ACCT 1201 Chapter Notes - Chapter 5: Deferral, Financial Statement, Retained Earnings
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Prepare an Income Statement, Balance Sheet, and Statement of Changes in Shareholder's Equity. Analyze the results. The following information was obtained from the records of Shae, Inc.:
Merchandise Inventory | $132,000 |
Notes Payable, long term | $150,000 |
Sales | $450,000 |
Buildings and Equipment | $252,000 |
Selling, general, and administrative expenses | $36,000 |
Accounts Receivable | $60,000 |
Common Stock (21,000 shares) | $105,000 |
Income tax expense | $42,000 |
Cash | $96,000 |
Retained Earnings, 1/1/13 | $64,500 |
Accrued Liabilities | $9,000 |
Cost of Goods Sold | $270,000 |
Accumulated Depreciation | $108,000 |
Interest Expense | $24,000 |
Accounts Payable | $45,000 |
Dividends declared and paid during 2013 | $19,500 |
Except as otherwise indicates, assume that all Balance Sheet items reflect account balances at December 31, 2013, and that all Income Statement items reflect activities that occurred during the year ended December 31, 2013. There were no changes in paid-in capital during the year.
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Required:
a. Prepare an Income Statement and Statement of Changes in Shareholder's Equity for the year ended December 31, 2013, and a Balance Sheet at December 31, 2013, for Shae, Inc.
Based on the financial statements that you have prepared for part a, answer the questions in parts b-e. Provide brief explanations for each of your answers and state any assumptions you believe are necessary to ensure that your answers are correct.
b. What is the company's average income tax rate?
c. What interest rate is charged on long-term debt?
d. What is the ar value per share of common stock?
e. What proportion of the company's earnings is used for dividends?Â
Comparative financial statement data for Carmono Company follow: |
This Year | Last Year | |||
Assets | ||||
Cash | $ | 7.50 | $ | 14.00 |
Accounts receivable | 50.00 | 43.00 | ||
Inventory | 92.50 | 79.20 | ||
Total current assets | 150.00 | 136.20 | ||
Property, plant, and equipment | 231.00 | 194.00 | ||
Less accumulated depreciation | 45.60 | 34.20 | ||
Net property, plant, and equipment | 185.40 | 159.80 | ||
Total assets | $ | 335.40 | $ | 296.00 |
Liabilities and Stockholders’ Equity | ||||
Accounts payable | $ | 55.50 | $ | 46.00 |
Common stock | 118.00 | 91.00 | ||
Retained earnings | 161.90 | 159.00 | ||
Total liabilities and stockholders’ equity | $ | 335.40 | $ | 296.00 |
For this year, the company reported net income as follows: |
Sales | $ | 850.00 |
Cost of goods sold | 510.00 | |
Gross margin | 340.00 | |
Selling and administrative expenses | 320.00 | |
Net income | $ | 20.00 |
This year Carmono declared and paid a cash dividend. There were no sales of property, plant, and equipment during this year. The company did not repurchase any of its own stock this year. Carmono CompanyStatement of Cash Flows - Indirect MethodFor This Year Ended December 31Operating activities:Net income$20.00Adjustments to convert net income to a cash basis:Depreciation$11.40Increase in accounts receivable(7.00)Increase in inventory(13.30)Increase in accounts payable9.500.60Net cash provided by operating activities20.60Investing activities:Increase in plant and equipment(37.00)Net cash used in investing activities(37.00)Financing activities:Increase in common stock27.00Cash dividends(17.10)Net cash provided by financing activities9.90Net decrease in cash(6.50)Beginning cash and cash equivalents14.00Ending cash and cash equivalents$7.50 |
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2. | Compute Carmono’s free cash flow for this year. (Negative amount should be indicated by a minus sign. Round your intermediate calculations and final answer to 2 decimal places.) |
Free cash flow$
3.
