Financial-statements - Excel

							571e8bf7-f125-4f0e-a735-b181cc714135.xls Super Company - Balance Sheet - Beginning and End of 2007 Debt & Equity Assets Jan. 1 Dec. 31 Jan. 1 Current Liabilities: Current Assets:
Cash Accounts Receivable Prepaid Expenses Inventory $30,000 15,000 5,000 40,000 $90,000 $10,000 20,000 120,000 (40,000) 110,000 $200,000 $40,000 50,000 10,000 50,000 $150,000 $10,000 30,000 160,000 (50,000) 150,000 $300,000 Accounts Payable Salaries Payable Dividends Payable Income Tax Payable Total Current Liabilities Bonds Payable (10%) $11,000 4,000 3,000 8,000 26,000 0 $26,000 $80,000 94,000 174,000 $200,000

Dec. 31
$12,000 3,000 5,000 10,000 30,000 50,000 $80,000 $100,000 120,000 220,000 $300,000

Total Current Assets Non-Current Assets:
Long-Term Investments Land Building & Equipment
Accumulated Depreciation

Total Liabilities
Owner Equity:
Common Stock ($10 Par) Retained Earnings

Non-current assets Total Assets

Owner Equity Debt and Equity

Accounts Receivable are for sales. Accounts payable are for purchase of inventory. No account was written off as uncollectible. There were no sales of investments or equipment in 2007. All dividends payable at start of 2007 were paid before 2007 dividends were declared.

Super Company - Income Statement for 2007 2006 2007
Sales Cost of Goods Sold-FIFO: Beginning Inventory 60,000 Add: Purchases or COGM 220,000 Equals Goods Available 280,000 Less: Ending Inventory -40,000 Cost of Goods Sold Gross Profit on Sales Rent Expense 30,000 Salaries Expense 75,000 Miscellaneous Expense 5,000 Depreciation Expense 10,000 Total Operating Expenses Operating Income Interest Expense - Bonds Net Income Before Tax Income Taxes Net Income After Tax Beginning Retained Earnings - January 1, 2007 Subtotal Less: Dividends Declared Equals: Ending Retained Earnings - Dec. 31, 2007 $400,000 40,000 300,000 340,000 -50,000 240,000 160,000 30,000 110,000 5,000 10,000 120,000 40,000 0 40,000 -8,000 $32,000 155,000 55,000 -5,000 50,000 -10,000 $40,000 290,000 210,000 $500,000

1. How much cash was collected from customers in 2007? ____________ 2. How much dividends were declared in 2007? _______________ How much dividends were paid? _________ 3. How much merchandise was purchased in 2007? _____________ 4. How much cash was paid for inventory in 2007? ________ 5. How much income tax was paid in 2007? ____________ 6. What is current ratio at end of 2007? ______________

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1

How much cash was collected from customers in 2007?
Sales in 2007 were $500,000. If all sales were cash sales, collections from customers would be: At the start of the year we had accounts receivable from customers: That means that we could possibly collect from customers: However, the accounts receivable balance at end of year was: Some of our potential collections were not collected in 2007. We will collect the ending receivables (at end of 2007) in 2008. Cash collections from customers in 2007: Beginning Accounts Receivable: Plus Sales on credit: Equals total possible collections in 2007: Less ending Accounts Receivable: Collections from customers in 2007: The Cash balance increased in the year by $10,000, but that was due to many transactions – not just collections from customers. Remember, we had to pay our employees, our suppliers, etc. $500,000 500,000 15,000 515,000 50,000

