2-26. Solution:
Vriend Software Inc.
27. Construction of income statement and balance sheet (LO1 and 3) For December 31,
20X1, the balance sheet of Baxter Corporation was as follows:
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Current Assets Liabilities
Cash………………………………….….. $ 15,000 Accounts payable….…….….. $ 17,000
Accounts receivable….………….... 20,000 Notes payable…………………. 25,000
Inventory……………….……….…….. 30,000 Bonds payable………………... 55,000
Prepaid expenses……….…………... 12,500
Fixed Assets Stockholders’ Equity
Plant and equipment (gross)….... $255,000 Preferred stock..….……….…. $25,000
Less: Accumulated…………….... Common stock….…….……... 60,000
depreciation………………………... 51,000 Paid-in capital..…………....... 30,000
Net plant and equipment............. $204,000 Retained earnings ………..…. 69,500
………………………………………..…... Total liabilities and
Total assets…………….………….….. $281,500 stockholders’ equity…......... $281,500
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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
10 percent, while the interest rate on the bonds payable was 12 percent. This interest
expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.
$2,500 in preferred stock dividends were paid, and $5,500 in dividends were paid to
common stockholders. There were 10,000 shares of common stock outstanding.
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.
Accounts payable increased by 20 percent. Notes payable increased by $6,500 and
bonds payable decreased by $12,500, both at the end of the year. The preferred stock,
common stock, and paid-in capital in excess of par accounts did not change.
a. Prepare an income statement for 20X2.
b. Prepare a statement of retained earnings for 20X2.
c. Prepare a balance sheet as of December 31, 20X2.
2-27. Solution:
Baxter Corporation
20X2 Income Statement
a. Sales……………………………..…….…….…….……… $245,000
Cost of good sold (60%)…..……….…….……...... 147,000
Gross profit………………………….….……….….. $ 98,000
Selling and administrative expense……….…….. 24,500
b. 20X2 Statement of Retained Earnings
Retained earnings balance, January 1, 20X2. . . $ 69,500
2-27. (Continued)
c. 20X2 Balance Sheet
Current Assets Liabilities
Cash………….. $ 15,000
Accounts
payable $20,400
Fixed Assets Stockholders’ Equity
Gross plant…… $295,000
Preferred stock…
Common stock…
$ 25,000
60,000
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
procedures indicated in Table 2–10.
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?
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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
Selling and administrative expense………………………………….... 420,000
Statement of Retained Earnings
For the Year Ended December 31, 20X2
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
Inventory……………………………………………………………………….. 410,000 430,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable…………………………………………….…….….. $ 250,000 $ 440,000
Notes payable……………………………………………………………. 400,000 400,000
Accrued expenses………………………………………………………. 70,000 50,000
Total current liabilities………………………………..…….…….. 720,000 890,000
Long-term liabilities:
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(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
flow from operating activities:
……………………………………………………..
Net cash flows from operating
activities
………………………………………………….…….
Cash flows from investing activities:
Decrease in investments
………………………………………………….…….
Increase in plant and equipment
$150,000
50,000
(10,000)
(50,000)
(10,000)
$ 30,000
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
Solution 2-28 d):
