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							              ACCOUNTING FOR MANAGERS – HOMEWORK SET #1

                        REVIEW OF FINANCIAL STATEMENTS
                         FINANCIAL STATEMENT ANALYSIS



1. Indicate on which financial statement you would expect to find each of the following. The
       first is done for you.

        Cash                      Balance Sheet
        Notes payable             ___________
        Wages expense             ___________
        Cost of goods sold        ___________
        Sales revenue             ___________
        Inventory                 ___________
        Income tax expense        ___________
        Dividends                 ___________
        Retained earnings         ___________
        Accounts payable          ___________
        Rent expense              ___________

       Difficulty: Easy L.O.: 1
2. For each of the following items that appear on the balance sheet, identify each as an
   asset (A), liability (L), or element of stockholders' equity (SE). For any item that
   would not appear on the balance sheet, write the letter, N.

    Retained earnings               _______
    Accounts payable                _______
    Selling expense                 _______
    Contributed capital             _______
    Accounts receivable             _______
    Income tax expense              _______
    Dividends                       _______
    Property and equipment          _______

   Difficulty: Easy L.O.: 1
3. Fulton Company was established at the beginning of 2009 when several investors paid a
       total of $200,000 to purchase Fulton stock. No additional investments in stock were
       made during the year. By the end of that year, Fulton had cash on hand of $45,000,
       office equipment (net) of $40,000, inventories of $156,000, and accounts payable of
       $10,000. Sales for the year were $812,000. Of this amount, customers still owed
       $20,000. Fulton paid dividends of $25,000 to its investors.

       Required:
       1. Based on the information above, prepare a balance sheet for Fulton Company as of
          December 31, 2009. In the process of preparing the balance sheet, you must
          calculate the ending balance in retained earnings.
       2. Prepare a statement of retained earnings. (The beginning amount of retained
          earnings was $0.)
       3. What was the amount of Fulton's net income for the year?
       4. Was Fulton successful during its first year in operation?

       Difficulty: Hard L.O.: 1
     4. For each of the following accounts, complete the chart below by indicating
        whether the account is an asset (A), liability (L), or stockholders' equity (SE)
        and give a brief definition of the account.

                                      Balance                  Brief Definition
Account                                Sheet
                                      Category
1.      Retained earnings
2.      Inventory
3.      Contributed capital
4.      Accounts payable
5.      Accounts receivable
6.      Property and equipment
7.      Wages payable
8.      Prepaid expenses

Level: Medium L.O.: 4
5. On October 1, 2006, World Services, Inc., was started with $100,000 invested by the
       owners as contributed capital. On October 31, the accounting records contained the
       following amounts:

        Accounts payable             $   100      Office supplies           $ 500
        Accounts receivable            3,900      Rent expense               1,500
        Cash                          25,000      Salaries expense           2,000
        Contributed capital           50,000      Supplies expense             100
        Consulting fees earned        10,500      Telephone expense            200
        Dividends declared             2,100
        Office equipment              24,100

       Prepare an income statement in good form for October 31, 2006 which is the first
       month of operation. Ignore taxes.

       Difficulty: Medium L.O.: 4
   6. Explain why the net income reported on the income statement is usually not equal to
      net cash flows from operating activities on the statement of cash flows.

       Difficulty: Medium L.O.: 4




7. Match the following conceptual definitions with the elements of financial statements by
entering appropriate letters in the blanks provided.

        A.     Probable future economic benefits owned by the entity from past transactions.
        B.     Outflows, using up of assets, or incurrence of liabilities for delivery of goods or
               services.
        C.     Increase in net assets from peripheral or incidental transactions.
        D.     Residual interest of owners after all debts are paid.
        E.     Cash received during the accounting period.
        F.     Inflows of net assets or settlements of liabilities from the sale of goods and
               services; based on the ongoing operations.
        G.     Probable future sacrifices of economic benefits as a result of past transactions;
               involves transfer of assets or services.
        H.     Cash actually paid out during the accounting period.
        I.     Decrease in net assets from peripheral or incidental transactions.

        ____ 1.    Revenues
        ____ 2.    Expenses
        ____ 3.    Gains
        ____ 4.    Losses
        ____ 5.    Assets
        ____ 6.    Liabilities
        ____ 7.    Stockholders’ Equity
        ____ 8.    Sources of cash (cash inflows)
        ____ 9.    Uses of cash (cash outflows)

       Difficulty: Medium L.O.: 3
8. Match the following terms with their definitions by placing the letter that identifies the best
       definition in the blank next to the term.

         A.    Current assets divided by current liabilities.
         B.    Accumulated earnings minus accumulated dividends.
         C.    A gain or loss that is unusual in nature and infrequent in occurrence.
         D.    Total assets minus total liabilities.
         E.    Government agency that regulates financial disclosures for publicly traded
               companies.
         F.    Information that is accurate, unbiased, and verifiable.
         G.    Obligations to be paid with current assets normally within one year.
         H.    Results from the disposal of a major segment of a business and is reported net of
               tax effects.
         I.    Amount reflected on the income statement for adjustments made to balance
               sheet accounts when applying different accounting methods.
         J.    Information that can influence a user’s decision.
         K.    Auditors’ statement that the financial statements are fair presentations in all
               material respects in conformity with GAAP.