$15,000 500,000 515,000 (50,000) $465,000

2

How much dividends were declared in 2007?
The Income statement shows Income (revenue) and Expenses from dealing with our customers, suppliers, employees, etc. Expenses are subtracted from revenue (income) to get net income. A dividend payment is not an expense that affects net income. We must compute profit (also called earnings or net income), before we can distribute earnings as dividends. Dividends are a “distribution” of “net earnings” to shareholders. We often use different terms to mean the same thing: “profit” or “net income” or “net earnings.”. Look at the retained earnings statement you prepared in class for this company (at bottom of Super Company income statement). Beginning Retained Earnings (Jan. 1, 2007) were: Net income for 2007 was: If we did not declare any dividends, then the ending balance in retained earnings should be: However, the ending balance in Retained Earnings is only: Where did the other $14,000 go? Answer, we declared dividends of $14,000. When we declare dividends, we do not pay them immediately. $

$94,000 40,000 134,000 120,000 $14,000 14,000

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Declaring a dividend creates a liability to pay the dividend. We began the year owing our shareholders $3,000 Dividends payable on balance sheet: This means we need to pay stockholders a total of $17,000. (Beginning liability plus dividends declared.) However, at the end of 2007, we still owed our stockholders: We must have written checks to our stockholders for: $

3,000 17,000 5,000 12,000

3

How much merchandise (product) was purchased in 2007?
Remember, Sales are stated at retail or the price we charge for the goods. Our cost is much less. The difference is our gross profit. If our gross profit is more than our expenses, we have net income. In this course, merchandise, inventory and product are considered to have the same meaning – what we sell to our customers. We report this product inventory at our cost to purchase or manufacture. The income statement shows that beginning inventory was: $ 40,000 (That is also the amount shown on the balance sheet.) Income statement shows that we purchased inventory at a cost of: 300,000 The total goods on hand was $340,000. (not all on hand at the same time). If we had sold all of our inventory, we would have an expense for this item of $340,000. However, we ended the year with inventory in our warehouse: So our cost of sales was $290,000. That is our cost of the goods (products) that we shipped to our customers. 340,000

50,000 $ 290,000

4

How much cash was paid for inventory in 2007?
We have established that we bought inventory (products) at a cost of $300,000 in 2007. We don’t pay cash when we buy inventory – we buy it on credit. We owe our suppliers for the inventory purchases until we pay for the purchases. We began the year owing our suppliers (Accounts Payable): We bought inventory at a cost of $300,000 in 2007. This means we owed our suppliers a total of $311,000. However, at the end of 2007, we still owed them $12,000. This means we must have written checks to them in the amount of: $ 300,000

$

11,000 300,000 311,000 12,000

$ 299,000

5

How much income tax was paid in 2007?
We began the year owing the IRS $8,000 (Income Tax Payable) – – unpaid amount from 2006 (see liability section of balance sheet). We earned net income in 2007 of $50,000 and that caused us $ 8,000

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to owe additional income taxes of $10,000 for 2007. This means we would have owed the IRS $18,000, if we had not made any payments in 2007. However, at the end of 2007, we still owed the IRS only $10,000. We must have written checks to the IRS in 2007 the amount of: Apparently, we are recording income tax expense for 2006, and then paying it in 2007, etc. $

10,000 18,000 10,000 8,000

6

You may also consider the following additional questions. What was Current Ratio at end of 2007?
Current Assets Current Liabilities Current Ratio $ 150,000 30,000 5.00

7

What is return on investment in 2007?
(Use average total assets as invested capital) (Adjust Net Income to "Operating Income" by adding back bond interest expense: result - $45,000) With this ratio, we are looking at the relationship of net income with total assets. Total assets equal total debt and owner equity. Some creditors receive interest as their return from our company. Stockholders receive dividends as their return from our company. When we look at net income after interest expense, we have already subtracted the portion of income that goes to bond holders. If we are comparing net income with total debt and equity, we should not subtract interest expense in arriving at the net income figure to be use in the ratio. So we add back interest expense. Why? Because net income is the amount that belongs to stockholders, which they receive as dividends or allow to accumulate in Retained Earnings. The return for bond holders (interest) has already been taken out when you get to net income. Beginning Total Assets $200,000 Ending Total Assets 300,000 Total Average Total Assets Net Income (plus interest expense) Return on Investment (Return on Assets) 500,000 250,000 $45,000 18.00%