SMG AC 221 Chapter Notes - Chapter 2: Retained Earnings, Accrual, Net Income

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burgundydonkey615

27 Jan 2018

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To measure the overall performance measure profitability by looking at net income. Sales - expense = income * 100% = xx% of sales. Stock prices is the difference between expectation and reported income. If reported income > expected income thenstock prices will increase. Correlation of income and stop prices are not perfect. Operating cycle (cash cycle) - repeating cycle of activities in most companies. Company sells good at a higher price than it was bought for. The difference in price is the profit or income. Fiscal year - march 31, june 30, september 30, january 31. Interim periods - periods less than a year. Revenue - (sales or sales revenue) - the increase in net assets from selling products or services. Income - (profits, earnings) - revenue minus expense. Cost of goods sold - the original cost to produce that good. Product costs - expense that is charged with revenue.

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PROBLEM 15-18 Common-Size Statements and Financial Ratios for a Loan Application (2015-1, L015-2, L015-3, L015-4] 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 expe- riencing a severe cash shortage. For this reason, it is requesting a $500,000 long-term loan from Gulfport State Bank, $100,000 of which will be used to bolster the Cash account and S400,000 of which will be used to modemize 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 Marketable securities ........ Accounts receivable, net ... Inventory ... Prepaid expenses............ Total current assets ........... Plant and equipment, net ........ $ 70,000 0 480,000 950,000 20,000 1,520,000 1,480,000 $3,000,000 $ 150,000 18,000 300,000 600,000 22,000 1,090,000 1,370,000 $2,460,000 ssets ......................... $ 800,000 600,000 1,400,000 $430,000 600,000 1,030,000 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 ....... 750,000 850,000 1,600,000 $3,000,000 750,000 680,000 1,430,000 $2,460,000 Sabin Electronics Comparative Income Statement and Reconciliation This Year Last Year Sales .... $5,000,000 $4,350,000 Cost of goods sold ................... 3,875,000 3,450,000 Gross margin ........................ 1,125,000 900,000 Selling and administrative expenses .... 653,000 548,000 Net operating income . 472,000 352,000 Interest expense ... 72,000 72,000 Net income before taxes ... 400,000 280,000 Income taxes (30%) .... 120,000 84,000 Net income ..................... 280,000 196,000 Common dividends ......... 110,000 95,000 Net income retained .................. 170,000 101.000 Beginning retained earnings .......... 680,000 579,000 Ending retained earnings ............... $ 850,000 $ 680,000 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. PROBLEM 15-19 Financial Ratios for Assessing Profitability and Market Performance (L015-2] Refer to the financial statements and other data in Problem 15-18. Assume that Paul Sabin has asked you to assess his company's profitability and stock market performance. Required: 1. You decide first to assess the company's stock market performance. For both this year and last year, compute: a. The earnings per share. There has been no change in common stock over the last two years. b. The dividend yield ratio. The company's stock is currently selling for $40 per share; last year it sold for $36 per share. c. The dividend payout ratio. d. The price-earnings ratio. How do investors regard Sabin Electronics as compared to other companies in the industry if the industry norm for the price-earnings ratio is 12? Explain. e. The book value per share of common stock. Does the difference between market value and book value suggest that the stock is overpriced? Explain. 2. You decide next to assess the company's profitability. Compute the following for both this year and last year: a. The gross margin percentage. b. The net profit margin percentage. c. The return on total assets. (Total assets at the beginning of last year were $2,300,000.) d. The return on equity. (Stockholders' equity at the beginning of last year was $1,329,000.) e. Is the company's financial leverage positive or negative? Explain. Comment on the company's profit performance and stock market performance over the two- year period. 3.

