ACCT 001 Lecture Notes - Lecture 7: Retained Earnings, Initial Public Offering, Preferred Stock

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blackpig616

29 May 2020

School

College of The Sequoias

Department

Accounting (ACCT)

Course

ACCT 001

Professor

williams

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Document Summary

Measuring financial risks related to long term liabilities. The higher the debt to equity ratio, the higher the risk of bankruptcy. When the company assumes more debt, risk increases. Can be good or bad depending on whether the company earns a return in excess of the cost of borrowed funds. Measures the amount of income generated for each dollar of assets. The higher the return on asset, the more successful. Compares interest expense with income available to pay those charges. The higher a company"s earnings relative to its interest expense, the more likely it will be able to make current and future interest payments. Three primary classifications of stockholders equity (1) (2) (3) Paid-in capital: amount stockholders have invested in the company. Retained earnings: amount of earnings the corporation has kept or retained. Treasury stock: corporation"s own stock that it has reacquired. *stockholders equity is increased by paid in capital, retained earnings.

Related Questions

EXERCISE 15-2 Financial Ratios for Assessing Liquidity (L015-2] Comparative financial statements for Weller Corporation, a merchandising company, for the fiscal year ending December 31 appear below. The company did not issue any new common stock dur ing the year. A total of 800,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%, the income tax rate was 40%, and the dividend per share of common stock was $0.40. The market value of the company's common stock at the end of the year was $18. All of the company's sales are on account. Weller Corporation Comparative Balance Sheet (dollars in thousands) This Year Last Year Assets Current assets: Cash................... Accounts receivable, net ......... Inventory ..................... Prepaid expenses .............. Total current assets ............... Property and equipment: Land ............ Buildings and equipment, net ........ Total property and equipment. Total assets ........ $ 1,280 12,300 9,700 1,800 25,080 $ 1,560 9,100 8,200 2,100 20,960 6,000 19,200 25,200 $50,280 6,000 19,000 25,000 $45,960 .... $ 9,500 600 300 10,400 $ 8,300 700 300 9,300 Liabilities and Stockholders' Equity Current liabilities: Accounts payable.. Accrued liabilities .......... Notes payable, short term ........ Total current liabilities ......... Long-term liabilities: Bonds payable ............ Total liabilities .............................. Stockholders' equity: Common stock ... Additional paid-in capital ...... Total paid-in capital ............... Retained earnings ........ . Total stockholders' equity .. Total liabilities and stockholders' equity .......... 5,000 15,400 5,000 14,300 800 4,200 800 4,200 5,000 29,880 34,880 $50,280 5,000 26,660 31,660 $45,960 Weller Corporation Comparative Income Statement and Reconciliation (dollars in thousands) This Year Last Year Sales ...... $79,000 $74,000 Cost of goods sold .................... 52,000 48,000 Gross margin .......................... 27,000 26,000 Selling and administrative expenses: Selling expenses 8,500 8.000 Administrative expenses .... 12,000 11,000 Total selling and administrative expenses .... 20,500 19,000 rating income.................... 6,500 Interest expense ........................ 600 600 Net income before taxes ................. 5,900 6,400 Income taxes .......................... 2,360 2,560 Net income ............ .......... 3,540 3,840 Dividends to common stockholders ......... 320 Net income added to retained earings...... 3,220 3,240 Beginning retained earnings 26,660 23,420 Ending retained earnings ................. $29,880 $26,660 7,000 320 EXERCISE 15-4 Financial Ratios for Debt Management (LO15-4] Refer to the data in Exercise 15-2 for Weller Corporation. Required: Compute the following financial ratios for this year: 1. Times interest earned ratio. 2. Debt-to-equity ratio. 3. Equity multiplier.

PROBLEM 15-21 Incomplete Statements; Analysis of Ratios (L015-2, L015-3, L015-4, L015-5, LO15-6] Incomplete financial statements for Pepper Industries follow: Pepper Industries Balance Sheet March 31 - - - - Current assets: Cash.... Accounts receivable, net ... Inventory .... Total current assets Plant and equipment, net .................. Total assets .... Liabilities: Current liabilities ............. Bonds payable, 10% .............. Total liabilities .......................... Stockholders' equity: Common stock, $5 par value ...... Retained earnings Total stockholders' equity ................. Total liabilities and stockholders equity ....... $ 320,000 Pepper Industries Income Statement For the Year Ended March 31 $4,200,000 Sales ........ Cost of goods sold ...... Gross margin ........................... Selling and administrative expenses ......... Net operating income.................. Interest expense ..................... Net income before taxes ............... Income taxes (30%) ............. Net income .......... 80,000 $ ? a. b. c. The following additional information is available about the company: All sales during the year were on account. There was no change in the number of shares of common stock outstanding during the year. The interest expense on the income statement relates to the bonds payable: the amount of bonds outstanding did not change during the year. Selected balances at the beginning of the current year were: d. Accounts receivable ...... Inventory ............... Total assets ............. $270,000 $360,000 $1,800,000 e. Selected financial ratios computed from the statements above for the current year are: Earnings per share ........... Debt-to-equity ratio ........... Accounts receivable turnover .... Current ratio ................ Return on total assets ........ Times interest earned ratio ...... Acid-test ratio ............... Inventory tumover ............ $2.30 0.875 14.0 2.75 18.0% 6.75 1.25 6.5 Required: Compute the missing amounts on the company's financial statements. (Hint: What's the difference between the acid-test ratio and the current ratio?)

20. Brigman Inc. has the following financial statementinformation for 2009 and 2008:

Balance Sheet Information:	2009	2008
Assets:
Cash	$ 5,000	$ 12,000
Accounts receivable	14,000	10,000
Inventory	35,000	30,000
Total current assets	$ 54,000	$ 52,000

Property and Equipment (net)	50,000	45,000
Total assets	$104,000	$ 97,000

Liabilities:
Accounts payable	$ 9,000	$ 3,000
Salaries payable	3,000	1,000
Total current liabilities	$ 12,000	$ 4,000
Notes payable	20,000	25,000
Total liabilities	$ 32,000	$ 29,000

Stockholders' Equity:
Common stock	$ 40,000	$ 40,000
Retained earnings	32,000	28,000
Total stockholders' equity	$ 72,000	$ 68,000
Total liabilities and stockholders' equity	$104,000	$ 97,000

Income Statement Information:
Net sales	$650,000	$556,000
Cost of goods sold	380,000	290,000
Gross profit	$270,000	$266,000
Selling and administrative expenses	75,000	70,000
Interest expense	4,000	10,000
Income before income taxes	$191,000	$186,000
Income tax expense	57,300	56,300
Net income	$133,700	$129,700

Other Information:
Number of common shares outstanding	4,000	4,000
Dividends paid	$ 0	$ 0
Market price per share (12/31)	$40	$30
Income tax rate	30%	30.27%

Required: Compute the following ratios for the year endingDecember 31, 2009: (round to two decimal places)

A.	Inventory turnover

B.	Return on assets (ROA) ratio

C.	Asset turnover ratio

D.	Earnings per share (EPS)

E.	Price earnings (P/E) ratio.

F. Return on common stockholdersâ equity

G. Current ratio

H. Quick ratio

I. Debt-to-equity ratio

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ACCT 001 Lecture Notes - Lecture 7: Retained Earnings, Initial Public Offering, Preferred Stock

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