Accounting 122 Group Project Problem 1 100 Points The comparative financial stat
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Accounting 122 Group Project Problem 1 100 Points The comparative financial statements of the Summer Company are as follows. The market price of the Summer Company common stock was $36 on December 31, 2016 and $11.20 on December 31, 2017. Summer Company Comparative Balance Sheet December 31, 2017, 2016 and 2015 ASSETS 2017 2016 2015 Current Assets Cash $176,200 $253,100 $26,500 Accounts Receivable 238,850 31,850 67,350 Merchandise Inventory 62,500 42,500 130,000 Prepaid Expenses 700 1,700 2,200 Total Current Assets $478,250 $329,150 $226,050 Plant Assets 696,100 726,100 786,100 Less: Accumulated Depreciation (70,000) (60,000) (80,000) Plant Assets (net) 626,100 666,100 706,100 Total Assets $1,104,350 $995,250 $932,150 Liabilities and Stockholder's Equity Current Liabilites Accounts Payable $55,000 $30,000 $60,000 Accrued Liabilities 1,000 8,000 12,000 Dividends Payable 0 10,000 2,000 Total Current Liabilities $56,000 $48,000 $74,000 Long-Term Liabilities Mortgage Note Payable $9,000 $29,000 $49,000 Bonds Payable 240,000 340,000 290,000 Less: Discount on Bonds Payable (4,500) (5,500) (4,500) Total Long-Term Liabilities $244,500 $363,500 $334,500 Total Liabilities $300,500 $411,500 $408,500 Stockholders' Equity Common Stock, $10 Par $411,900 $311,900 $311,900 Paid in Capital in Excess of Par 162,350 72,350 72,350 Retained Earnings 236,600 209,500 149,400 Less: Treasury Stock (7,000) (10,000) (10,000) Total Stockholders' Equity $803,850 $583,750 $523,650 Total Liabilities and Stockholders' Equity $1,104,350 $995,250 $932,150 The Summer Company Retained Earnings Statement For the years Ended December 31, 2011 and 2010 2017 2016 Retained Earnings. Jan. 1, $209,500 $149,400 Add: Net Income 27,100 70,100 Less: Dividends Declared (10,000) Retained Earnings Dec. 31 $236,600 $209,500 The Summer Company Income Statement For the years ended December 31, 2011 and 2010 2017 2016 Sales $260,000 $521,000 less: Cost of Merchandise Sold 200,000 387,500 Gross Profit 60,000 133,500 less: Operating Expenses; excluding Depreciation 11,000 8,500 Depreciation Expense 20,000 20,000 Income from Operations $29,000 $105,000 Add: Other Income: Gain on sale of equipment 10,000 0 Less: Other Expenses: Loss on sale of equipment 8,000 $39,000 $97,000 Less: Interest Expense 3,900 5,900 Income before Income Tax $35,100 $91,100 Less: Income Tax expense 8,000 21,000 $27,100 $70,100 The Summer Company Statement of Cash Flows For the year ended December 31, 2016 Cash Flow From Operating Activities: Net Income $70,100 Add: Net decrease in Accounts Receivable $35,500 Net decrease in Merchandise Inventory 87,500 Net decrease in Prepaid Expenses 500 Loss on Sale of Plant Assets (1) 8,000 Depreciation Expense (1) 20,000 Amortization of Bond Discount (2) 1,000 152,500 222,600 Deduct: Decrease in Accounts Payable $30,000 Decrease in Accrued Liabilities 4,000 34,000 Cash Flow From Operating Activities 188,600 Cash Flow from Investing Activities: Sale of Plant Assets for cash (1) 12,000 Cash Flow from Investing Activities 12,000 Cash Flow from Financing Activities Issued Bonds for cash (2) 48,000 Deduct: Cash Dividends Paid 2,000 Mortgage paid 20,000 22,000 Cash Flow from Financing Activities 26,000 Net Increase in Cash 226,600 1/1/2016 Cash Balance 26,500 12/31/2016 Cash Balance 253,100 (1) Sold Plant Assets with a book value of $20,000. (2) Issued bonds for $48,000. Face Value $50,000. The following transactions occurred during 2017 to assist you in preparing the Statement of Cash Flows for 2017. A. Dividends were declared in 2016 and paid 2017. B. Purchased Treasury Stock for $10,000 on 1/1/2017. C. Sold Treasury Stock receiving cash. D. Sold Plant Assets, receiving cash. The net book value of the plant asset was $20,000. E. Paid off a portion of the mortg age note. F. Retired bonds at their maturity value. G. Amortized the Discount on Bonds Payable. H. Issued common stock, receiving cash. Required: 1. Prepare the Statement of Cash Flows for the year ended December 31, 2017. (Show all required computations). Assume that your manager, who has a marketing background ask you the following questions 2-5, after reviewing the Statement of Cash Flows for 2017 and 2016. As you can see from the premise of the questions, that your manager does not have a basic understanding of the statement of cash flows. Take that into consideration when answering questions 2-5. 2. "How can Depreciation be a cash flow"? 3. "How can a gain on the sale of non-current assets be a deduction from Net Income in determining the Cash Flow from Operating Activities? 4. "How can a Loss on the Sale of non current assets be be an addition to Net Income in determining Cash Flow from Operating Activities? 5. "Why does the bank need a Statement of Cash Flows anyway? They can compute the increase or decrease in cash flow from the Balance Sheet for the last two years"? 