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Chapter 02: Review of Accounting
2-28
28. Statement of cash flows (LO4) Prepare a statement of cash flows for the Jeter
Corporation. Follow the general procedures indicated in Table 2–10.
_______________________________________________________________________
JETER CORPORATION
Income Statement
For the Year Ended December 31, 2010
Sales ...................................................................................... $ 3,300,000
Cost of goods sold ................................................................. 1,950,000
Gross profits .................................................................... 1,350,000
Selling and administrative expense ........................................ 650,000
Depreciation expense............................................................. 230,000
Operating income ............................................................ 470,000
Interest expense ..................................................................... 80,000
Earnings before taxes ....................................................... 390,000
Taxes ..................................................................................... 140,000
Earnings after taxes ......................................................... 250,000
Preferred stock dividends ......................................................... 10,000
Earnings available to common stockholders .......................... $ 240,000
Shares outstanding ................................................................. 150,000
Earnings per share ................................................................. $ 1.60
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_______________________________________________________________________
Statement of Retained Earnings
For the Year Ended December 31, 2010
Retained earnings, balance, January 1, 2010 .......................... $800,000
Add: Earnings available to common stockholders, 2010 ..... 240,000
Deduct: Cash dividends declared and paid in 2010 ............. 140,000
Retained earnings, balance, December 31, 2010 .................... $900,000
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Chapter 02: Review of Accounting
2-29
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Comparative Balance Sheets
For 2009 and 2010
Year-End Year-End
Assets 2009 2010
Current assets:
Cash ................................................................................ $ 100,000 $120,000
Accounts receivable (net) ................................................ 500,000 510,000
Inventory ......................................................................... 610,000 640,000
Prepaid expenses ............................................................. 60,000 30,000
Total current assets .................................................... 1,270,000 1,300,000
Investments (long-term securities) ................................... 90,000 80,000
Plant and equipment ........................................................ 2,000,000 2,600,000
Less: Accumulated depreciation ................................. 1,000,000 1,230,000
Net plant and equipment .................................................. 1,000,000 1,370,000
Total assets ............................................................................ $2,360,000 $2,750,000
Year-End Year-End
Liabilities and Stockholders’ Equity 2009 2010
Current liabilities:
Accounts payable............................................................. $ 300,000 $ 550,000
Notes payable .................................................................. 500,000 500,000
Accrued expenses ............................................................ 70,000 50,000
Total current liabilities .................................................. 870,000 1,100,000
Long-term liabilities:
Bonds payable, 2015 ........................................................ 100,000 160,000
Total liabilities .............................................................. 970,000 1,260,000
Stockholders’ equity:
Preferred stock, $100 par value ........................................ 90,000 90,000
Common stock, $1 par value ............................................ 150,000 150,000
Capital paid in excess of par ............................................ 350,000 350,000
Retained earnings ............................................................ 800,000 900,000
Total stockholders’ equity ............................................. 1,390,000 1,490,000
Total liabilities and stockholders’ equity ................................ $2,360,000 $2,750,000
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Chapter 02: Review of Accounting
2-28. Solution:
Jeter Corporation
Statement of Cash Flows
For the Year Ended December 31, 2010
Cash flows from operating activities:
Net income (earnings after taxes) ..........
Adjustments to determine cash
flow from operating activities:
Add back depreciation ...........................
Increase in accounts receivable ..............
Increase in inventory..............................
Decrease in prepaid expenses ................
Increase in accounts payable ..................
Decrease in accrued expenses ................
Total adjustments ............................
Net cash flows from operating
activities ................................................
Cash flows from investing activities:
Decrease in investments.........................
$230,000
(10,000)
(30,000)
30,000
250,000
(20,000)
10,000
$250,000
450,000
$700,000
Chapter 02: Review of Accounting
(The following questions apply to the Jeter Corporation, as presented in Problem 28.)
29. Net income and cash flows (LO1 & 3) Describe the general relationship between net
income and net cash flows from operating activities for the firm.
2-29. Solution:
Cash flows from operating activities far exceed net income.
This occurs primarily because we add back depreciation of
$230,000 and accounts payable increase by $250,000. Thus, the
reader of the cash flow statement gets important insights as to
how much cash flow was developed from daily operations.
30. Financing of assets (LO3) Has the buildup in plant and equipment been financed in a
satisfactory manner? Briefly discuss.
2-30. Solution:
The buildup in plant and equipment of $600,000 (gross) and
$370,000 (net) has been financed, in part, by the large increase
in accounts payable (250,000). This is not a very satisfactory
situation. Short-term sources of funds can always dry up, while
fixed asset needs are permanent in nature. This firm may wish to
consider more long-term financing, such as a mortgage, to go
along with profits, the increase in bonds payable, and the add-
back of depreciation.
31. Book value (LO3) Compute the book value per common share for both 2009 and 2010 for
the Jeter Corporation.
Chapter 02: Review of Accounting
2-32
2-31. Solution:
Book value
Per share
Book value
Per share
(2009)
Book value
Per share
(2010)
( )
( )
Stockholders' equity Preferred stock
=Common shares outstanding
$1,390,000 $90,000 $1,300,000
= = = $8.67
150,000 150,000
$1,490,000 $90,000 $1,400,000
= = = $9.33
150,000 150,000
−
−
−
32. P/E ratio (LO2) If the market value of a share of common stock is 3.1 times book value
for 2010, what is the firm’s P/E ratio for 2010? (Round to the nearest whole number.)
2-32. Solution:
Market value = 3.1 × $9.33 = $28.92
P/E ratio = $28.92/$1.60 = 18.07 or 18 ×
W E B E X E R C I S E
1. PepsiCo, at the top of Table 2 in the chapter, is a company that provides comprehensive
financial statements. Go to finance.yahoo.com. In the box next to “Get Quotes” type in its
ticker symbol PEP and click.
2. Scroll all the way down to “Financials” and click on “Income Statement.” Compute the
annual percentage change between the three years for the following:
a. Total Revenue
b. Net Income Applicable to Common Shares
3. Now click on the “Balance Sheet” and compute the annual percentage change between the
three years for the following:
Chapter 02: Review of Accounting
2-33
a. Total Assets
b. Total Liabilities
4. Write a one paragraph summary of how the company is doing.
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