INTRODUCTION TO FINANCIAL ACCOUNTING - Essay Example

Picket Company Trial Balance Debit Credit Account payable 14500 Account receivable 18000 Cash 41500 Common stock 10000 Depreciation expense 18250 Cost of goods sold 402610 Equipment 325000 Insurance 1500 Inventory 80500 Long term debt 105000 Marketing expense 5600 Misc. expense 4500 Paid-in capital 90000 Property taxes 6500 Rent 22000 Retained earnings 156400 Revenues 619400 Salaries 61940 Utilities 7400 Totals 995300 995300 Adjusting entries to fix errors Retained earnings 10000 Inventory 10000 Cash 5000 Sales revenues 5000 Picket Company Adjusted Trial Balance Account payable 14500 Account receivable 18000 Cash 42000 Common stock 10000 Depreciation expense 18250 Cost of goods sold 402610 Equipment 325000 Insurance 1500 Inventory 70500 Long term debt 105000 Marketing expense 5600 Misc.

expense 4500 Paid-in capital 90000 Property taxes 6500 Rent 22000 Retained earnings 146400 Revenues 619900 Salaries 61940 Utilities 7400 Totals 985800 985800 Picket company Income Statement as of December 31, 2012 Revenues 619900 Cost of goods sold 402610 Gross margin 217290 Expenses Depreciation expense 18250 Insurance expense 1500 Marketing expense 5600 Misc. expense 4500 Property taxes 6500 Rent 22000 Salaries 61940 Utilities 7400 Total expenses 127690 Net Income 89600 Picket Company Balance Sheet as of December 31, 2012 Current Assets Cash 42000 Account Receivable 18000 Inventory 70500 Total current assets 130500 Property, Plant, Equipment 325000 Total Assets 455500 Current Debt Account Payable 14500 Long term debt 105000 Total debt 119500 Stockholders equity Common stock 10000 Paid-in Capital 90000 Retained earnings 236000 Total equity 336000 Total equity plus liabilities 455500 Pickett Company in 2012 had a profitable year due to the fact that its net income was $89,600.

A company is profitable when it obtain a positive net income. The gross margin of the firm was 35.05%. This financial metric is considered a broad measure of profitability. The net margin of the company was 14.45%. The formula to calculate net margin is net income divided by sales (Financeformulas, 2012). The desirable outcome is to have the highest possible net margin. A reference points to determine whether a net margin is good or bad is by comparing it to the industry standard. A good database to find the industry ratios of different industries is Dun & Bradstreet.

The net margin is a measure of the absolute profitability of a company (Besley & Brigham, 2000). The return on assets (ROA) of the company was 19.67%. Return on assets measures how well assets have been employed by management (Garrison & Noreen, 2003). The formula to calculate return on assets is net income divided by total assets. The return on equity (ROE) of Pickett Company was 26.67%. Return on equity is calculated dividing net income by total equity. A high ROE is the best outcome. The cash position of the company is a vital component of any profit-generating organization (Ann, 2012).

The cash account of the company reflects a balance of $42,000. The total currents assets of the company are $130,500, while its total current liabilities are $14,500. The current ratio metric measures whether the company is in a good position or not to pay off its short term debt. A good current ratio is above the 1.0 threshold. The current ratio of Pickett Company is 9.0. The current ratio of the firm is outstanding which implies that the company is good position to pay off its short term debt.

The current ratio is calculated dividing current assets by current liabilities (130500 / 14500). The debt ratio calculates the ability of a business entity to pay off its long term debt. The formula to calculate debt ratio is total assets divided by total liabilities. The total debt of the company is 119,500, while its total assets are 455,500. The debt ratio of Pickett Company is 3.81. The enterprise has a very good debt ratio, thus the company is in a good position to pay off its long term debt.

The inventory turnover ratio measures how many times a company sold its inventory over in a period of one year. The formula to calculate inventory turnover is cost of goods sold divided by inventory (Accountingexplained, 2012). Pickett Company has an inventory turnover ratio of 5.71. The company sold its inventory 5.71 times during the year. The common stock account of the company has a balance of 10,000, while there is $90,000 in the paid-in capital account. The total retained earnings of the company are $236,000.

The analysis performed on the company indicates that the firm has both good profitability and liquidity. Pickett Company is a good company for an investor to invest in. The firm has solid sales and good net income figures. References Accountingexplained.com (2012). Inventory Turnover Ratio. Retrieved November 1, 2012 from http://accountingexplained.com/financial/ratios/inventory-turnover Ann, L. (2012). Importance of Cash Control. Retrieved November 1, 2012 from http://ezinearticles.com/?Importance-Of-Cash-Control&id=2287169 Besley, S.

, Brigham, E. (2000). Essentials of Managerial Finance (12th ed.). Fort Worth: The Dryden Press. Garrison, R., Noreen, E. (2003). Managerial Accounting (10th ed.). Boston: McGraw-Hill Irwin Financeformulas.net. Net Profit Margin. Retrieved November 1, 2012 from http://www.financeformulas.net/Net_Profit_Margin.html .