Chapter 2: Financial Statements and the Annual Report
Eagle Corporation
Presented below are all of the items from Eagle Corporation’s income statement for the years ending
December 31, 2014 and 2013.
December 31, 2014
December 31, 2013
Service fees
$2,300,000
$2,100,000
General and administrative expenses
1,900,000
1,500,000
Other income, net
40,000
20,000
Income taxes
150,000
180,000
171. Read the information about Eagle Corporation.
Required:
How much is net income for the year ended December 31, 2014? If Eagle Corporation had used a single-step
statement, by how much would net income be different? Explain.
172. Read the information about Eagle Corporation.
Required:
Compare the profit margins for 2014 and 2013. Is the company becoming more or less profitable or staying
the same? What could be contributing to this?
Chapter 2: Financial Statements and the Annual Report
Burke Company
The following income statement items are taken from the records of Burke Company for the year ended
December 31, 2014:
Advertising expense
$ 2,600
Commission expense
3,515
Cost of goods sold
29,200
Depreciation expense – Office Building
4,000
Income tax expense
190
Insurance expense – sales person’s auto
3,350
Interest expense
1,400
Interest revenue
2,340
Rent revenue
7,700
Salaries and wages expense – Office
13,660
Sales Revenue
50,300
Supplies expense – Office
1,990
173. Read the information about Burke Company.
Required:
Prepare a multiple-step income statement for the year ended December 31, 2014.
Chapter 2: Financial Statements and the Annual Report
174. Read the information about Burke Company
Required:
Prepare a single-step income statement for the year ended December 31, 2014.
175. The 2015 income statement of Cigmar Enterprises shows operating revenues of $120,500, selling expenses of
$35,200, general and administrative expenses of $29,900, interest expense of $1,500, and income tax expense of
$10,520. Cigmar’s stockholders’ equity was $280,000 at the beginning of the year and $320,000 at the end of
the year. The company has 20,000 shares of stock outstanding at December 31, 2015.
Required:
Compute Cigmar’s profit margin. What other information would you need in order to comment on whether this
ratio is favorable?
Chapter 2: Financial Statements and the Annual Report
176. The 2014 income statement of Nasir Inc. shows operating revenues of $135,800, selling expenses of
$40,310, general and administrative expenses of $33,990, interest expense of $880, and income tax expense
of $13,090. Nasir’s stockholders’ equity was $250,000 at the beginning of the year and $345,000 at the end
of the year. The company has 10,000 shares of stock outstanding at December 31, 2014.
Required:
Compute Nasir’s profit margin. What other information would you need in order to comment on whether this
ratio is favorable?
177. Hammar Corporation’s partial income statement is as follows:
Sales
$2,400,000
Cost of sales
900,000
Selling expenses
121,600
General and admin. expenses
Required:
150,000
Determine the profit margin. Would you invest in Hammar Corporation? Explain your answer.
Chapter 2: Financial Statements and the Annual Report
178. Peterson Corporation’s partial income statement is as follows:
Sales
$1,300,000
Cost of sales
300,000
Selling expenses
210,000
General and admin. expenses
150,000
Required:
Determine the profit margin. Would you invest in Peterson Corporation? Explain your answer.
Chapter 2: Financial Statements and the Annual Report
179. Powder Corporation began operations on January 2, 2013, with a total investment of $150,000 by its
stockholders. Net income for its first year of business was $90,000. During 2014 and 2015, net income
increased to $188,000 and to $217,000, respectively. Powder paid $85,000 in dividends to its shareholders in
each of the three years.
A) In good form, prepare a statement of retained earnings for the year ended December 31, 2014.
B) How much is total retained earnings on December 31, 2015?
C) Explain the link between the statement of retained earnings and the balance sheet.
