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Chapter 2 Problems
|2-4|2-10|2-13|2-4a|2-10a|2-13a|Case 2-3|Case
2-5| |
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Problem
2-4 Multiple-Step Income Statement
Refer to the list of income statement items in Problem 2-3 (see
below). Assume that Oak Corporation
classifies all operating expenses into two categories, (1) selling
and (2) general and
administrative.
1. Prepare in good form a multiple-step income statement for
the year.
2. Compute Oak's gross profit percentage.
3. What does this percentage tell you about Oak's mark-up on
its products?
List of Income Statement
Items
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Advertising expense |
$1,500 |
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Commissions expense |
2,415 |
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Cost of goods sold |
29,200 |
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Depreciation expense - office building |
2,900 |
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Income tax expense |
1,540 |
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Insurance expense - salespersons' autos |
2,250 |
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Interest expense |
1,400 |
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Interest revenue |
1,340 |
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Rent revenue |
6,700 |
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Salaries and wages expense - office |
12,560 |
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Sales revenue |
48,300 |
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Supplies expense - office |
890 |
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Problem
2-10 Statement of Stockholders' Equity and Retained Earnings
Timeshare, Inc., includes the changes in retained earnings in
a statement that combines
retained earnings and stockholders' equity. Use the following
information to complete the
statement for the years 1992, 1993, and 1994.
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1992 |
Net income, $5,000,000
Dividends, $1,000,000 |
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1993 |
Net income, $12,000,000
Dividends, 1,100,000
Issued 100,000 shares of stock for $2 each |
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1994 |
Net income, $18,000,000
Dividends, $1,650,000
Stock split, 2 for 1 (the number of shares outstanding doubled
and the par value per share reduced by one-half) |
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Number of Shares |
Common Stock, Par |
Paid-In Capital |
Retained Earnings |
Total |
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Jan. 1, 1992 |
1,000,000 |
$1,000,000 |
$500,000 |
$462,000 |
$1,962,000 |
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Dec. 31, 1992 |
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Dec. 31, 1993 |
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Dec. 31, 1994 |
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Problem
2-13 Cash Flow
Franklin Co., a specialty retailer,
has a history of paying quarterly dividends of $.50 per share.
Management is trying to determine whether the company will have
adequate cash on December 31, 1995, to pay a dividend if one
is declared by the board of directors. The following additional
information is available:
* All sales are on account, and accounts receivable are collected
one month after the sale. Sales volume has been increasing 5%
each month.
* All purchases of merchandise are on account, and accounts payable
are paid one month after the purchase. Cost of sales is 40% of
the sales price. Inventory levels are maintained at $75,000.
* Operating expenses in addition to the mortgage are paid in
cash. They amount to $3,000 per month and are paid as they are
incurred.
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Franklin Co. Balance Sheet September 30, 1995 |
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Cash |
$5,000 |
Accounts payable |
$5,000 |
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Accounts Receivable |
$12,500 |
Mortgage note** |
$150,000 |
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Inventory |
$75,000 |
Common stock-$1 par |
$50,000 |
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Note Receivable* |
$10,000 |
Retained earnings |
$66,500 |
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Building/Land |
$169,000 |
Total liabilities and stockholders' equity |
$271,500 |
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Total Assets |
271,500 |
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*notes receivable represents a one-year, 5% interest-bearing
note, due November 1.
**Mortgage note is 30-year, 7% note due in monthly installments
of $1,200. |
Determine the cash that Franklin will have available to pay a
dividend on December 31, 1995. Round all amounts to the nearest
dollar. What can Franklin's management do to increase the cash
available? Should management recommend that the board of directors
declare a dividend? |
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Problem
2-4a Multiple-Step Income Statement
Refer to the list of income
statement items in Problem 2-3a (see below). Assume that Lucky
Enterprises classifies all operating expenses into two categories,
(1) selling and (2) general and administra_tive.
1. Prepare in good form a multiple-step income statement for
the year.
2. Compute Lucky's gross profit percentage.
3. What does this percentage tell you about Lucky's mark-up on
its products?