Changes in various accounts and gains and losses on the sale of assets during the year for Argon Company are given below: |
Item | Amount | ||
Accounts receivable | $ | 79,000 | decrease |
Inventory | $ | 120,000 | increase |
Prepaid expenses | $ | 3,500 | decrease |
Accounts payable | $ | 41,000 | decrease |
Accrued liabilities | $ | 9,600 | increase |
Income taxes payable | $ | 15,700 | increase |
Sale of equipment | $ | 8,100 | gain |
Sale of long-term investments | $ | 12,200 | loss |
Required: |
For each item, indicate whether the dollar amount should be added to or deducted from net income under the indirect method when computing the net cash provided by operating activities for the year. |
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4.
Apex Company prepared the statement of cash flows for the current year that is shown below: |
Apex Company Statement of Cash Flows—Indirect Method | ||||
Operating activities: | ||||
Net income | $ | 41,500 | ||
Adjustments to convert net income to cash basis: | ||||
Depreciation | $ | 20,100 | ||
Increase in accounts receivable | (61,500) | |||
Increase in inventory | (25,100) | |||
Decrease in prepaid expenses | 9,400 | |||
Increase in accounts payable | 54,300 | |||
Decrease in accrued liabilities | (10,100) | |||
Increase in income taxes payable | 3,300 | (9,600) | ||
Net cash provided by operating activities | 31,900 | |||
Investing activities: | ||||
Proceeds from the sale of equipment | 15,200 | |||
Loan to Thomas Company | (41,900) | |||
Additions to plant and equipment | (121,800) | |||
Net cash used for investing activities | (148,500) | |||
Financing activities: | ||||
Increase in bonds payable | 88,800 | |||
Increase in common stock | 38,700 | |||
Cash dividends | (28,400) | |||
Net cash provided by financing activities | 99,100 | |||
Net decrease in cash | (17,500) | |||
Beginning cash balance | 27,200 | |||
Ending cash balance | $ | 9,700 | ||
Required: |
Compute Apex Company’s free cash flow for the current year. (Negative amount should be indicated by a minus sign.) |
Free Cash Flow
5.
For the just completed year, Hanna Company had net income of $95,000. Balances in the company’s current asset and current liability accounts at the beginning and end of the year were as follows: |
December 31 | ||||
End of Year | Beginning of Year | |||
Current assets: | ||||
Cash | $ | 59,000 | $ | 80,000 |
Accounts receivable | $ | 164,000 | $ | 184,000 |
Inventory | $ | 448,000 | $ | 346,000 |
Prepaid expenses | $ | 11,500 | $ | 15,000 |
Current liabilities: | ||||
Accounts payable | $ | 366,000 | $ | 392,000 |
Accrued liabilities | $ | 8,000 | $ | 13,000 |
Income taxes payable | $ | 32,000 | $ | 25,000 |
The Accumulated Depreciation account had total credits of $42,000 during the year. Hanna Company did not record any gains or losses during the year. |
Required: |
Use the indirect method to determine the net cash provided by (or used in) operating activities for the year. (List any deduction in cash and cash outflows as negative amounts.) |
I am unsure of what is unclear. The instructions are:
1. Set up a worksheet for the solvency ratios--currentratio and the quick ratio.
2. Compute these ratios for Doctors Smith and Brown. Todo so, you will need one additional piece of information that isnot present on the doctors’statements: their maximum annual debt service is$22,200.
Practice Exercise 11–II: Solvency Ratios
Refer to Doctors Smith and Brown’s financial statementspresented in the preceding Chapter 10.
Required
1. Set up a worksheet for the solvency ratios. current ratio and the quick ratio.
2. Compute these ratios for Doctors Smith and Brown. Todo so, you will need one additional piece of information that isnot present on the doctors’statements: their maximum annual debt service is$22,200.
