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Monterrey Company Case Analysis

What type of costs does Monterrey Company include in their finished goods? Name all the costs, as they are specified in the case. The Monterrey Company includes the cost of goods sold is the sum of raw materials in these goods plus the value added by the manufactures. The amounts include the cost of services to convert raw materials into goods in process in which they will increase the value of goods in process inventory. The costs include purchase for cash: direct manufacturing labor, $420 000, indirect manufacturing labor 174000 social security taxes and labor$ 61 200, power, heat and electricity $92,400. The other costs include supplies used in manufacturing $94, 000, raw materials $786,000, depreciation of plant and equipments 80,400, expiration of prepaid taxes and insurance $30,000.

What does the balance of $ 313.200 for accounts receivable represent? The balance of $ 313.200 for accounts receivable represents the transaction sales on credit for the year end financial statement for 2003.

What are retained earnings? A retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or accumulated deficit. Retained earnings and losses are cumulative from year to year with losses offsetting earnings. Retained earnings are reported in the shareholders’ equity section of the balance sheet. Companies with net accumulated losses may refer to negative shareholders’ equity as a shareholders’ deficit. A complete report of the retained earnings or retained losses is presented in the Statement of Retained Earnings or Statement of Retained Losses.

Is the balance of retained earnings account equal with the balance of cash account? The balance of retained earnings is not necessarily equal with the balance of cash account. Balance in retained earnings means that the company has been profitable over the years and its dividends to stockholders have been less than its profits. It is possible that a company with billions of dollars of retained earnings has very little cash available today. One possible explanation for the small amount of cash in relation to the retained earnings is that the company invested in new plant assets in order to expand its operations.

Rather than distributing the company’s cash to its stockholders, the company used the cash to pay for the factory and equipment in order to meet demand for its new product line. Corporations might have a stated policy on dividends. For example, a corporation might pay dividends equal to approximately 40% of its earnings. Another corporation might have a plan to increase the amount of dividends each year by more than the rate of inflation. A new corporation might pay no dividends until its ratio of debt to equity is a specified percentage.

Analyze the financial statements for 2003 and 2004 by comparing the inventories, cost of goods sold, fixed costs, income tax and net profit between these two years. Based on the analysis 2003 is the more profitable year for the company. The cost of goods was low as compared to 2004. The income tax in 2003 was $34,200which was noticeably lower than 2004. The sales were 2442,000 between 2003 and 2004.

Monterrey Company estimates to pay dividend of $ 126.000 in 2004. You can see this amount in the pro forma Cash Flow Statement for 2004. Is this decision (to pay dividends) a good one from the company point of view? Does the company have enough money to support this decision? The decision to pay dividends in 2004 is not a good decision from companies’ point of view as the company doesn’t have enough money to support this decision. The company should pay no dividends until its ratio of debt to equity is a specified percentage.

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