6. Prepare the following financial statement analysis for the 2017 and 2016. Define each measure and whether the Summer Company did better or worse and why? A. Current ratio. B. Quick ratio. C. Rate of Return on Total Assets. D. Rate of Return on Common Stockholders' Equity. E. Earnings Per Share on Common Sock. (When computing the earnings per share assume there is no Treasury Stock). Use the outstanding shares as of 12/31/2017 for 2017 and the outstanding shares as of 12/31/ 2016 for 2016. Do not use the weighted average outstanding shares. F. Accounts Receivable Turnover. Assume all Sales are on account. G. Average collection period. Assume all Sales are on account. H. Inventory Turnover. I. Debt to equity ratio J. Times Interest Earned Ratio. K. Price Earnings Ratio. L. Operating Cash Flow to current liability ratio M. Vertical analysis for the Income Statement for 2017 and 2016. Below is an example of how you should present the information. 2011 2010 Working Capital: Current Assets $478,250 $329,150 Current Liabilities 56,000 48,000 Net Working Capital 422,250 281,150 Strength or Weakness Working Capital measures the ability of a company to meet it's short-term obligations with current assets. In 2011 Summer is performing much better since they have more current assets available to meet their short-term obligations. 7. From your analysis, summarize the major strenths and weaknesses comparing Summer's 2017 and 2016 performance. Summarize part 6 A through M. Accounting 122 Group Project Problem 1 100 Points The comparative financial statements of the Summer Company are as follows. The market price of the Summer Company common stock was $36 on December 31, 2016 and $11.20 on December 31, 2017. Summer Company Comparative Balance Sheet December 31, 2017, 2016 and 2015 ASSETS 2017 2016 2015 Current Assets Cash $176,200 $253,100 $26,500 Accounts Receivable 238,850 31,850 67,350 Merchandise Inventory 62,500 42,500 130,000 Prepaid Expenses 700 1,700 2,200 Total Current Assets $478,250 $329,150 $226,050 Plant Assets 696,100 726,100 786,100 Less: Accumulated Depreciation (70,000) (60,000) (80,000) Plant Assets (net) 626,100 666,100 706,100 Total Assets $1,104,350 $995,250 $932,150 Liabilities and Stockholder's Equity Current Liabilites Accounts Payable $55,000 $30,000 $60,000 Accrued Liabilities 1,000 8,000 12,000 Dividends Payable 0 10,000 2,000 Total Current Liabilities $56,000 $48,000 $74,000 Long-Term Liabilities Mortgage Note Payable $9,000 $29,000 $49,000 Bonds Payable 240,000 340,000 290,000 Less: Discount on Bonds Payable (4,500) (5,500) (4,500) Total Long-Term Liabilities $244,500 $363,500 $334,500 Total Liabilities $300,500 $411,500 $408,500 Stockholders' Equity Common Stock, $10 Par $411,900 $311,900 $311,900 Paid in Capital in Excess of Par 162,350 72,350 72,350 Retained Earnings 236,600 209,500 149,400 Less: Treasury Stock (7,000) (10,000) (10,000) Total Stockholders' Equity $803,850 $583,750 $523,650 Total Liabilities and Stockholders' Equity $1,104,350 $995,250 $932,150 The Summer Company Retained Earnings Statement For the years Ended December 31, 2011 and 2010 2017 2016 Retained Earnings. Jan. 1, $209,500 $149,400 Add: Net Income 27,100 70,100 Less: Dividends Declared (10,000) Retained Earnings Dec. 31 $236,600 $209,500 The Summer Company Income Statement For the years ended December 31, 2011 and 2010 2017 2016 Sales $260,000 $521,000 less: Cost of Merchandise Sold 200,000 387,500 Gross Profit 60,000 133,500 less: Operating Expenses; excluding Depreciation 11,000 8,500 Depreciation Expense 20,000 20,000 Income from Operations $29,000 $105,000 Add: Other Income: Gain on sale of equipment 10,000 0 Less: Other Expenses: Loss on sale of equipment 8,000 $39,000 $97,000 Less: Interest Expense 3,900 5,900 Income before Income Tax $35,100 $91,100 Less: Income Tax expense 8,000 21,000 $27,100 $70,100 The Summer Company Statement of Cash Flows For the year ended December 31, 2016 Cash Flow From Operating Activities: Net Income $70,100 Add: Net decrease in Accounts Receivable $35,500 Net decrease in Merchandise Inventory 87,500 Net decrease in Prepaid Expenses 500 Loss on Sale of Plant Assets (1) 8,000 Depreciation Expense (1) 20,000 Amortization of Bond Discount (2) 1,000 152,500 222,600 Deduct: Decrease in Accounts Payable $30,000 Decrease in Accrued Liabilities 4,000 34,000 Cash Flow From Operating Activities 188,600 Cash Flow from Investing Activities: Sale of Plant Assets for cash (1) 12,000 Cash Flow from Investing Activities 12,000 Cash Flow from Financing Activities Issued Bonds for cash (2) 48,000 Deduct: Cash Dividends Paid 2,000 Mortgage paid 20,000 22,000 Cash Flow from Financing Activities 26,000 Net Increase in Cash 226,600 1/1/2016 Cash Balance 26,500 12/31/2016 Cash Balance 253,100 (1) Sold Plant Assets with a book value of $20,000. (2) Issued bonds for $48,000. Face Value $50,000. The following transactions occurred during 2017 to assist you in preparing the