The requested information is below:
Exhibit 10-1 Westside Clinic Balance Sheet
Assets | December 31, 20x2 | December 31, 20x1 | ||
Current Assets | ||||
Cash and cash equivalents | $190,000 | $145,000 | ||
Accounts receivable (net) | 250,000 | 300,000 | ||
Inventories | 25,000 | 20,000 | ||
Prepaid Insurance | 5,000 | 3,000 | ||
Total Current Assets | $470,000 | $468,000 | ||
Property, Plant, and Equipment | ||||
Land | $100,000 | $100,000 | ||
Buildings (net) | 0 | 0 | ||
Equipment (net) | 260,000 | 300,000 | ||
Net Property, Plant, and Equipment | 360,000 | 400,000 | ||
Other Assets | ||||
Investments | $133,000 | $32,000 | ||
Total Other Assets | 133,000 | 32,000 | ||
Total Assets | $963,000 | $900,000 | ||
Liabilities and Fund Balance | ||||
Current Liabilities | ||||
Current maturities of long-term debt | $52,000 | $48,000 | ||
Accounts payable and accruedexpenses | 293,000 | 302,000 | ||
Total Current Liabilities | $345,000 | $350,000 | ||
Long-Term Debt | $252,000 | $300,000 | ||
Less Current Maturities of Long-Term Debt | ?52,000 | ?48,000 | ||
Net Long-Term Debt | 200,000 | 252,000 | ||
Total Liabilities | $545,000 | $602,000 | ||
Fund Balances | ||||
Unrestricted fund balance | $418,000 | $298,000 | ||
Restricted fund balance | 0 | 0 | ||
Total Fund Balances | 418,000 | 298,000 | ||
Total Liabilities | $963,000 | $900,000 |
Exhibit 10-2 sets out the result of operations for two years,with the most current period in the left column. If the balancesheet is a snapshot, then the statement of revenue and expenses isa diary because it is a record of transactions over the period of ayear. Operating revenues and operating expenses are set out first,with the result being income from operations of $115,000($2,000,000 less $1,885,000). Then other transactions are reported;in this case, interest income of $5,000 under the heading“Nonoperating Gains (Losses).” The total of $120,000 ($115,000 plus$5,000) is reported as an increase in fund balance. This figurecarries forward to the next major report, known as the statement ofchanges in fund balance.
STATEMENT OF CHANGES IN FUND BALANCE/NET WORTH
Remember that our formula for a basic statement of revenue andexpense looked like this:
Operating Revenue — Operating Expenses = Operating Income
Exhibit 10-2 Westside Clinic Statement of Revenue andExpenses
For the Year Ending | |||||
Revenue | December 31, 20x2 | December 31, 20x1 | |||
Net patient service revenue | $2,000,000 | $1,850,000 | |||
Total operating revenue | $2,000,000 | $1,850,000 | |||
Operating Expenses | |||||
Medical/surgical services | $600,000 | $575,000 | |||
Therapy services | 860,000 | 806,000 | |||
Other professional services | 80,000 | 75,000 | |||
Support services | 220,000 | 220,000 | |||
General services | 65,000 | 60,000 | |||
Depreciation | 40,000 | 40,000 | |||
Interest | 20,000 | 24,000 | |||
Total operating expenses | 1,885,000 | 1,800,000 | |||
Income from Operations | $115,000 | $50,000 | |||
Nonoperating Gains (Losses) | |||||
Interest Income | $5,000 | $2,000 | |||
Net nonoperating gains | 5,000 | 2,000 | |||
Revenue and Gains in Excess of | |||||
Expenses and Losses | $120,000 | $52,000 | |||
Increase in Unrestricted Fund Balance | $120,000 | $52,000 |
The excess of revenue over expenses flows back into equity orfund balance through the mechanism of the statement of fundbalance/net worth. Exhibit 10-3 shows a balance at the first of theyear; then it adds the excess of revenue over expenses (in theamount of $115,000) plus some interest income (in the amount of$5,000) to arrive at the balance at the end of the year.
If you refer back to the balance sheet, you will see the$418,000 balance at the end of the year appearing on it. So we canthink of the balance sheet, the statement of revenue and expenses,and the statement of changes in fund balance/net worth as lockedtogether, with the statement of changes in fund balance being themechanism that links the other two statements.
But there is one more major report—the statement of cashflows—and we will examine it next.
