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2-12. Solution:
Lemon Auto Wholesalers
Income Statement
a.Sales.................................................................. $1,000,00
0
Cost of goods sold (78% of sales)..................... $ 780,000
2-12. (Continued)
b.Sales.................................................................. $1,050,900
Cost of goods sold (74% of sales) .................... $ 777,666
Gross profit................................................... $
273,234
Selling and administrative expense
Ms. Carr’s ideas will increase profitability.
13. Balance sheet (LO3) Classify the following balance sheet items as current or
noncurrent:
Retained earnings Bonds payable
Accounts payable Accrued wages payable
2-13. Solution:
Retained earnings – noncurrent
Accounts payable – current
Prepaid expense – current
14. Balance sheet and income statement classification (LO1 & 3) Fill in the blank spaces
with categories 1 through 7:
Indicate Whether
Item Is on Balance
Sheet (BS) or
Income
Statement (IS)
If on Balance
Sheet, Designate
Which
Category Item
_____ _____ Accounts receivable
_____ _____ Retained earnings
_____ _____ Income tax expense
_____ _____ Accrued expenses
_____ _____ Cash
2-14. Solution:
1. Balance Sheet (BS)
4. Fixed Assets (FA)
5. Current Liabilities (CL)
2-14. (Continued)
Indicate
Whether
Item is on
Income
Statement or
Balance
Sheet
If Item Is
on
Balance
Sheet,
Designate
Which
Category Item
BS CA Accounts Receivable
BS SE Retained Earnings
IS Income Tax Expense
BS SE Capital in Excess of Par Value
15. Development of balance sheet (LO3) Arrange the following items in proper balance sheet
presentation:
Accumulated depreciation..................................................... $309,000
Retained earnings................................................................... 187,000
Cash........................................................................................ 14,000
Bonds payable........................................................................ 136,000
2-15. Solution:
Assets
Current Assets:
Cash........................................... $ 14,000
Marketable securities................... 24,000
2-15. (Continued)
Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable.....................................................
Stockholders’ equity:
Preferred stock, $59 par, 1,000 shares outstanding...
$ 35,000
59,000
16. Earnings per share and retained earnings (LO1 and 3) Elite Trailer Parks has an
operating profit or $200,000. Interest expense for the year was $10,000; preferred
dividends paid were $18,750; and common dividends paid were $30,000. The tax was
$61,250. The firm has 20,000 shares of common stock outstanding.
2-16. Solution:
Elite Trailer Parks
a. Operating profit (EBIT)......................................... $200,000
Interest expense................................................. 10,000
Earnings Available to Common Stockholders
Number of Shares of Com. Stock Outstanding
$110,000/20,000 shares
$5.50 per share
=
=
Dividends per share = $30,000/20,000 shares
= $1.50 per share
b. Increase in retained earnings = $80,000
17. Earnings per share and retained earnings (LO1 and 3) Quantum Technology had
$669,000 of retained earnings on December 31, 20X2. The company paid common
2-17. Solution:
Quantum Technology
Retained earnings, December 31, 20X2........................ $669,000
Less: Retained earnings, December 31, 20X1.............. 576,000
Earnings per share
$128,500 $2.71 per share
47,400 shares
= =
18. Price/earning ratio (LO2) Botox Facial Care had earnings after taxes of $370,000 in
20X1 with 200,000 shares of stock outstanding. The stock price was $31.50. In 20X2,
earnings after taxes increased to $436,000 with the same 200,000 shares outstanding. The
stock price was $42.00.
a. Compute earnings per share and the P/E ratio for 20X1.
2-18. Solution:
Botox Facial Care
$370,000
200,000
=
P/E ratio (20X1) = Price/EPS =
$31.50
$1.85
= 17.03x
b. EPS (20X2)
$436,000
200,000
=
= $2.18
P/E ratio (20X2) = Price/EPS =
$42.00
$2.18
= 19.27x
c. The stock price increased by 33.33% while EPS only
increased 17.84%.
19. Price/earning ratio (LO2) Stilley Corporation had earnings after taxes of $436,000 in
20X2 with 200,000 shares outstanding. The stock price was $42.00. In 20X3, earnings after
taxes declined to $206,000 with the same 200,000 shares outstanding. The stock price
declined to $27.80.
2-19. Solution:
Stilley Corporation
$436,000
200,000
=
P/E ratio (20X2) = Price/EPS =
$42.00
$2.18
= 19.27x
b. EPS (20X3)
$206,000 $1.03
200,000
= =
P/E ratio (20X3) = Price/EPS =
$27.80 26.99
$1.03 x=
c. As explained in the text, when EPS drops rapidly, the stock
20. Cash flow (LO4) Identify whether each of the following items increases or decreases
cash flow:
Increase in accounts receivable Decrease in prepaid expenses
Increase in notes payable Increase in inventory
2-20. Solution:
Increase in accounts receivable – decreases cash flow (use)
Increase in notes payable – increases cash flow (source)
Depreciation expense – increases cash flow (source)
21. Depreciation and cash flow (LO5) The Rogers Corporation has a gross profit of $880,000
and $360,000 in depreciation expense. The Evans Corporation also has $880,000 in gross
2-21. Solution:
Rogers Corporation – Evans Corporation
Rogers Evans
Gross profit...........................................
Selling and adm. expense...............
Depreciation....................................
$880,000
120,000
$880,000
120,000
Rogers had $300,000 more in depreciation which provided
$120,000 (0.40 $300,000) more in cash flow.
22. Free cash flow (LO4) Nova Electrics anticipates cash flow from operating activities of $6
million in 20X1. It will need to spend $1.2 million on capital investments to remain
competitive within the industry. Common stock dividends are projected at $.4 million and
a. What is the firm’s projected free cash flow for the year 20X1?
b. What does the concept of free cash flow represent?
