“You Decide” Essay
You are an entrepreneur with a great idea for a new business. In order to obtain
financing, the loan officer at First Second Third National Bank has requested a
budgeted set of financial statements. An accountant friend of yours has mentioned that
there are several options associated with plant assets that are available to help you
improve your budgeted income.
Describe several decisions concerning property, plant, and equipment that have an
impact on reported net income. Are there any ethical concerns in this area?
Refer to King Cotton Company. Which long-term liability would also be listed in the
short-term liability section? Why?
Refer to Atlantis Tropicals. If the aging approach is used to estimate bad debts, how
much bad debts expense will the company report for 2013?
An accumulated ________ account is used when writing off natural resources.
Refer to McCullow Investment Group. What is meant by the term “cash flow
adequacy”? What other financial information would be necessary in order to make a
determination of the cash flow adequacy for these three companies?
A significant disadvantage of financing with debt rather than stock is the fact that the
interest expense on debt is not tax-deductible.
The income statement summarizes the assets, liabilities and stockholders’ equity for a
period of time.
The lender of a note recognizes a note payable on the balance sheet and interest expense
on its income statement.
The issuance of common stock increases a company’s assets and stockholders’ equity.
In the stockholders’ equity section of a classified balance sheet, a distinction is made
between amounts invested by owners and amounts financed by creditors.
Cost of goods sold is the difference between costs of goods available for sale and
ending inventory.
If a company overstates its ending inventory for the current year, what are the effects on
assets, cost of goods sold, income before taxes, and retained earnings for the current
year?
The cash flow adequacy ratio is defined as Free Cash Flow / Average Amount of Debt
Maturing over the Next Five Years.
Long-term debt generally refers to obligations that extend beyond one year.
Recovery Solutions, Inc.
Comparative financial statements are provided below:
Statements of Income and Retained Earnings for the Fiscal Years Ended:
June 30, 2015 June 30,
2014 June 30, 2013
Net Sales $2,004,719 $1,937,021 $1,835,987
Other Income 18,636 17,153 14,614
Total Revenues 2,023,355 1,954,174 1,850,601
Cost of Goods Sold 848,363 847,366 814,483
Selling, General, & Administrative Expenses 733,498 711,610 666,909
Interest Expense 615 958 1,097
Total Costs and Expenses 1,582,476 1,559,934 1,482,489
Income Before Taxes 440,879 394,240 368,112
Income Taxes 136,378 122,614 128,840
Net Income 304,501 271,626 239,272
Retained Earnings at Beginning of Year 1,032,139 898,512 746,541
Dividends Declared (152,023) (137,999) (87,301)
Retained Earnings at End of Year $1,184,617 $1,032,139 $ 898,512
Per Average Share Amounts:
Net income per share of common stock $2.63 $2.34 $1.99
Dividends per share of common stock $1.30 $1.17 $1.02
Balance Sheets
June
30, 2015 June 30, 2014
Cash $ 214,572 $ 206,627
Short-term Investments 137,112 120,728
Accounts Receivable 194,877 175,967
Inventory 256,108 247,392
Other Current Assets 40,403 46,959
Total Current Assets 843,072 797,673
Long-term Investments 39,888 26,375
Other Non-current Assets 92,183 59,566
Note Receivable 25,522 29,038
Land 36,013 26,298
Buildings and Building Equipment 310,212 277,808
Machinery and Equipment 642,656 566,766
Less: Accumulated Depreciation (432,050) (401,279)
Total Assets $1,557,496 $1,382,245
Accounts Payable $ 76,691 $ 71,001
Accrued Expenses 67,848 78,378
Dividend Payable 23,222 22,034
Income and Other Taxes Payable 50,865 54,403
Total Current Liabilities 218,626 225,816
Bonds Payable 104,885 101,057
Other Non-current Liabilities 40,312 30,874
Total Liabilities 363,823 357,747
Preferred Stock, no par 3,157 3,157
Common Stock, $1 par 12,339 2,339
Additional Paid-in-Capital 272 226
Retained Earnings 1,184,617 1,032,139
Treasury Stock (common shares at cost) (6,712)
(13,363)
Total Stockholders’ Equity 1,193,673
1,024,498
Total Liabilities and Stockholders’ Equity $1,557,496 $1,382,245
Refer to Recovery Solutions, Inc. Calculate the current ratio, quick ratio, and cash ratio
for 2015. If you were a banker, would you lend money to this company under a
short-term note payable?
The debt-to-equity ratio is defined as total liabilities divided by total stockholders’
equity.
Flott Corp. purchased a machine on January 1, 2012, for $60,000. The company
decided to depreciate the machine over a 8-year period using the straight-line method.
The company estimated its residual value at $4,000. Show how the costs should be
presented on the balance sheet and income statement for the full year ended June 30,
2014. Label the statements properly.