Statement of Cash Flows for 2017. A. Dividends were declared in 2016 and paid 2017. B. Purchased Treasury Stock for $10,000 on 1/1/2017. C. Sold Treasury Stock receiving cash. D. Sold Plant Assets, receiving cash. The net book value of the plant asset was $20,000. E. Paid off a portion of the mortg age note. F. Retired bonds at their maturity value. G. Amortized the Discount on Bonds Payable. H. Issued common stock, receiving cash. Required: 1. Prepare the Statement of Cash Flows for the year ended December 31, 2017. (Show all required computations). Assume that your manager, who has a marketing background ask you the following questions 2-5, after reviewing the Statement of Cash Flows for 2017 and 2016. As you can see from the premise of the questions, that your manager does not have a basic understanding of the statement of cash flows. Take that into consideration when answering questions 2-5. 2. "How can Depreciation be a cash flow"? 3. "How can a gain on the sale of non-current assets be a deduction from Net Income in determining the Cash Flow from Operating Activities? 4. "How can a Loss on the Sale of non current assets be be an addition to Net Income in determining Cash Flow from Operating Activities? 5. "Why does the bank need a Statement of Cash Flows anyway? They can compute the increase or decrease in cash flow from the Balance Sheet for the last two years"? 6. Prepare the following financial statement analysis for the 2017 and 2016. Define each measure and whether the Summer Company did better or worse and why? A. Current ratio. B. Quick ratio. C. Rate of Return on Total Assets. D. Rate of Return on Common Stockholders' Equity. E. Earnings Per Share on Common Sock. (When computing the earnings per share assume there is no Treasury Stock). Use the outstanding shares as of 12/31/2017 for 2017 and the outstanding shares as of 12/31/ 2016 for 2016. Do not use the weighted average outstanding shares. F. Accounts Receivable Turnover. Assume all Sales are on account. G. Average collection period. Assume all Sales are on account. H. Inventory Turnover. I. Debt to equity ratio J. Times Interest Earned Ratio. K. Price Earnings Ratio. L. Operating Cash Flow to current liability ratio M. Vertical analysis for the Income Statement for 2017 and 2016. Below is an example of how you should present the information. 2011 2010 Working Capital: Current Assets $478,250 $329,150 Current Liabilities 56,000 48,000 Net Working Capital 422,250 281,150 Strength or Weakness Working Capital measures the ability of a company to meet it's short-term obligations with current assets. In 2011 Summer is performing much better since they have more current assets available to meet their short-term obligations. 7. From your analysis, summarize the major strenths and weaknesses comparing Summer's 2017 and 2016 performance. Summarize part 6 A through M.Explanation / Answer
1.
2. Depreciation is not a cash flow in the current period but it is the amortization in the curren period of the cash flow of a previous period. It is hence added back to the net income for arriving at the cash flow for the current period.
3. Gain on sale of non-current assets is not an inflow from operating activities of the business. Hence the net income is reduced by the amount of gain while calculating the net cash flow from operating activities. The total cash received from the sale of the non-current assets i.e. the carrying value of the asset plus the gain on sale is shown separately as an inflow under investing activities.
4. Similar to the gain on sale of non-current assets, loss on sale of non-current assets is not an operating cash flow. The net income is thus increased by the amount of this loss and the actual cash received from the sale of the non-current assets is shown separately as a cash inflow under investing activities section.
Per Chegg guidelines, 4 sub-parts have been answered.
The Summer Company Statement of Cash Flows For the Year Ended December 31, 2017 Cash Flows from Operating Activities: Net income 27100 Add: Net decrease in prepaid expenses 1000 Net increase in accounts payable 25000 Depreciation expense 20000 Amortization of bond discount 1000 47000 74100 Deduct: Net increase in accounts receivable 207000 Net increase in merchandise inventory 20000 Net decrease in accrued liabilities 7000 Gain on sale of equipment 10000 244000 Net cash used in operating activities -169900 Cash Flows from Investing Activities: Sale of plant assets for cash 30000 Net cash flow from investing activities 30000 Cash Flows from Financing Activities: Common stock issued 190000 Sale of treasury stock 13000 203000 Deduct: Cash dividends paid 10000 Mortgage paid 20000 Retirement of bonds payable 100000 Purchase of treasury stock 10000 140000 Cash flow from financing activities 63000 Net increase (decrease) in cash -76900 1/1/2017 Cash balance 253100 12/31/2017 Cash balance 176200Related Questions
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