1. For this problem, use the following randomly generated list of accounts, plac
ID: 2618879 • Letter: 1
Question
1. For this problem, use the following randomly generated list of accounts, placing them in appropriate order to prepare an income statement.
Accounts
($000,000)
Depreciation
25
General and administrative expenses
22
Sales
345
Sales expenses
18
Cost of goods sold
255
Lease expense
4
Interest expense
3
The following randomly constructed table requires that as part of your Critical Thinking Assignment you arrange the accounts into a well-labeled income statement. Make sure you label and solve for gross profit, operating profit, and net profit before taxes.
Using a 35% tax rate, calculate taxes paid and net profit after taxes.
Assuming a dividend of $1.10 per share with 4.25 million shares outstanding, calculate EPS and additions to retained earnings.
2. Explain why the income statement can also be called a “profit-and-loss statement.” What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves?
3. CS Industries, Inc. began 2016 with retained earnings of $25.32 million. During the year, it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders. Preferred stockholders, holding 500,000 shares, were paid two semiannual dividends of $0.75 per share. The firm had a net profit after taxes of $5.15 million. Prepare the statement of retained earnings for the year ended December 31, 2016.
Accounts
($000,000)
Depreciation
25
General and administrative expenses
22
Sales
345
Sales expenses
18
Cost of goods sold
255
Lease expense
4
Interest expense
3
Explanation / Answer
1.
Income statement
Number of shares outstanding = 4,250,000
EPS = Profit after tax/Number of shares outstanding
= 11,700,000/4,250,000
= $2.75
Dividend per share = $1.10
Hence, total dividend paid = 4,250,000 x 1.10
= $4,675,000
Hence, addition to retained earnings = 11,700,000 - 4,675,000
= $7,025,000
2.
Income statement is also known as profit and loss statement because through income statement profit earned by a company or loss suffered is calculated. Hence, it is justified to call income statement, profit and loss statement.
Balance in Balance sheet means the balances of assets and liabilities as at a particular date. Balance sheet is always prepared at a particular date to show the financial status of a company. Financial status is nothing but the balances in assets and liabilities accounts of the company.
The two halves of the balance sheet i.e. assets and liabilities are always balanced i.e. equal to each other because whatever assets a company posseses, it must have been funded through either external funds (liabilities) or internal funds( shareholders' equity). Hence, the two halves of the balance sheet are always balanced.
3.
Number of common shares = 2,750,000
Quarterly dividend paid = $0.35 per share
Hence, annual dividend paid on common shares = 2,750,000 x 0.35 x 4
= $3,850,000
Number of preferred shares = 500,000
Semi-annual dividend paid = $0.75 per share
Hence, annual dividend paid on preferred shares = 500,000 x 0.75 x 2
= $750,000
C.S. Industries, Inc.
Statement of retained earnings
For the year ended December 31, 2016
Sales 345,000,000 Less: cost of goods sold -255,000,000 Gross profit 90,000,000 Less: Operating expenses: Depreciation - 25,000,000 General and administrative expenses - 22,000,000 Sales expenses - 18,000,000 Operating profit 25,000,000 Less : Other expenses: Lease expense - 4,000,000 Interest expense - 3,000,000 Profit before tax 18,000,000 Less: Income tax @35% - 6,300,000 Profit after tax 11,700,000Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.