List of Income Statement
Items
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Advertising expense |
$9,000 |
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Cost of goods sold |
150,000 |
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Depreciation expense - computer |
4,500 |
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Dividend revenue |
2,700 |
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Income tax expense |
30,700 |
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Interest expense |
1,900 |
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Rent expense - salesperson's car |
18,000 |
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Rent expense - office |
26,400 |
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Sales revenue |
350,000 |
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Supplies expense - office |
1,300 |
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Utilities expense |
6,750 |
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Wages expense - office |
45,600 |
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Problem
2-10a Statement of Stockholders' Equity and Retained Earnings
Texas
Two-step, Inc., includes the changes in retained earnings in
a statement that combines retained earnings and stockholders'
equity. Use the following information to complete the statement
for the years 1992, 1993, and 1994.
Texas Two-Step, Inc.
Statement of Stockholders' Equity and Retained Earnings |
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1992 Net income, $45,000
Dividends, $21,000
1993 Net loss, ($15,000)
Dividends, $11,000
Issued 100,000 shares of stock for $6 each
1994 Net income, $15,000
Dividends, $11,650
Texas Two-step, Inc.
Statement of Stockholders' Equity and Retained Earnings
Number of Common Paid-In Retained
Shares Stock, Par Capital Earnings Total
Jan.1, 1992 7,000,000 $7,000,000 $9,000,000 $162,000 $8,062,000
Dec. 31, 1992
Dec. 31, 1993
Dec. 31, 1994 |
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Problem
2-13a Cash Flow
Roosevelt, Inc., a consulting service,
has a history of paying annual dividends of $1 per share. Management
is trying to determine whether the company will have adequate
cash on December 31, 1995, to pay a dividend if one is declared
by the board of directors. The following additional information
is available:
*All sales are on account, and accounts receivable are collected
one month after the sale. Sales volume has been decreasing 5%
each month.
*Operating expenses are paid in cash in the month incurred. Average
monthly expenses are $10,000 (excluding the biweekly payroll).
*Biweekly payroll is $4,500 and it will be paid December 15 and
December 31.
*Unearned revenue is expected to be earned in December. This
amount was taken into consideration in the expected sales volume.
Roosevelt, Inc.
Balance Sheet
December 1, 1995 |
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Cash |
$15,000 |
Unearned revenue |
$2,000 |
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Accounts receivable |
40,000 |
Notes payable* |
30,000 |
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Computer equipment |
120,000 |
Common Stock- $2 par |
50,000 |
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Total assets |
$175,000 |
Retained earnings |
93,000 |
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Total liabilities and
stockholders' equities |
$175,000 |
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*The note payable plus 3%
interest for six months is due January 15, 1996. |
Determine the cash that Roosevelt will have available to pay
a dividend on December 31, 1995. Should management recommend
that the board of directors declare a dividend? |
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Case
2-3 Analysis of Cash Flow for a Small Business
Charles, a financial consultant, has been self-employed for two
years. His list of clients has grown, and he is earning a reputation
as a shrewd investor. Charles rents a small office, uses the
pool secretarial service, and has purchased a car that he is
depreciating over three years. The following income statements
cover Charles's first two years of business:
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Year 1 |
Year 2 |
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Commissions revenue |
$25,000 |
$65,000 |
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Rent |
12,000 |
12,000 |
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Secretarial services |
3,000 |
9,000 |
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Car expenses, gas, insurance |
6,000 |
6,500 |
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Dpreciation |
15,000 |
15,000 |
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Net income |
$(11,000) |
$22,500 |
Charles believes that he should
earn more than $11,500 for working very hard for two years. He
is thinking about going to work for an investment firm where
he can earn $40,000 each year. What would you advise Charles
to do? |
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Case 2-5 Barbara Applies for a Loan
Barbara Bites, owner of Bites of Bagels, a drive-through bagel
shop, would like to expand her business from its current one
location to a chain of bagel shops. Sales in the bagel shop have
been increasing an average of 8% each quarter. Profits have been
increasing accordingly. Barbara is conservative in spending and
a very hard worker. She has an appointment with a banker to apply
for a loan to expand the business. To prepare for the appointment,
she instructs you, as the chief financial officer and payroll
clerk, to copy the quarterly income statements for the past two
years but not to include a balance sheet. Barbara already has
a substantial loan from another bank on the books. In fact, she
has very little of her own money invested in the business.
What should you do? Do you think the banker will lend Barbara
more money? |