Genmo Corporation* On the night of February 27, 2012, certain records of the Genmo Corporation were accidentally destroyed by fire. Two days after that the principal owner had an appointment with an investor to discuss the possible sale of the company. The owner needed as much information as could be gathered for this purpose, recognizing that over a longer period of time a more complete reconstruction would be possible. On the morning of February 28, the following were available: (1) A balance sheet as of December 31, 2010, and an income statement for 2010 (Exhibit 1) and (2) certain fragmentary data and ratios that had been calculated from the current financial statements (Exhibit 2). The statements themselves had been destroyed in the fire. (In ratios involving balance sheet amounts, Genmo used yearend amounts rather than an average.) And (3) the following data (in thousands): 2011 revenues.............................................................. $10,281 Current liabilities, December 31, 2011 ......................... 2,285 EXHIBIT 1 Genmo Corporation Financial Statements (thousands of dollars) BALANCE SHEET As of December 31, 2010 Assets Current assets: Cash................................................................ $ 18 Marketable securities..................................... 494 Accounts receivable...................................... 728 Inventories...................................................... 972 Prepaid expenses........................................... 214 Total current assets..................................... 2,426 Investments……………………………………………. 898 Real estate, plant, and equipment........................... $4,727 Less: Accumulated depreciation..................... 2,433 2,294 Special tools............................................................. 171 Goodwill................................................................... 594 Total assets.............................................................. $6,383 Liabilities and Shareholders’ Equity Current liabilities: Accounts payable............................................. $ 732 Loans payable.................................................. 266 Accrued liabilities.............................................. 1,232 Total current liabilities............................. 2,230 Long-term debt.......................................................... 250 Other noncurrent liabilities......................................... 951 Total liabilities............................................................ 3,431 Shareholders’ equity: Preferred stock................................................. 25 Common stock................................................. 54 Additional paid-in capital.................................. 667 Retained earnings............................................ 2,206 Total shareholders’ equity....................... 2,952 Total liabilities and shareholders’ equity.................... $6,383 Income Statement, 2010 Total revenu.

1. Genmo Corporation*
On the night of February 27, 2012, certain records of the Genmo Corporation were accidentally
destroyed by fire. Two days after that the principal owner had an appointment with an investor to
discuss the possible sale of the company. The owner needed as much information as could be
gathered for this purpose, recognizing that over a longer period of time a more complete
reconstruction would be possible.
On the morning of February 28, the following were available: (1) A balance sheet as of
December 31, 2010, and an income statement for 2010 (Exhibit 1) and (2) certain fragmentary
data and ratios that had been calculated from the current financial statements (Exhibit 2). The
statements themselves had been destroyed in the fire. (In ratios involving balance sheet amounts,
Genmo used yearend amounts rather than an average.) And (3) the following data (in thousands):
2011 revenues.............................................................. $10,281
Current liabilities, December 31, 2011 ......................... 2,285
EXHIBIT 1 Genmo Corporation Financial Statements
(thousands of dollars)
BALANCE SHEET
As of December 31, 2010
Assets
Current assets: Cash................................................................ $ 18
Marketable securities..................................... 494
Accounts receivable...................................... 728
Inventories...................................................... 972
Prepaid expenses........................................... 214
Total current assets..................................... 2,426
Investments……………………………………………. 898
Real estate, plant, and equipment........................... $4,727
Less: Accumulated depreciation..................... 2,433 2,294
Special tools............................................................. 171
Goodwill................................................................... 594
Total assets.............................................................. $6,383
Liabilities and Shareholders’ Equity
Current liabilities: Accounts payable............................................. $ 732
Loans payable.................................................. 266
Accrued liabilities.............................................. 1,232
Total current liabilities............................. 2,230

2. Long-term debt.......................................................... 250
Other noncurrent liabilities......................................... 951
Total liabilities............................................................ 3,431
Shareholders’ equity: Preferred stock................................................. 25
Common stock................................................. 54
Additional paid-in capital.................................. 667
Retained earnings............................................ 2,206
Total shareholders’ equity....................... 2,952
Total liabilities and shareholders’ equity.................... $6,383
Income Statement, 2010
Total revenues.......................................................... $9,779
Cost of sales (excluding depreciation and amortization)… $8,165
Depreciation........................................................................ 278
Amortization of goodwill and special tools.......................... 343 8,786
Selling, general, and administrative expenses................... 430
Provision for income taxes.................................................. 163
Total costs and expenses................................................... 9,379
Net income.......................................................................... $ 400
EXHIBIT 2 Selected Ratios
2011 2010
Acid-test ratio.......................................................................... 0.671 0.556
Current ratio ........................................................................... 1.172 1.088
Inventory turnover (times) .......................................................10.005 8.400
Days’ receivables.................................................................... 39.66 27.17
Gross margin percentage........................................................ 15.12 16.50
Profit margin percentage.......................................................... 2.831 4.090
Invested capital turnover (times) ............................................. 2.091 2.355
Debt/equity ratio (percentage) ................................................. 62.15 40.68
Return on shareholders’ equity.................................................. ? 13.55
Questions 1. Prepare a balance sheet as of December 31, 2011, and the 2011 income statement.
2. What was the return on shareholders’ equity for 2011?
Solution
1) Acid test ratio= cash+A/R+marketable security/Current liabilities
0.671 = cash+A/R+marketable security/2285

3. cash+A/R+marketable security=0.671*2285
cash+A/R+marketable security=1533.24
2) Current ratio= CA/CL
1.172=CA/2285
CA= 1.172*2285
CA= 2678.02
3) Days receivable ratio=closing A/R*365 divided by revenue
39.66=closing A/R*365/10281
closing A/R= 39.66*10281/365
closing A/R= 1117.11
4) Inventory turnover=COS/Average stock
10.005= 8726.51 (from point 5)/average stock
Average stock= 872.21
5) Gross margin=GP/revenue*100
15.12=Gross profit/10281*100
Gross profit=1554.49
COS= revenue-GP
10281-1554.49
=8726.51
6) Average stock =872.21
opening+closing stock/2 = 872.21
972+closing=872.21*2
closing stock= 772.42
7) CA= cash+marketable securit+A/R+inventory+Prepaid expense
2678.02=1533.24+772.42+prepaid expense
prepaid expense= 372.36
8) Net margin ration= net income/revenue*100
2.831= net income/10281*100
Net income=291.06
9) Invested capital ratio= Annual sales/average stockholder equity
2.091= 10281/average equity
average equity=4916.79
opening +closing equity/2=4916.79
2952+closing/2=4916.79
closing equity=6881.58
10) debt equity=long term debt/equity*100

4. 62.15=long term debt/6881.58*100
long term debt=4276.90
11) Return on equity= net income/equity
=291.06/6881.58*100
=4.23
Return on equity for 2011= 4.23 (see point no. 11)Balance SheetAs of december
31,2011AssetsCurrent Assets: Cash and marketable
securities416.13A/R1117.11Inventory772.42Prepaid expenses372.36Total current
assets2678.02Total non current assets10765.46Total assets 13443.48Liabilitie and shareholder
equity:Current liability2285non current liability4276.9Total liability6561.9Shareholder
equity6881.58Total Liabilitie and shareholder equity:13443.48