ACCT 2001 Lecture Notes - Lecture 2: Financial Statement, Retained Earnings, Accounting

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24 Sep 2015

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Chapter 2: a further look at the financial statements. Study guide (note: this worksheet is intended as an optional study guide. Identify the sections of a classified balance sheet. Identify tools for analyzing financial statements and ratios for computing a company"s profitability: omit (pages 56-57): explain the relationship between a retained earnings statement and a statement of stockholders" equity. A balance sheet that groups together similar assets and similar liabilities, using a number of standard classifications and sections: this is useful because items within a group have similar economic characteristics, standard classifications of classified balance sheet: Assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. Cash, investments (such as short-term u. s. government securities), receivables (accounts receivable, notes. Page 1 of 9 receivable), inventories, prepaid expenses (insurance and supplies)

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Oak Industries, Inc is a manufacturer of radio and cable TVequipment. It also operates subscription TV systems. At one timeOak had a military contract, the loss of which was not disclosed inthe financial statements. The government, subject to a customs dutyaudit, is claiming $4 million due it. Oak officials have had atarget earnings per share amount of $.25 per share.

The financial statements, without footnotes, are included in thefollowing two pages. Using the financial information available andthe information above, answer the following questions:

1) Prepare a vertical analysis for both the balance sheet andthe statement of income

2) Prepare a horizontal analysis for both the balance sheet andthe statement of income

3) What ratios might be of some use in analyzing these financialstatements?

4) Using the ratios identified in #3 above, what trends appearto be out of line?

5) Other than failure to disclose the loss of the governmentcontract, can you identify any potential fraudulent, misleading oromitted information from your analysis in number 1-4 above?

6) If your answer to #5 is yes, can you quantify the amount ofthe potential misstatement?

Oak Industries, Inc

Unaudited consolidated Financial Statements

(000âs Omitted)

Balance Sheet

Balance Sheet	12/31/X1	12/31/X2
ASSETS
Cash	$10,304	$12,683
Marketable Securities	66,676	33,235
Accounts Receivable	104,953	131,017
Inventories	106,569	127,305
Prepaid Income Taxes	10,762	24,461
Total Current Assets	299,264	328,701
Fixed Assets	248,991	277,493
Accumulated Depreciation	(70,640)	(99,789)
Notes Receivable	10,983	13,368
Intangible Assets (net)	78,918	57,946
Investments	27,323	34,164
Other Assets	14,480	24,297
	310,055	307,479
Total Assets Liabilities & equity	$609,319	$636,180
Notes Payable	$70,758	$8,846
Accounts Payable	35,053	31,430
Accrued Liabilities	47,765	54,857
Current Portion LTD	8,889	5,391
Subscriber Deposits	17,502	15,378
Total Current Liabilities	179,967	115,902
Long-Term Debt	141,744	238,417
Other L/T Liabilities	25,325	27,746
	167,069	266,163
Common Stock	16.363	16,402
Preferred Stock	72	54
Capital Surplus	158,890	159,281
Retained Earnings	89,761	89,932
Currency Adjustments	(2,757)	(11,521)
Treasury Stock	(46)	(33)
Total Liabilities & Equity	$609,319	$636,180

Statement of Income

Statement of Income	12/31/X1	12/31/X2
Net Sales	$507,119	$545,720
Cost of Goods Sold	338,682	410,209
Gross Margin	168,437	135,511
General Expenses	107,707	125,982
Operation Income	60,730	9,529
Other Income	15,944	10,659
Interest Expense	25,430	30,170
Minority Interests	8,986	3,075
Income Taxes (Benefit)	11,908	(17,160)
	(30,380)	(5,426)
Net Income	$30,350	$4,103
Earnings Per Share	$2.01	$0.25

brownscorpion305

PROBLEM 1:

The 2018 and 2019 comparative balance sheets and 2019 income statement for Edmond & Edmond Company appear below:

EDMOND & EDMOND COMPANY

Comparative Balance Sheet

December 31

2019 2018

Assets

Cash $ 26,000 $ 23,000

Accounts receivable 25,000 34,000

Merchandise inventory 32,000 15,000

Property, plant, and equipment 60,000 78,000

Accumulated depreciation (21,000) (24,000)

Total $122,000 $126,000

Liabilities and Stockholders' Equity

Accounts payable $ 18,000 $ 23,000

Income taxes payable 9,000 8,000

Notes payable (long-term) 8,000 33,000

Common stock 28,000 24,000

Retained earnings 59,000 38,000

Total $122,000 $126,000

EDMOND & EDMOND COMPANY

Income Statement

For the Year Ended December 31, 2019

Sales $400,000

Cost of goods sold 270,000

Gross profit 130,000

Operating expenses 45,000

Income from operations 85,000

Interest expense 5,000

Income before income taxes 80,000

Income tax expense 24,000

Net income $ 56,000

The following additional data were provided:

1. Dividends declared and paid were $35,000.

2. During the year, equipment was sold for $17,000 cash. This equipment cost $28,000 originally and had a book value of $17,000 at the time of sale.

