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ACCT 2301 Lecture Notes - Lecture 4: Net Income, Common Stock, Retained Earnings

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School
UT-Dallas
Department
Accounting
Course
ACCT 2301
Professor
Yun Sun

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Classified balance sheet:
-Presents the main categories of the basic accounting equation; Assets, Liabilities and
Stockholder’s Equity.
-Common sub groupings:
1) Current assets:
-Cash and other assets that can be converted into cash or used up within the normal operating
cycle
-listed first on B/S
2) Long-term assets
3) Current liabilities
4) long-term liabilities
5) Stockholders’ equity
Current assets
-Cash and other assets that can be converted into cash or used up within the normal operating cycle, or
one year, whichever is longer.
-Listed first on the balance sheet in order of liquidity.
Long term assets:
Assets the company does not expect to convert into cash during the normal operating cycle, or one year,
whichever is longer.
Common types:
-Property, plant, and equipment
-Intangible assets
-Other long-term assets
Intangible assets:
Assets that lack a physical presence
Common examples:
¡Brand names
¡Copyrights
¡Patents
¡Trademarks
Current liabilities:
Liabilities that must be settled within the normal operating cycle, or one year, whichever is longer
Common examples:
¡Accounts payable
¡Accrued expenses payable
¡Short-term notes payable
¡Other current liabilities
Long term liabilities:
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Document Summary

Presents the main categories of the basic accounting equation; assets, liabilities and. Cash and other assets that can be converted into cash or used up within the normal operating cycle. Listed first on b/s: long-term assets, current liabilities, long-term liabilities, stockholders" equity. Cash and other assets that can be converted into cash or used up within the normal operating cycle, or one year, whichever is longer. Listed first on the balance sheet in order of liquidity. Assets the company does not expect to convert into cash during the normal operating cycle, or one year, whichever is longer. Liabilities that must be settled within the normal operating cycle, or one year, whichever is longer. Debt obligations not due to be settled within the normal operating cycle, or one year, whichever is less. The residual ownership interest in the assets of a business after its liabilities have been paid off.

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Related Questions

In addition to presenting the computed answers, please also discuss how you arrived at each answers the accounting problem asks. The accounting problem presents a company’s balance sheet and income statement. The Diamond Gem Cleaning and Maintenance Service Company is in the business of contracting its cleaning and maintenance services to office buildings. The balance sheet and income statement have blank lines. Determine the values that would be appropriate for each blank line. Provide a narrative of how you arrived at each value. In doing so, explain the account being valued and its relationship to the other financial data. For example, if the accounts payable line was missing, explain that you can derive its value based on knowing all the other values of the current liabilities section. Then explain what an account liability is, as well as why it would belong in the current liabilities section of the balance sheet

Please refer to the income statement and balance sheet of the Diamond Gem Cleaning and Maintenance Service Company available down:

Superior papers will mention and explain the following elements when responding to the assignment question:

Provide correct balances for the blank financial account lines.

Provide a narrative about how the values were determined.

Provide a definition and explanation of each account line that was completed

Balance sheet
ASSETS
CURRENT ASSETS
Cash 225,971
Contracts receivables [__A____]
Other assets 162,847
Total current assets 893,868
LONG TERM ASSETS
Equipment [___B____]
TOTAL ASSETS 1,180,660
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable [__C____]
Line of credit 85,000
Accrued expenses 72,495
Income tax payable 46,660
Current portion of notes payable 31,747
Deferred income taxes 78,460
Total current liabilities 571,697
LONG TERM LIABILITIES
Notes payable (long term) 172,467
TOTAL LIABILITIES 744,164
STOCKHOLDERS' EQUITY
Common stock 62,000
Additional paid-in capital 63,862
Retained Earnings [___D___]
Total stockholders' equity 436,496
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY [___E___]
Income sheet
Contract Revenues 5,146,862
Contract Costs [___F____]
Gross Profit 614,343
General and Administrative Expenses 322,356
Operating Income 291,987
Other Expense 25,770
Income Before Provision for Income Taxes 266,217
Provision for Income Taxes [__G____]
Net Income 150,767
Retained Earnings, Beginning Balance [__H____]
Net Income 150,767
Retained Earnings, Ending Balance 310,634

Problem 13-18A Common-Size Statements and Financial Ratios for a Loan Application [LO13-1, LO13-2, LO13-3, LO13-4]

Paul Sabin organized Sabin Electronics 10 years ago to produce and sell several electronic devices on which he had secured patents. Although the company has been fairly profitable, it is now experiencing a severe cash shortage. For this reason, it is requesting a $540,000 long-term loan from Gulfport State Bank, $120,000 of which will be used to bolster the Cash account and $420,000 of which will be used to modernize equipment. The company’s financial statements for the two most recent years follow:
Sabin Electronics
Comparative Balance Sheet
This Year Last Year
Assets
Current assets:
Cash $ 86,000 $ 190,000
Marketable securities 0 22,000
Accounts receivable, net 529,000 340,000
Inventory 960,000 635,000
Prepaid expenses 22,000 26,000
Total current assets 1,597,000 1,213,000
Plant and equipment, net 1,631,600 1,410,000
Total assets $ 3,228,600 $ 2,623,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities $ 820,000 $ 470,000
Bonds payable, 12% 800,000 800,000
Total liabilities 1,620,000 1,270,000
Stockholders' equity:
Common stock, $15 par 810,000 810,000
Retained earnings 798,600 543,000
Total stockholders’ equity 1,608,600 1,353,000
Total liabilities and equity $ 3,228,600 $ 2,623,000
Sabin Electronics
Comparative Income Statement and Reconciliation
This Year Last Year
Sales $ 5,200,000 $ 4,470,000
Cost of goods sold 3,915,000 3,490,000
Gross margin 1,285,000 980,000
Selling and administrative expenses 661,000 556,000
Net operating income 624,000 424,000
Interest expense 96,000 96,000
Net income before taxes 528,000 328,000
Income taxes (30%) 158,400 98,400
Net income 369,600 229,600
Common dividends 114,000 93,000
Net income retained 255,600 136,600
Beginning retained earnings 543,000 406,400
Ending retained earnings $ 798,600 $ 543,000

