A firm's income statement included the following data.  The firm's
average tax rate was 20 percent. Cost of goods sold $8K, Income taxes
paid $2K, Administrative expenses $3K, Intereset expenses $1K,
depreciation $1K.  What was the firm's net income? What must have been
the firm's revenue? What was EBIT?

Trade & Receivables
A firmn offers terms of sale of 2/15, net 30. Currently, two-thirds of
all customers take advantage of the trade discount; the remainder pay
bills at the due date.
What will be the firm's typical value for its accounts receivable period?
What is the average investment in accounts receivablr if annual sales
are $20million? What would likely happen to the firm's accounts
receivable period if it changed its terms to 3/15, net 30?

Economic Order Quantity.  A larger consulting firm orders post it
notes by the carton.  The firm pay's $30 delivery charge on each
order.  The total cost of storing the post its, include forgone
interest, storage space, and deterioration, comes to about $1.50 per
carton per month.  The firm uses about 1,000 cartons of paper per
month.

Fill in the following table:
(a)                                Order Size

                        100      200      250      500

Orders per month        ____     ____     ____     ____

Total order cost        ____     ____     ____     ____

Avg inventory           _____    ____     _____    _____

Total carrying costs    _____    ____     _____    _____

Total inventory costs   _____    ____     _____    _____

Calculate the economic order quantity.  Is your answer consistent with
your findings in part (a)the table?

Hi calcal15!
Here are the answers to your questions.

- A firm's income statement included the following data.  The firm's
average tax rate was 20 percent. Cost of goods sold $8K, Income taxes
paid $2K, Administrative expenses $3K, Intereset expenses $1K,
depreciation $1K.  What was the firm's net income? What must have been
the firm's revenue? What was EBIT?

In order to answer these three questions, we need to find the firm's
revenue. We can do this in the following way. Let's call X to the
total revenue. Income taxes are paid in this case on the firms revenue
minus cost of goods sold (COGS), minus administrative expesnes, minus
interest expenses, minus depreciation expenses. This is called the
taxable income.

We also know that the firm paid $2K in income taxes, and that the
average tax rate (which is PaidTaxes/TaxableIncome) is 20%. Since 2K
is the 20% of 10K, the taxable income must then have been $10K.
Therefore, in order to find the revenue, we have to solve the simple
equation:

X - 8 - 3 - 1 - 1 = 10
X = 23

So the total revenue was $23K.

You can find the definition of EBIT at the following link.

EBIT - InvestorWords
http://www.investorwords.com/1631/EBIT.html

Therefore, in this case, EBIT = 23 - 8 - 3 - 1 = $11K; that is, we
don't deduct interest and tax expenses from the total revenue.

Finally, in order to find net income, we just subtract the interest
and tax expenses from the EBIT. Since these expenses amount to $3K
($2K taxes plus $1K interest), then we have that the net income for
this firm was 11-3=$8K


- A firmn offers terms of sale of 2/15, net 30. Currently, two-thirds of
all customers take advantage of the trade discount; the remainder pay
bills at the due date. What will be the firm's typical value for its
accounts receivable period?  What is the average investment in
accounts receivablr if annual sales are $20million? What would likely
happen to the firm's accounts receivable period if it changed its
terms to 3/15, net 30?

I will assume here that customers that take advantage of the discount
pay exactly 15 days after the sale, while the others pay exactly 30
days after. Since 2/3 of the customers take 15 days to pay and 1/3
take 30 days, then the average value for the account receivables
period is simply:

(2/3)*15 + (1/3)*30 = 20 days

The average investment in accounts receivable can be calculated in the
following way. We know that the annual sales amount to $20 million.
Using a 360-day year, sales in 20 days should be in average
(20/360)*20million. This gives $1.11 million sales in 20 days. This is
also the average investment in accounts receivable, because the firm
will take 20 days in average to collect the payment for its sales, so
in average there will be 20 days worth of sales still unpaid. The
answer to this question is then $1.11 million.

Finally, what would happen if the firm offered terms of sale 3/15 net
30? These terms are very similar to the previous one, but the discount
is higher (3% vs 2%). This means that probablt more people will take
advantage of the discount, so more people will pay in 15 days rather
than in 30. This will have the effect of reducing the accounts
receivable period and the average investment in acc. receivables.
However, since the discount is higher, it will also have the effect of
reducing the annual profits for the firm (assuming that sales won't
grow), since the discounts are considered losses.


- Economic Order Quantity Question

I have previously answered this question for another Google Answers
customer, so I'll direct you here to the page with that answer

Google Ansers: Economic Order Quantity
http://answers.google.com/answers/threadview?id=340463

It appears that there is a problem with the link to the completed
table in that page, so I'm copying it here:

http://www.angelfire.com/alt/elmarto/googleanswers/340643EOQ.xls


Google search terms

ebit definition
://www.google.com/search?hl=en&q=ebit+definition
"average tax rate" definition
://www.google.com/search?hl=en&lr=&q=%22average+tax+rate%22+definition
"accounts receivable period"
://www.google.com/search?hl=en&lr=&q=%22accounts+receivable+period%22


I hope this helps! If you have any doubts regarding my answer, please
don't hesitate to request clarification before rating it; otherwise I
await your rating and final comments.

Best wishes!
elmarto

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Request for Answer Clarification by calcal15-ga on 12 Mar 2005 05:16 PST

Elmarto-ga, 
Thank you so much for the answers to my problems.  However, I am
unable to retrieve that link for the Economic order Quanity problem
that you supplied in your response.  If you could please send the
answer again to me or in an attachment, it would be greatly
appreciated.

In addition:
Cash Budget
The following data are from the budget of Ritwell Publishers.  Half
the compay's sales are transacted on a cash basis. The other half are
paid with a 1-month delay.  The company pays all of its creidt
purchases with a 1-month delay.  Credit purchases in January were $30
and total sales in Jnauary were $180.

                                      Feb                 Mar            Apr
Total sales                          200                  220            180
Cash purchases                        70                   80             60
Credit purchases                      40                   30             40
Labor & admin expenses                30                   30             30
Taxes, interest, dividends            10                   10             10
Capital expenditures                 100                    0              0

Complete the cash budget

                                               Feb           Mar          Apr
Sources of cash
    Collections on current sales
    Collections on acct recvbl
        Total sources of cash

Uses of cash
   Payment of acct pyble
   Cash purchases
   Labor & admin expenses
   Taxes, interest & dividends
         Total uses of cashe

Net cash inflow
     Cash at start of period                    100
    + Net cash inflow
    = Cash at end of period
    + Minimum operating cash balance            100           100          100
    = Cumulative short-term financing req.
   

What is a good price for this question?

---

Clarification of Answer by elmarto-ga on 12 Mar 2005 11:47 PST

Hi calcal15!
First of all, thank you for the rating :-)

As for the link, I've just tried it and it works. Please remember to
use the link provided in this answer and not the one mentioned in the
previous answer. I'm cpoying it here again.

http://www.angelfire.com/alt/elmarto/googleanswers/340643EOQ.xls

Please tell me if you still have trouble with the link.

Regarding your other question, I think $10/$15 would be a good price
to bid for it. I'm not sure if I will be able to address it myself,
though, due to time constraints.

Best wishes!
elmarto