3. Purchased a used delivery truck for $10,000

4. All depreciation expense is included the operating expenses.

5. All sales and purchases are on account.

6. Accounts payable pertain to merchandise suppliers.

REQUIREMENTS: Prepare 1 WORD document (WD1) and 1 EXCEL document (ED1):

1. (WD1)>>Write a brief, yet clear, paragraph about the purpose of a statement of cash flow .

Be specific.

2. (ED1)>>Prepare a statement of cash flows for Edmond & Edmond Company using the indirect

method. Be sure your statement is complete in form, includes all needed line-items, and is
accurate.

3. (WD1)>>Write a brief, yet thorough, email to Cisslee Williams (the Controller for Edmond and
Edmond) stating the overall conclusion you have drawn from the completed statement of cash
flows.

PROBLEM 2:

Find the official website for ONE of the following companies:

Coca-cola

Walmart

Tyson Foods

Once you find an official website for the company you select, perform the following tasks:

Find the âInvestor Relationsâ link and click. Once in âinvestor relations,â

Find the 2017 annual report OR 10-K Report to the SEC

After locating one of the documents, locate the financial statements included in the document.

Copy and paste the (1) comparative balance sheet, (2) income statement, and (3) statement of cash flows and include ALL three (3) in a separate file. Do not be concerned with the formatting once you have pasted. Just be sure the name of the company, name of the statement, and the years are clearly shown as proof that you have provided the required statements.

Now that you have access to the financial statements, compute the following ratios FOR TWO YEARS. Be sure to show ALL computations, equations, formulas, etc.:

Any two liquidity ratios

One solvency ratio

Any two profitability ratios

REQUIRED1: Write and submit a 1^st document that:

>>>Identifies the name of the company on which you performed research

>>> Presents the ratios (e.g., a table) you have computed. Keep computations separate from final ratio answers. Be sure to clearly classify and identify all ratios. Show the computations. Neatness, order, and clarity are a MUST. Be sure your presentation is neat, orderly, and can be clearly followed.

>>>States YOUR conclusion about each of the three groups of ratios. Hint: A cover page is expected.

REQUIRED2: Write and submit a 2^nd document that includes the financial statements you copied and pasted (as required in âdâ above. IF you can easily include your financial statements as pages in the 1^st document, that will absolutely acceptable, and preferred.

I am having a problem getting my memo right for this math done already class, I have the math done. Heres the directions and Ill post the memo outline they gave us and the math I have doneI have to tell them yes on the loan as you will see in my answer to Part 3

Precision company wishes to expand but needs a $300,000 loan. The bank requests that Precision prepare a balance sheet and key financial ratios. Precision has kept formal records and is able to provide financial statements as of December 31, 2017. The industry debt ratio averages 45.00%. The industry return on assets is 2.0%.

You represent Ideal Bank and will present your findings in a memo to report the ratios for Precision, and identify the conclusion of your opinion reached from your analysis of the companyâs financials. The memo is to be copied and distributed to the VP of Ideal Bank, so a well-written and detailed memo is crucial. Your memo will be crucial to bank leadersâ decision to lend Precision the $300,000.

Make sure you use complete sentences. Check your work for proper spelling, grammar and punctuation.

Part 1(a) - Return on Total assets

Return on Total Assets = (Earning Before Income And Taxes)/Total Assets*100

Total Assets = $1684000

Earning before Interest and Taxes = $185000

Return on Total Assets = ($185000/$1684000)*100 = 10.99%

Part 1(b) - Its Building Block is Profitability. Profitability ratios measure the how effectively company uses its assets in generating revenue. The ratio explain the relationship between income and Resources.

Company is generating more return on total assets than the industry average. Industry average is 2% and company's return on total assets is 10.99%

Also company is having the very high profit Margin, High Return on Equity. Hence overall Position regarding Profitability is Higher than Industry's average

Part 2(a) - Debt Ratio = Total Debts/Shareholders Equity

Total Debts = $400000

Shareholders Equity = $1019000

Debt Ratio = ($400000/$1019000)*100 = 39.25%

Part 2(b) - Its Building Block is Solvency. Solvency ratio determines the ability of company to meet the liabilities of long term debts. It analyses that whether company has sufficient cash flows to repay the long term debts.

Company debt ratio is 39% which is lesser than Industry Average ratio. It says that company better manages its long term debt financing. Lower debt equity ratio is better. And debt equity ratio of more than 50% is considered unhealthy. Hence company is very much performing better than its Industries sector.

Part 3- Yes, Company is highly able to get the loan of $300000. Company is performing better than Industry averages in terms of profitability and Solvency. Also Company has current ratio of more than 2.0 which says that company has high liquidity. Hence company is Growing in business and has strong financials better than industry average. Hence Company can get the loan of $300000 for expansion

Precision Company

Memorandum

To: Recipient Name

From: Your Name

CC: CC Name

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ACCT 2001 Lecture Notes - Lecture 2: Financial Statement, Retained Earnings, Accounting

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