During the past year, the company introduced several new product lines and raised the selling prices on a number of old product lines in order to improve its profit margin. The company also hired a new sales manager, who has expanded sales into several new territories. Sales terms are 2/10, n/30. All sales are on account.

2.

For both this year and last year:
a.

Present the balance sheet in common-size format. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)
Sabin Electronics
Common-Size Balance Sheets
This Year Last Year
Assets
Current Assets:
Cash % %
Marketable securities
Account receivable, net
Inventory
Prepaid expenses
Total current assets
Plant and equipment, net
Total assets % %
Liabilities and Stockholders' Equity
Liabilities:
Current Liabilities % %
Bonds payable, 12%
Total Liabilities
Stockholders' equity:
Common stock, $15 par
Retained earnings
Total stockholders' equity
Total liabilities and equity % %


b.

Present the income statement in common-size format down through net income. (Round your percentage answers to 1 decimal place (i.e., 0.1234 should be entered as 12.3).)

Sabin Electronics
Common-Size Income Statements
This Year Last Year
Sales % %
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
Interest expense
Net income before taxes
Income taxes
Net Income % %

A fire destroyed your firm’s ending balance sheet and income statement after the year-end
but before the financial statements are released. However, you have been successful in obtaining the
numbers for the beginning balance sheet and the statement of cash flows, which are provided to you and
your team members in Excel format. Fields representing the missing balance sheet and income statement
are End of year2 in the Excel sheet

CONSOLIDATED BALANCE SHEETS (USD $) End of year 2 End of year 1
In Thousands, unless otherwise specified
Current assets:
Cash and cash equivalents 　 598
Receivables, net 　 230
Inventories, net 　 2309
Other current assets 　 47
Total current assets 　 3184
Property and equipment, net of accumulated depreciation 　 1292
Assets held for sale 　 1
Goodwill 　 76
Intangible assets, net 　 29
Other assets, net 　 32
Assets, Total 　 4614
Current liabilities: 　 0
Current portion of long-term debt 　 0
Accounts payable 　 2030
Accrued expenses 　 380
Other current liabilities 　 150
Total current liabilities 　 2560
Long-term debt 　 604
Other long-term liabilities 　 239
Commitments and Contingencies 　 0
Stockholders Equity Attributable to Parent [Abstract] 　 0
Preferred stock, nonvoting, $00001 par value 　 0
Common stock, voting, $00001 par value 　 0
Additional paid-in capital 　 520
Treasury stock, at cost 　 -27
Accumulated other comprehensive income (loss) 　 3
Retained earnings 　 715
Total stockholders equity 　 1210
Liabilities and Stockholders Equity, Total 　 4613
CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) 12 Months Ended
In Thousands, except Per Share data, unless otherwise specified Year 2
Net sales 　
Cost of sales, including purchasing and warehousing costs 　
Gross profit 　
Selling, general and administrative expenses 　
Operating income 　
Interest expense 　
Other income, net 　
Total other, net 　
Income before provision for income taxes 　
Provision for income taxes 　
Net income 　
CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) 12 Months Ended
In Thousands, unless otherwise specified Year 2
Cash flows from operating activities:
Net income $392
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 208
Share-based compensation 13
Loss on property and equipment, net 1
Other 2
Provision for deferred income taxes -2
Excess tax benefit from share-based compensation -16
Increase Decrease in Operating Capital
Receivables, net -32
Inventories, net -204
Other assets 11
Accounts payable 113
Accrued expenses 63
Other liabilities -4
Net cash provided by operating activities 545
Cash flows from investing activities:
Purchases of property and equipment -196
Payments to Acquire Businesses, Gross -186
Sale of certain assets of acquired business 19
Proceeds from sales of property and equipment 1
Net cash used in investing activities -362
Cash flows from financing activities:
(Decrease) increase in bank overdrafts -3
Decrease in financed vendor accounts payable 0
Issuance of senior unsecured notes 449
Payment of debt related costs -9
Borrowings under credit facilities 0
Payments on credit facilities 0
Dividends paid -18
Proceeds from the issuance of common stock, primarily exercise of stock options 4
Tax withholdings related to the exercise of stock appreciation rights -22
Excess tax benefit from share-based compensation 16
Repurchase of common stock -81
Contingent payment accrued on acquisitions 5
Other -1
Net cash provided by (used in) financing activities 331
Net increase (decrease) in cash and cash equivalents 514
Cash and cash equivalents, beginning of period 598
Cash and cash equivalents, end of period 1,112
Supplemental cash flow information:
Interest paid 35
Income tax payments 219
Non-cash transactions:
Accrued purchases of property and equipment 21
Retirement of common stock 0
Contingent consideration accrued on acquisitions 0
Changes in other comprehensive income 1
Declared but unpaid cash dividends $4