EXHIBIT 5

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

	Year Ended December 31,
	2014			2013			2012
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	$	8,658		$	8,084		$	5,269
OPERATING ACTIVITIES:
Net income (loss)	(241		)	274			(39		)
Adjustments to reconcile net income (loss) to net cash fromoperating activities:
Depreciation of property and equipment, including internal-usesoftware and website development, and other amortization	4,746			3,253			2,159
Stock-based compensation	1,497			1,134			833
Other operating expense (income), net	129			114			154
Losses (gains) on sales of marketable securities, net	(3		)	1			(9		)
Other expense (income), net	62			166			253
Deferred income taxes	(316		)	(156		)	(265		)
Excess tax benefits from stock-based compensation	(6		)	(78		)	(429		)
Changes in operating assets and liabilities:
Inventories	(1,193		)	(1,410		)	(999		)
Accounts receivable, net and other	(1,039		)	(846		)	(861		)
Accounts payable	1,759			1,888			2,070
Accrued expenses and other	706			736			1,038
Additions to unearned revenue	4,433			2,691			1,796
Amortization of previously unearned revenue	(3,692		)	(2,292		)	(1,521		)
Net cash provided by (used in) operating activities	6,842			5,475			4,180
INVESTING ACTIVITIES:
Purchases of property and equipment, including internal-usesoftware and website development	(4,893		)	(3,444		)	(3,785		)
Acquisitions, net of cash acquired, and other	(979		)	(312		)	(745		)
Sales and maturities of marketable securities and otherinvestments	3,349			2,306			4,237
Purchases of marketable securities and other investments	(2,542		)	(2,826		)	(3,302		)
Net cash provided by (used in) investing activities	(5,065		)	(4,276		)	(3,595		)
FINANCING ACTIVITIES:
Excess tax benefits from stock-based compensation	6			78			429
Common stock repurchased	â			â			(960		)
Proceeds from long-term debt and other	6,359			394			3,378
Repayments of long-term debt	(513		)	(231		)	(82		)
Principal repayments of capital lease obligations	(1,285		)	(775		)	(486		)
Principal repayments of finance lease obligations	(135		)	(5		)	(20		)
Net cash provided by (used in) financing activities	4,432			(539		)	2,259
Foreign-currency effect on cash and cash equivalents	(310		)	(86		)	(29		)
Net increase (decrease) in cash and cash equivalents	5,899			574			2,815
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	14,557		$	8,658		$	8,084

EXHIBIT 6

AMAZON.COM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share data)

	Year Ended December 31,
	2014			2013			2012
Net product sales	$	70,080		$	60,903		$	51,733
Net service sales	18,908			13,549			9,360
Total net sales	88,988			74,452			61,093
Operating expenses:
Cost of sales	62,752			54,181			45,971
Fulfillment	10,766			8,585			6,419
Marketing	4,332			3,133			2,408
Technology and content	9,275			6,565			4,564
General and administrative	1,552			1,129			896
Other operating expense (income), net	133			114			159
Total operating expenses	88,810			73,707			60,417
Income from operations	178			745			676
Interest income	39			38			40
Interest expense	(210		)	(141		)	(92		)
Other income (expense), net	(118		)	(136		)	(80		)
Total non-operating income (expense)	(289		)	(239		)	(132		)
Income (loss) before income taxes	(111		)	506			544
Provision for income taxes	(167		)	(161		)	(428		)
Equity-method investment activity, net of tax	37			(71		)	(155		)
Net income (loss)	$	(241	)	$	274		$	(39	)
Basic earnings per share	$	(0.52	)	$	0.60		$	(0.09	)
Diluted earnings per share	$	(0.52	)	$	0.59		$	(0.09	)
Weighted average shares used in computation of earnings pershare:
Basic	462			457			453
Diluted	462			465			453

Cash Flows at Amazon.com

Case Questions:

Graph the financial statement items in Exhibit 1. Graph revenueand COGS separate from the other items in Exhibit 1 because oftheir magnitude (i.e., make two graphs).

Using the graphs above, identify time periods of similarcharacteristics and classify them using the following life cycleterms: introduction, growth, maturity, or decline (see Exhibit 4for definitions). For each period labeled, provide support for yourclassification. Specifically, briefly discuss the patterns observed(e.g., in revenue, income, operating cash flow, investing cashflow, and financing cash flow) and how they indicate whereAmazon.com is in the life cycle.

What is the general trend in cash flows from investingactivities in Exhibit 3 from 1995 to 2010? Discuss both the netcash flows from investing activities (CFI) and the components ofCFI.

Why did Amazon.com invest in marketable securities (Exhibit 3,net change in securities)?

Analyze Amazon.comâs performance for fiscal year ended December31, 2014 using its Consolidated Statements of Cash Flows (Exhibit5) and Consolidated Statement of Operations (Exhibit 6).Specifically, answer the following questions:

(a) What are Amazon.comâs net incomeor loss over the three years? Comment on the companyâsprofitability.

(b) Comment on Amazon.comâsperformance using cash flows from operating, investing andfinancing activities over the three-year period.