STATEMENT OF CASH FLOWS
To perceive why a statement of cash flows is necessary, we mustfirst revisit the concept of accrual basis accounting. If cash isnot paid or received when revenues and expenses are entered on thebooks—the usual situation in accrual accounting—what happens? Theother side of the entry for revenues is accounts receivable, andthe other side of the entry for expenses is accounts payable. Theseaccounts rest on the balance sheet and have not yet been turnedinto cash. Another characteristic of accrual accounting is therecognition of depreciation. A capital asset—a piece of equipment,for example—is purchased for $20,000. It has a usable life of fiveyears. So depreciation expense is recognized in each of the fiveyears until the $20,000 is used up, or depreciated. (Land is anexception to this rule: it is never depreciated.) Depreciation isrecognized within each year as an expense, but it does notrepresent a cash expense. This is a concept that now enters intothe statement of cash flows.
Exhibit 10-4 presents the current period cash flow. In effect,this statement takes the accrual basis statements and converts themto a cash flow for the period through a series of reconcilingadjustments that account for the noncash amounts.
Understanding the cash/noncash concept makes sense of thisstatement. The starting point is the income from operations, thesubtotal from the statement of revenue and expense. Depreciationand interest are added back, and changes in asset and liabilityac-counts, both positive and negative, are recognized. Theseadjustments account for operating activities. Next, capital andrelated financing activities are addressed; then investingactivities are adjusted. The result is a net increase in cash andcash equivalents of $45,000 in our example. This figure is added tothe cash balance at the beginning of the year ($145,000) to arriveat the cash balance at the end of the year ($190,000). Now referback to the balance sheet, and you will find the cash balance isindeed $190,000. So the fourth major report—the statement of cashflows—interlocks with the other three major reports.
Exhibit 10-3 Westside Clinic Statement of Changes in FundBalance
For the Year Ending | |||
Statement of Changes in Fund Balance | December 31, 20x2 | December 31, 20x1 | |
Balance First of Year | $298,000 | $246,000 | |
Revenue in Excess of Expenses | 115,000 | 50,000 | |
Interest Income | 5,000 | 2,000 | |
Balance End of Year | $418,000 | $298,000 |
Exhibit 10-4 Westside Clinic Statement of Cash Flows
Statement of Cash Flows | For the Year Ending | |||
December 31, 20x2 | December 31, 20x1 | |||
Operating Activities | ||||
Income from operations | $115,000 | $50,000 | ||
Adjustments to reconcile income from | ||||
operations to net cash flows from | ||||
operating activities | ||||
Depreciation and amortization | 40,000 | 40,000 | ||
Interest expense | 20,000 | 24,000 | ||
Changes in asset and liabilityaccounts | ||||
Patient accountsreceivable | 50,000 | –250,000 | ||
Inventories | –5,000 | –5,000 | ||
Prepaid expenses andother assets | –2,000 | –1,000 | ||
Accounts payable andaccrued expenses | –9,000 | 185,000 | ||
Net cash flow from operating activities | $209,000 | $43,000 | ||
Cash Flows from Noncapital Financing Activities | 0 | 0 | ||
Cash Flows from Capital and Related Financing ActivitiesAcquisition of equipment | $ 0 | $(300,000) | ||
Proceeds from loan for equipment | 0 | 300,000 | ||
Interest paid on long-term obligations | –20,000 | 0 | ||
Repayment of long-term obligations | –48,000 | 0 | ||
Net cash flows from capital and related financing activities | –68,000 | 0 | ||
Cash Flows from Investing Activities | ||||
Interest income received | $5,000 | $2,000 | ||
Investments purchased (net) | – 101,000 | 0 | ||
Net cash flows from investing activities | –96,000 | 2,000 | ||
Net Increase (Decrease) in Cash and Cash Equivalents | $45,000 | $45,000 | ||
Cash and Cash Equivalents, Beginning of Year | 145,000 | 100,000 | ||
Cash and Cash Equivalents, End of Year | $190,000 | $145,000 |