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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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of McGraw-Hill Education.
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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of McGraw-Hill Education.
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
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
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:
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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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of McGraw-Hill Education.
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
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
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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of McGraw-Hill Education.
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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of McGraw-Hill Education.
Chapter 02: Review of Accounting
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
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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of McGraw-Hill Education.
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