(c) How do you reconcile the largediscrepancy between a net loss of $241 million and net cash fromoperating activities of $6,842 million for fiscal year endedDecember 31, 2014?

I need all of these answeredthouroughly!!! Like as best as possible with as much explanation! Icould not fit intoi one post so the others 2 post before this arerelated!!! Thank you!

magentalouse253

Prepare a multiple-step income statement for the year endedDecember 31, 2016, concluding with earnings per share. In computingearnings per share, assume that the average number of common sharesoutstanding was 100,000 and preferred dividends were $100,000.(Round earnings per share to the nearest cent.)

â¢

Refer to the Chart of Accounts for exact wording of accounttitles.

â¢

Refer to the Labels and Amount Descriptions for exact wording oftext entries.

Prepare a retained earnings statement for the year endedDecember 31, 2016.

â¢	Refer to the Chart of Accounts for exact wording of accounttitles.
â¢	Refer to the Labels and Amount Descriptions for exact wordingof text entries.
â¢	You will need to enter the word âLessâ or âAddâ asnecessary.

Prepare a balance sheet in report form as of December 31, 2016.You are not required to present the details of Preferred and CommonStock (i.e., number of shares authorized, issued and outstanding).

â¢	Refer to the Chart of Accounts for exact wording of accounttitles.
â¢	Refer to the Labels and Amount Descriptions for exact wordingof text entries.
â¢	âLessâ , âDeductâ, âAddâ and colons will appearautomatically.
â¢	Available-for-sale investments should be reported as a singleasset on the balance sheet, regardless of how many accounts existin the ledger for such assets.
â¢	Recall that current assets are to be reported in order ofliquidity. Available-for-sale investments are considered to be moreliquid that accounts receivable.
â¢	Report fixed assets and paid-in capital accounts inaccount-number order.
â¢	Omit the description of bonds and stocks (i.e., percentagerates, due date, number of shares, etc.)
â¢	Enter all amounts as positive numbers, with one exception: Ifan unrealized loss has occurred, it must be reported as a negativeamount on the balance sheet.

Labels

In CengageNOW, a Label is a text entry that does not have anamount associated with it.

Current assets

Current liabilities

December 31, 2016

For the Year Ended December 31, 2016

Intangible assets

Investments

Less dividends

Long-term liabilities

Operating expenses

Other income and expenses

Paid-in capital

Add dividends

Property, plant, and equipment

Amount Descriptions

In CengageNOW, an Amount Description is a text entry other thanan Account that has an amount associated with it.

Available-for-sale investments

Decrease in retained earnings

Excess of issue price over par

Gross profit

Income before income tax

Income from operations

Increase in retained earnings

Miscellaneous selling expense

Net income

Net loss

Retained earnings, January 1, 2016

Retained earnings, December 31, 2016

Sales commissions

Sales salaries expense

Store supplies expense

Total administrative expenses

Total assets

Total (before treasury stock)

Total current assets

Total current liabilities

Total liabilities

Total liabilities and stockholdersâ equity

Total long-term liabilities

Total investments

Total operating expenses

Total paid-in capital

Total property, plant, and equipment

Total selling expenses

Total stockholdersâ equity

Unamortized premium

Unamortized discount

Income Statement data:
Advertising expense	$ 150,000
Cost of merchandise sold	3,700,000
Delivery expense	30,000
Depreciation expense-office buildings and equipment	30,000
Depreciation expense-store buildings and equipment	100,000
Dividend revenue	4,500
Gain on sale of investments	4,980
Income from Pinkberry Co. investment	76,800
Income tax expense	140,500
Interest expense	21,000
Interest revenue	2,720
Miscellaneous administrative expense	7,500
Miscellaneous selling expense	14,000
Office rent expense	50,000
Office salaries expense	170,000
Office supplies expense	10,000
Sales	5,254,000
Sales commissions	185,000
Sales salaries expense	385,000
Store supplies expense	21,000