         ____ 1.     Cumulative effect of changes in accounting methods
         ____ 2.     Discontinued operations
         ____ 3.     SEC
         ____ 4.     Current ratio
         ____ 5.     Stockholders’ equity
         ____ 6.     Reliable information
         ____ 7.     Current liabilities
         ____ 8.     Extraordinary item
         ____9.      Retained earnings
         ____10.     Unqualified audit report (clean opinion)

       Difficulty: Medium L.O.: 3
Payne Company's sales and current assets have been reported as follows over the last four
years:




   9. Suppose that Payne Company employs trend percentages to analyze performance with
      Year 1 as the base year. Sales for Year 4 expressed as a trend percentage would be
      closest to:
      a. 128.6%
      b. 74.1%
      c. 112.5%
      d. 135.0%

   10. Suppose that Payne Company employs trend percentages to analyze performance with
       Year 2 as the base year. Inventory for Year 3 expressed as a trend percentage would be
       closest to:
       a. 125%
       b. 80%
       c. 90%
       d. 36%

   11. Suppose that Payne Company employs common size statements to analyze changes in
       the current assets. The increase in the Accounts Receivable account when comparing
       Year 3 to Year 2 would be closest to:
       a. 1.3% increase
       b. 0.4% increase
       c. 5.3% increase
       d. 4.2% increase
12. Lundberg Corporation's most recent balance sheet and income statement appear below:




Dividends on common stock during Year 2 totaled $50 thousand. Dividends on preferred
stock totaled $20 thousand. The market price of common stock at the end of Year 2 was $9.36
per share.

Required:

Compute the following for Year 2:

a. Gross margin percentage.
b. Earnings per share (of common stock).
c. Price-earnings ratio.
d. Dividend payout ratio.
e. Dividend yield ratio.
f. Return on total assets.
g. Return on common stockholders' equity.
h. Book value per share.
i. Working capital.
j. Current ratio.
k. Acid-test ratio.
l. Accounts receivable turnover.
m. Average collection period.
n. Inventory turnover.
o. Average sale period.
p. Times interest earned.
q. Debt-to-equity ratio.
13. Condensed financial statements for Blackhurst Company appear below:




There were 72,000 shares of common stock outstanding throughout the year. Dividends on
common stock amounted to $320,400 and dividends on preferred stock amounted to $45,000.
The market value of a share of common stock was $54 at the end of the year.

Required:

On the basis of the information given above, fill in the blanks with the appropriate figures:

Example: The gross margin as a percent of sales would be computed by dividing $2,160,000
by $5,400,000.

a. The earnings per share of common stock for the year would be computed by dividing
_______________ by _________________.

b. The times interest earned for the year would be computed by dividing _______________
by _________________.

c. The price-earnings ratio at the end of the year would be computed by dividing
_______________ by _________________.

d. The dividend payout ratio for the year would be computed by dividing _______________
by _________________.

e. The dividend yield ratio for the year would be computed by dividing _______________ by
_________________.

f. The return on total assets for the year would be computed by dividing _______________ by
_________________.

g. The return on common stockholders' equity for the year would be computed by dividing
_______________ by _________________.

h. The acid-test ratio at the end of the year would be computed by dividing _______________
by _________________.

i. The accounts receivable turnover for the year would be computed by dividing
_______________ by _________________.

j. The inventory turnover for the year would be computed by dividing _______________ by
_________________.

k. The debt-to-equity ratio at the end of the year would be computed by dividing
_______________ by _________________.
14. Renbud Computer Services Co. (RCS) specializes in customized software development
for the broadcast and telecommunications industries. The company was started by three
people in 1973 to develop software primarily for a national network to be used in
broadcasting national election results. After sustained and manageable growth for many years,
the company has grown very fast over the last three years, doubling in size.

This growth has placed the company in a challenging financial position. Within thirty days,
RCS will need to renew its $300,000 loan with the Third State Bank of San Marcos. This loan
is classified as a current liability on RCS's balance sheet. Harvey Renbud, president of RCS,
is concerned about renewing the loan. The bank has requested RCS's most recent financial
statements which appear below, including balance sheets for this year and last year. The bank
has also requested four ratios relating to operating performance and liquidity.




Required:

a. Explain why the Third State Bank of San Marcos would be interested in reviewing Renbud
Computer Services Co.'s comparative financial statements and its financial ratios before
renewing the loan.
b. Calculate the following financial ratios for Renbud Computer Services Co.:

1. The current ratio for both this year and last year.
2. Accounts receivable turnover for this year.
3. Return on common stockholders' equity for this year.
4. The debt-to-equity ratio for both this year and last year.

c. Discuss briefly the limitations and difficulties that can be encountered in using ratio
analysis.
15. Sweetman Corporation has provided the following financial data (in thousands of dollars):




Net income for Year 2 was $120 thousand. Interest expense was $25 thousand. The tax rate
was 30%. Dividends on common stock during Year 2 totaled $80 thousand. Dividends on
preferred stock totaled $20 thousand. The market price of common stock at the end of Year 2
was $4.75 per share.

Required:

Compute the following for Year 2:

a. Earnings per share (of common stock).
b. Price-earnings ratio.
c. Dividend payout ratio.
d. Dividend yield ratio.
e. Return on total assets.
f. Return on common stockholders' equity.
g. Book value per share.