Grand Canyon Univ FIN 350 Summer 2015 Module 2 Practice Problems

| June 7, 2016

Question

P3-3

Income statement preparation On December 31, 2015, Cathy Chen, a self-employed

certified public accountant (CPA), completed her first full year in business. During

the year, she billed $360,000 for her accounting services. She had two employees, a

bookkeeper and a clerical assistant. In addition to her monthly salary of $8,000,

Ms. Chen paid annual salaries of $48,000 and $36,000 to the bookkeeper and the

clerical assistant, respectively. Employment taxes and benefit costs for Ms. Chen and

her employees totaled $34,600 for the year. Expenses for office supplies, including

postage, totaled $10,400 for the year. In addition, Ms. Chen spent $17,000 during

the year on tax-deductible travel and entertainment associated with client visits

and new business development. Lease payments for the office space rented (a taxdeductible

expense) were $2,700 per month. Depreciation expense on the office

furniture and fixtures was $15,600 for the year. During the year, Ms. Chen paid

interest of $15,000 on the $120,000 borrowed to start the business. She paid an

average tax rate of 30% during 2015.

a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2015.

b. Evaluate her 2015 financial performance.

P3-6

Balance sheet preparation Use the appropriate items from the following list to prepare

in good form Mellark’s Baked Goods balance sheet at December 31, 2015. in good form Mellark’s Baked Goods balance sheet at December 31, 2015.

Item December 31, 2015 ($000) Item December 31, 2015 ($000)

Accounts payable $ 220 Inventories $ 375

Accounts receivable 450 Land 100

Accruals 55 Long-term debts 420

Accumulated depreciation 265 Machinery 420

Buildings 225 Marketable securities 75

Cash 215 Notes payable 475

Common stock (at par) 90 Paid-in capital in excess

Cost of goods sold 2,500 of par 360

Depreciation expense 45 Preferred stock 100

Equipment 140 Retained earnings 210

Furniture and fixtures 170 Sales revenue 3,600

General expense 320 Vehicles 25

P3-10

Statement of retained earnings Hayes Enterprises began 2015 with a retained earnings

balance of $928,000. During 2015, the firm earned $377,000 after taxes. From

this amount, preferred stockholders were paid $47,000 in dividends. At year-end

2015, the firm’s retained earnings totaled $1,048,000. The firm had 140,000 shares

of common stock outstanding during 2015.

a. Prepare a statement of retained earnings for the year ended December 31, 2015,

for Hayes Enterprises. (Note: Be sure to calculate and include the amount of cash

dividends paid in 2015.)

b. Calculate the firm’s 2015 earnings per share (EPS).

c. How large a per-share cash dividend did the firm pay on common stock during 2015.

P3-16

Accounts receivable management An evaluation of the books of Blair Supply, which

follows, gives the end-of-year accounts receivable balance, which is believed to consist

of amounts originating in the months indicated. The company had annual sales

of $2.4 million. The firm extends 30-day credit terms.

Month of origin Accounts receivable

July $3,875

August 2,000

September 34,025

October 15,100

November 52,000

December 193,000

Year-end accounts receivable $300,000

a. Use the year-end total to evaluate the firm’s collection system.

b. If 70% of the firm’s sales occur between July and December, would this information affect the validity of your conclusion in part a? Explain.

P3-18

Debt analysis

Springfield Bank is evaluating Creek Enterprises, which has requested

a $4,000,000 loan, to assess the firm’s financial leverage and financial risk. On the

basis of the debt ratios for Creek, along with the industry averages (see the top of

the next page) and Creek’s recent financial statements (following), evaluate and

recommend appropriate action on the loan request.

P3-20

Common-size statement analysis

A common-size income statement for Creek Enterprises’

2014 operations follows. Using the firm’s 2015 income statement presented in

Problem 3–18, develop the 2015 common-size income statement and compare it with

the 2014 statement. Which areas require further analysis and investigation?

P3-21

The relationship between financial leverage and profitability

Pelican Paper, Inc., and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial

statement values for each company follow. Use them in a ratio analysis that compares the firms’ financial

leverage and profitability.

a. Calculate the following debt and coverage ratios for the two companies. Discuss

their financial risk and ability to cover the costs in relation to each other.

b. Calculate the following profitability ratios for the two companies. Discuss their

profitability relative to one another.

c. In what way has the larger debt of Timberland Forest made it more profitable

than Pelican Paper? What are the risks that Timberland’s investors undertake

when they choose to purchase its stock instead of Pelican’s?

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