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16. True and false Year-end #1: Sales 200 with Cash 100 = + long-term debt 100...

16. True and false

Year-end #1: Sales 200 with Cash 100 = + long-term debt 100 + capital stock 100 + opening retained earnings 0 + net income 50 + accounts payable 100 – accounts receivable 100 – inventory 50 - fixed assets 100. Year-end #2: Sales 400 with Cash 100 = + long-term debt 200 + capital stock 100 + opening retained earnings 50 + net income 50 + accounts payable 200 – accounts receivable 100 – inventory 100 - fixed assets 300. The company pays dividends instead of investing cash in its business.

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Answer #1

True. The company should pay dividends instead of investing cash in its business. Because net profit ratio as well as return on asset is reduced, if the company pays dividend investor will invest the money where they get more return.

Total assets in year 1 = accounts receivable+cash+inventory+fixed assets = 100+100+50+100 = 350

Net profit ratio in year 1 = Net income/Sales = 50/200 = 25%

Return on asset in year 1 = Net income/Total assets = 50/350 = 14.29%

Total assets in year 2 = accounts receivable+cash+inventory+fixed assets = 100+100+100+300 = 600

Net profit ratio in year 2 = Net income/Sales = 50/400 = 12.5%

Return on asset in year 2= Net income/Total assets = 50/600 = 8.33%

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