Retained earnings and balance sheet data:
Accounts payable	$ 194,300
Accounts receivable	545,000
Accumulated depreciationâoffice buildings and equipment	1,580,000
Accumulated depreciationâstore buildings and equipment	4,126,000
Allowance for doubtful accounts	8,450
Available-for-sale investments (at cost)	260,130
Bonds payable, 5%, due 2024	500,000
Cash	246,000
Common stock, $20 par
(400,000 shares authorized; 100,000 shares issued, 94,600outstanding)	2,000,000
Dividends:
Cash dividends for common stock	155,120
Cash dividends for preferred stock	100,000
Goodwill	500,000
Income tax payable	44,000
Interest receivable	1,125
Investment in Pinkberry Co. stock (equity method)	1,009,300
Investment in Dream Inc. bonds (long term)	90,000
Merchandise inventory (December 31, 2016),
at lower of cost (FIFO) or market	778,000
Office buildings and equipment	4,320,000
Paid-in capital from sale of treasury stock	13,000
Excess of issue price over par:
-Common	886,800
-Preferred	150,000
Preferred 5% stock, $80 par
(30,000 shares authorized; 20,000 shares issued)	1,600,000
Premium on bonds payable	19,000
Prepaid expenses	27,400
Retained earnings, January 1, 2016	9,319,725
Store buildings and equipment	12,560,000
Treasury stock
(5,400 shares of common stock at cost of $33 per share)	178,200
Unrealized gain (loss) on available-for-sale investments	(6,500)
Valuation allowance for available-for-sale investments	(6,500)

none

Chart of Accounts

CHART OF ACCOUNTS

Equinox Products Inc.

General Ledger

	ASSETS
110	Cash
121	Accounts Receivable
122	Allowance for Doubtful Accounts
131	Merchandise Inventory
132	Interest Receivable
133	Prepaid Expenses
141	Investments-Solstice Corp.
142	Investment in Pinkberry Co. Stock
143	Investment in Dream Inc. Bonds
144	Valuation Allowance for Available-for-Sale Investments
181	Store Buildings and Equipment
182	Accumulated Depreciation-Store Buildings and Equipment
183	Office Buildings and Equipment
184	Accumulated Depreciation-Office Buildings and Equipment
191	Goodwill

	LIABILITIES
211	Accounts Payable
221	Income Tax Payable
225	Cash Dividends Payable
251	Bonds Payable
252	Discount on Bonds Payable
253	Premium on Bonds Payable

	EQUITY
311	Preferred Stock
312	Paid-in Capital in Excess of Par-Preferred Stock
321	Common Stock
322	Paid-in Capital in Excess of Par-Common Stock
331	Retained Earnings
341	Cash Dividends
351	Treasury Stock
352	Paid-in Capital from Sale of Treasury Stock
361	Unrealized Gain (Loss) on Available-for-Sale Investments

	REVENUE
410	Sales
611	Dividend Revenue
621	Interest Revenue
631	Income from Pinkberry Co.
641	Gain on Sale of Investments

	EXPENSES
511	Cost of Merchandise Sold
512	Bad Debt Expense
520	Sales Salaries Expense
521	Sales Commissions
522	Office Salaries Expense
531	Advertising Expense
532	Delivery Expense
537	Store Supplies Expense
538	Office Supplies Expense
539	Office Rent Expense
541	Income Tax Expense
551	Depreciation Expense-Store Equipment
552	Depreciation Expense-Office Equipment
591	Miscellaneous Selling Expense
592	Miscellaneous Administrative Expense
710	Interest Expense
731	Loss on Sale of Investments

none

Labels and Amount Descriptions

Labels In CengageNOW, a Label is a text entry that does not have anamount associated with it.
Current assets
Current liabilities
December 31, 2016
For the Year Ended December 31, 2016
Intangible assets
Investments
Less dividends
Long-term liabilities
Operating expenses
Other income and expenses
Paid-in capital
Add dividends
Property, plant, and equipment
Amount Descriptions In CengageNOW, an Amount Description is a text entry other thanan Account that has an amount associated with it.
Available-for-sale investments
Decrease in retained earnings
Excess of issue price over par
Gross profit
Income before income tax
Income from operations
Increase in retained earnings
Miscellaneous selling expense
Net income
Net loss
Retained earnings, January 1, 2016
Retained earnings, December 31, 2016
Sales commissions
Sales salaries expense
Store supplies expense
Total administrative expenses
Total assets
Total (before treasury stock)
Total current assets
Total current liabilities
Total liabilities
Total liabilities and stockholdersâ equity
Total long-term liabilities
Total investments
Total operating expenses
Total paid-in capital
Total property, plant, and equipment
Total selling expenses
Total stockholdersâ equity
Unamortized premium
Unamortized discount

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SMG AC 221 Chapter Notes - Chapter 2: Retained Earnings, Accrual, Net Income

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