)(7) Debt to assets ratio = Total Libailites / Total Equity 2022 Current Liabilities Long-term debt Total liabilities Total assets Debt to assets ratio $85,000 $1,45,000 $2,30,000 $7,25,000 32% 2021 $80,000 The corporation attempting $85,000 to reduce its debt burden, $1,65,000 as its debt to total assets ratio has decreased. $6,00,000 28%