Morrissey Forgings, Inc. Topics: Balance sheet, Asset, Generally Accepted Accounting Principles, Inventory / Pages: 6 (1419 words) / Published: Feb 27th, 2012

1- a. What is your estimate of the 1983 income statement and balance sheet?

Morrissey Forgings, Inc.
Balance Sheet 1983

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b. What is your estimate of Return on Assets in 1983? (Assume a 40% tax rate.) How is the company doing in 1983? For simplicity, you may assume that individual price and cost components have not changed 1983 and 1985.

From the Income statement we have that profit before taxes equals to \$1,790,000.00.

\$1,790,000.00 * 40% (tax rate) = \$716,000.00

Net income = Profit before taxes – Taxes = \$1,790,000 - \$716,000 = \$1,074,000

Return on assets (ROA) = Net Income/Total Assets = \$1,074,000/12,890,000 = 0.08= 8%

As we all know, the higher the ROA number, the better, because the company is earning more money on less investment. In this specific case the ROA is 8%, which means that the company has to invest more of its assets to earn more money. We could also say that this company is not good at converting its investment into profit, since it only earns \$0.08 cents on each dollar of assets invested. It will be better to make more profit with little investment.

Morrissey Forgings, Inc.
Income Statement 1983

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In order to do the Balance Sheet for 1983, I assumed the following facts:

Cash - \$9,000,000.00 (\$9,000,000 on sales)
Beginning of year Inventory - \$0.00, however, I considered the \$1,200,000 of materials as part of my inventory.
Account receivable - \$0.00
I assumed that the company incurred in the following expenses in the production of the 30,000 units that the company sold:
General expenses - \$1,500,000
Labor - \$1,500,000
Rent - \$550,000
Sales commission - \$450,000
Selling and Shipping in 1985 were two and a half times what they were in 1983.
Selling and shipping = (\$1,625,000 + \$1,300,000)/2.5= \$1,170,000.00
Accumulated depreciation – 7 years from 1977 to 1983, so 7 years * \$800,000 = \$5,600,000.00
Property equipment – \$800,000 * 15 years= \$12,000,000
Total