330 Week 1 – Assignment Problems
330 Week 1 – Assignment Problems
P1. Income statement preparation. On December 31, 2009, Cathy Chen, a self-employed CPA, completed her first full year in business. During the year, she billed $360,000 for her accounting services. She had two employees: a bookkeeper and a clerical assistant. In addition to her monthly salary of $8,000, Ms. Chen paid annual salaries of $48,000 and $36,000 to both of these employees, respectively. Employee taxes and benefit costs for Ms. Chen and her employees totaled $34,600 for the year. Expenses for office supplies, including postage, totaled $10,400 for the year. In addition, Ms. Chen spent $17,000 during the year on tax-deductible travel and entertainment associated with client visits and new business development. Lease payments for the office space rented (a tax deductable expense) were $2,700 per month. Depreciation expense on the office furniture and fixtures was $15,600 for the year. During the year, Ms. Chen paid interest of $15,000 on the $120,000 borrowed to start the business. She paid an average tax rate of 30% during 2009.
a. Prepare an income statement for Cathy Chen, CPA for the year ended December 31, 2009.
b. Evaluate (in a sentence of two) her 2009 financial performance.
P2. Balance sheet preparation Use the appropriate items from the following list to prepare in good form Owen Davis Company’s balance sheet at December 31, 2009.
| Item | Value ($000) at December 31, 2009 | Item | Value ($000) at December 31, 2009 |
| Accounts payable | $ 220 | Inventories | $ 375 |
| Accounts receivable | 450 | Land | 100 |
| Accruals | 55 | Long-term debt | 420 |
| Accumulated depreciation | 265 | Machinery | 420 |
| Buildings | 225 | Marketable securities | 75 |
| Cash | 215 | Notes payable | 475 |
| Common stock (at par) | 90 | Paid-in capital in excess of par | 360 |
| Cost of goods sold | 2,500 | ||
| Depreciation expense | 45 | Preferred stock | 100 |
| Equipment | 140 | Retained earnings | 210 |
| Furniture and fixtures | 170 | Sales revenue | 3,600 |
| General expense | 320 | Vehicles | 25 |
P3. Statement of retained earnings Hayes Enterprises began 2009 with retained earnings balance or $928,000. During 2009, the firm earned $377,000 after taxes. From this amount, preferred stockholders were paid $47,000 in dividends. At year-end 2009, the firm’s retained earnings totals $1,048,000. The firm had 140,000 shares of common stock outstanding during 2009.
a. Prepare a statement of retained earnings for the year ended December 31, 2009, for Hayes Enterprises. (Note: Be sure to calculate and include the amount of cash dividends paid in 2009).
b. Calculate the firm’s 2009 earnings per share (EPS).
c. How large a per-share cash dividend did the firm pay on common stock during 2009?
P4. Changes in stockholders’ equity Listed below are the equity sections of balance sheets for years 2008 and 2009 as reported by Mountain Air Ski Resorts, Inc. The overall value of stockholder’s equity has risen from $2,000,000 to $7,500,000. Use the statements to discover how and why this occurred.
Mountain Air Ski Resorts, Inc.
Balance Sheets (partial)
| Stockholders’ equity | 2008 | 2009 |
| Common stock ($1.00 par) | ||
| Authorized – 5,000,000 | ||
| Outstanding – 1,500,000 shares in 2009 | $ 1,500,000 | |
| – 500,000 shares in 2008 | $ 500,000 | |
| Paid-in capital in excess of par | 500,000 | 4,500,000 |
| Retained earnings | 1,000,000 | 1,500,000 |
| Total stockholders’ equity | $ 2,000,000 | $ 7,500,000 |
The company paid total dividends of $200,000 during fiscal 2009.
a. What was Mountain Air’s net income during fiscal 2009?
b. How many new shares did the corporation issue and sell during the year?
c. At what average price per share did the new stock sold during 2009 sell?
d. At what price per share did Mountain Air’s original 500,000 shares sell?
P5. Cross-sectional ratio analysis Use the financial statements that follow for Fox Manufacturing Company for the year ended December 31, 2009, along with the industry average ratios to:
a. Prepare and interpret a complete ratio analysis of the firm’s 2009 operations.
b. Summarize your findings and make recommendations regarding: (1) liquidity; (2) activity; (3) debt; (4) profitability. Only two or three short sentences each, please!
Fox Manufacturing Company
Income Statement
For the year ended December 31, 2009
| Sales revenue | $ 600,000 | |
| Less: Cost of goods sold | 460,000 | |
| Gross profits | $ 140,000 | |
| Less: Operating expenses | ||
| General admin. expenses | $ 30,000 | |
| Depreciation expense | 30,000 | |
| Total operating expense | 60,000 | |
| Operating profits | $ 80,000 | |
| Less: Interest expense | 10,000 | |
| Net profits before taxes | $ 70,000 | |
| Less: Taxes | 27,100 | |
| Net profits after taxes (earnings available for stockholders) | $ 42,900 | |
| Earnings per share (EPS) | $ 2.15 |
Fox Manufacturing Company
Balance Sheet
December 31, 2009
| Assets | |
| Cash | $ 15,000 |
| Marketable securities | 7,200 |
| Accounts receivable | 34,100 |
| Inventories | 82,000 |
| Total current assets | $ 138,300 |
| Net fixed assets | $ 270,000 |
| Total assets | $ 408,300 |
| Liabilities and Stockholders’ Equity | |
| Accounts payable | $ 57,000 |
| Notes payable | 13,000 |
| Accruals | 5,000 |
| Total current liabilities | $ 75,000 |
| Long-term debt | $ 150,000 |
| Stockholders’ equity
Common stock equity (20,000 shrs outstanding) |
$ 110,200 |
| Retained earnings | 73,100 |
| Total stockholders’ equity | $ 183,300 |
| Total liabilities and stockholder’s equity | $ 408,300 |
(Note: Industry averages and “worksheet” on following page).
(Hint: You must calculate the following Actual 2009 ratios for Fox Mfg. (fill-in the blanks) and include in part a when you set up your table, and consider in part b).
| Ratio | Industry Average, 2009 | Actual 2009 for Fox Mfg. Company |
| Current ratio | 2.35 | |
| Quick ratio | 0.87 | |
| Inventory turnover* | 4.55 | |
| Average collection period* | 35.8 days | |
| Total asset turnover | 1.09 | |
| Debt ratio | 0.300 | |
| Times interest earned ratio | 12.3 | |
| Gross profit margin | 0.202 | |
| Operating profit margin | 0.135 | |
| Net profit margin | 0.091 | |
| Return on total assets (ROA) | 0.099 | |
| Return on common equity (ROE) | 0.167 | |
| Earnings per share (EPS) | $ 3.10 |
* Based on a 365-day year and on end-of-year figures.
Have fun!
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