978-1259277160 Chapter 2 Solution Manual Part 3

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Chapter 02: Review of Accounting

2-22. Solution:

Nova Electronics

a. Cash flow from operations activities $6.00 million

b. Free cash flow represents the funds that are available for

special financial activities, such as a leveraged buyout,

23. Book value (LO3) Landers Nursery and Garden Stores has current assets of $220,000 and

fixed assets of $170,000. Current liabilities are $80,000 and long-term liabilities are

2-23. Solution:

Landers Nursery and Garden Stores

Current assets

……………………………………………………………..

Fixed assets

– Preferred stock obligation

……………………………………………………………..

Net worth assigned to common

$220,000

170,000

$390,000

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Chapter 02: Review of Accounting

……………………………………………………………..

Common shares outstanding

……………………………………………………………..

Book value (net worth) per share

……………………………………………………………..

24. Book value and market value (LO2 and 3) The Holtzman Corporation has assets of

$400,000, current liabilities of $50,000, and long-term liabilities of $100,000. There is

$40,000 in preferred stock outstanding; 20,000 shares of common stock have been issued.

a. Compute book value (net worth) per share.

2-24. Solution:

Holtzman Corporation

a. Total assets

……………………………………………………….

Common shares outstanding

…………………………………………………

Book values (net worth) per share

……………………………………………………..

b. Earnings available to common

……………………………………………………….

Shares outstanding

$400,000

50,000

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Chapter 02: Review of Accounting

……………………………………………………….

Earnings per share

……………………………………………………….

P/E ratio × earnings per share = price

18 × $1.10 = $19.80

c. Market value per share (price) to book value per

share $19.80/$10.50 = 1.89

25. Book value and market value (LO2 and 3) Amigo Software Inc. has total assets of

$889,000, current liabilities of $192,000, and long-term liabilities of $154,000. There is

$87,000 in preferred stock outstanding. Thirty thousand shares of common stock have

been issued.

a. Compute book value (net worth) per share.

b. If there is $56,300 in earnings available to common stockholders, and the firm’s stock

2-25. Solution:

Amigo Software, Inc.

a. Total assets

……………………………………………………….

$889,000

192,000

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Chapter 02: Review of Accounting

Book value (net worth) per share

……………………………………………………..

b. Earnings available to common

……………………………………………………….

ratio × earnings per share = price

23 × $1.88 = $43.24

P/ E

c. Market value per share (price) to book value per share

$43.24/$15.20 = 2.84

26. Book value and P/E ratio (LO2 and 3) Vriend Software Inc.’s book value per share is

$15.20. Earnings per share is $1.88, and the firm’s stock trades in the stock market at 3.5 times

book value per share, what will the P/E ratio be? (Round to the nearest whole number.)

2-26. Solution:

Vriend Software Inc.

3.5 × book value per share = price

Chapter 02: Review of Accounting

27. Construction of income statement and balance sheet (LO1 and 3) For December 31,

20X1, the balance sheet of Baxter Corporation was as follows:

________________________________________________________________________

Current Assets Liabilities

Prepaid expenses……………………. 12,500

Fixed Assets Stockholders’ Equity

…………………………………………….. Total liabilities and

________________________________________________________________________

Sales for 20X2 were $245,000, and the cost of goods sold was 60 percent of sales. Selling

and administrative expense was $24,500. Depreciation expense was 8 percent of plant and

equipment (gross) at the beginning of the year. Interest expense for the notes payable was

During 20X2, the cash balance and prepaid expenses balances were unchanged.

Accounts receivable and inventory increased by 10 percent. A new machine was purchased

on December 31, 20X2, at a cost of $40,000.

a. Prepare an income statement for 20X2.

2-27. Solution:

of McGraw-Hill Education.

Chapter 02: Review of Accounting

Baxter Corporation

20X2 Income Statement

a. Sales………………………………………………………. $245,000

Cost of good sold (60%)……………………………. 147,000

b. 20X2 Statement of Retained Earnings

Retained earnings balance, January 1, 20X2. . . $ 69,500

Add: Earnings available to common

1 8% × $255,000 = $20,400

2 (10% × $25,000) + (12% × $55,000) = $9,100

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Chapter 02: Review of Accounting

Retained earnings balance,

2-27. (Continued)

c. 20X2 Balance Sheet

Current Assets Liabilities

Cash………….. $ 15,000

Accounts

payable $20,400

Accounts

Fixed Assets Stockholders’ Equity

Gross plant…… $295,000

Preferred stock…

Common stock…

$ 25,000

60,000

Accumulated

Paid in capital in

28. Statement of cash flows (LO4) Refer to the following financial statements for Crosby

Corporation:

a) Prepare a statement of cash flows for the Crosby Corporation using the general

3 $51,000 + $20,400 = $71,400

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Chapter 02: Review of Accounting

b) Describe the general relationship between net income and net cash flows from operating

activities for the firm.

c) Has the buildup in plant and equipment been financed in a satisfactory manner? Briefly

discuss.

d) Compute the book value per common share for both 20X1 and 20X2 for the Crosby

Corporation.

e) If the market value of a share of common stock is 3.3 times book value for 20X1, what is

the firm’s P/E ratio for 20X2?

_______________________________________________________________________

CROSBY CORPORATION

Income Statement

For the Year Ended December 31, 20X2

Sales……………………………………………………………………………… $2,200,000

Cost of goods sold…………………………………………………………… 1,300,000

Gross profits……………………………………………………………… 900,000

Statement of Retained Earnings

For the Year Ended December 31, 20X2

Retained earnings, balance, January 1, 20X2……………………… $500,000

Comparative Balance Sheets

For 20X1 and 20X2

Year-End Year-End

Assets 20X1 20X2

Current assets:

Cash…………………………………………………………………………. $ 70,000 $100,000

Accounts receivable (net)…………………………………………… 300,000 350,000

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Chapter 02: Review of Accounting

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable………………………………………………………. $ 250,000 $ 440,000

Notes payable……………………………………………………………. 400,000 400,000

_______________________________________________________________________

(The following questions apply to the Crosby Corporation, as presented in Problem 27.)

Solution 2-28 a):

Crosby Corporation

Statement of Cash Flows

For the Year Ended December 31, 20X2

Cash flows from operating activities:

Net income (earnings after taxes)

………………………………………………………

Adjustments to determine cash

$160,000

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Chapter 02: Review of Accounting

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Chapter 02: Review of Accounting

Solution 2-28 b):

Cash flows from operating activities far exceed net income.

This occurs primarily because we add back depreciation of

Solution 2-28 c):

The buildup in plant and equipment of $690,000 (gross) and

$371,000 (net) has been financed, in part, by the large increase

in accounts payable (248,000). This is not a very satisfactory

Solution 2-28 d):

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Chapter 02: Review of Accounting

Book value

per share

Book value

per share

(20X1)

Book value

per share

(20X2)

( )

Stockholders’ equity Preferred stock

=Common shares outstanding

$1,120,000 $90,000 $1,030,000

= = = $8.58

120,000 120,000

$1,220,000 $90,000 $1,130,000

= = = $9.42

120,000 120,000

–

Solution 2-28 e):

Market value = 3.3 × $9.42 = $31.09

P / E ratio = Market value / Earnings per share

= $31.09 / $1.25

= 24.87