Chapter 2: Financial Statements and the Annual Report
180. The following information is taken from Harvey Company’s balance sheet at December 31, 2014:
Cash
$ 24,000
Retained earnings
14,000
Inventory
8,000
Equipment
38,000
Accounts payable
7,000
Bonds payable
23,000
Capital stock
26,000
Required:
Using the information provided for Harvey Company, answer the following questions:
A) How much did creditors provide to Harvey Company?
B) On which financial statement would an investor look to see if any stock was issued during the year?
Chapter 2: Financial Statements and the Annual Report
181. Coglin, Inc. incurred a net loss of $20,000 for 2014. The balance sheet at December 31, 2014, for Coglin, Inc.,
includes the following items:
Cash
$ 23,000
Accounts receivable
13,000
Inventory
45,000
Prepaid insurance
1,000
Land
21,000
Building
80,000
Accounts payable
55,000
Salaries payable
2,000
Capital stock
100,000
Retained earnings
25,000
A) Determine Coglin’s current ratio and working capital.
B) Beyond the information provided in your answers to “A,” what does the composition of Coglin’s current
assets tell you about its liquidity.
C) What other information would one need to fully access Coglin’s liquidity?
Chapter 2: Financial Statements and the Annual Report
182. During 2014, Wimbrow Images reported $60,000 of net income and generated $80,000 of cash from
operations. During the year, Wimbrow Images paid $15,000 to purchase a new delivery truck and also paid
dividends in the amount of $30,000. Wimbrow Images borrowed $40,000 cash from the bank. At the
beginning of the year, cash amounted to $50,000.
A) Prepare a statement of cash flows for the year ended December 31, 2014.
B) How much more cash does Wimbrow Images have available at the end of the year than at the
beginning?
C) Why is there a difference between net income and cash flows from operations?
Chapter 2: Financial Statements and the Annual Report
183. Tradewinds Corporation was organized on January 1, 2014, with the investment of $500,000 in cash by its
stockholders. Tradewinds signed a ten–year, $300,000 promissory note at a local bank during 2014 and
received cash in the same amount. The company immediately purchased an office building for $800,000,
paying in cash. During its first year, Tradewinds generated $35,000 in cash from operations and paid
$30,000 in cash dividends.
A) In good form, prepare a statement of cash flows for the year ended December 31, 2014.
B) What does this statement tell you that an income statement does not?
Chapter 2: Financial Statements and the Annual Report
184. Hindsville Company reported revenues of $165,000 and net income of $20,000 for 2014. Cash generated by
operations was $40,000. In addition, Hindsville Company borrowed $24,000 from a bank. During 2014,
Hindsville purchased new equipment for $30,000 cash and paid cash dividends of $15,000 to stockholders.
Hindsville’s cash balance at the beginning of 2014 was $22,000.
A)
Identify the amount of cash flows for financing, investing, and operating activities for
2014 by filling in the amounts below.
Financing Cash Flows:
Investing Cash Flows:
Operating Cash Flows:
B)
Did Hindsville Company’s operating activities generate enough cash to cover its
investing and financing activities? Explain.
C)
How much did Hindsville Company’s cash balance increase or decrease during 2014?
Financing Cash Flows = $9,000
($24,000 Cash borrowed from bank – $15,000 Cash dividends paid = $9,000)
Investing Cash Flows = ($30,000)
(Purchase of new equipment)
Operating Cash Flows = $40,000
(Cash generated by operations)
Yes. The total of investing and financing activities is an outflow of $21,000. The
$40,000 generated from operating activities is sufficient
C)
$19,000 Increase
($40,000 Cash flow from operations – $30,000 Cash flow from investing + $9,000
Chapter 2: Financial Statements and the Annual Report
185. Presented below are items from Joplin Shoes statement of cash flows for 2014.
Cash flows provided by operating activities
$ 75,000
Cash flows provided by financing activities
115,000
Cash at the beginning of the year
60,000
Cash flows used by investing activities
(100,000)
A) Determine whether Joplin Shoes’ cash increased or decreased during the year.
B) How much cash does Joplin Shoes have at the end of 2014?
C) What is the purpose of the statement of cash flows?