FIN 350 P3-3 to P3-21 P3-3 P3-6 P3-10 P3-16 P3-18 P3-20 P3-21
FIN 350 P3-3 to P3-21Details Complete the following
problems from the textbook (All 7 problems are printed on
here) P3-3 P3-6 P3-10 P3-16 P3-18 P3-20 P3-21
P-3 Income statement preparation On December 31, 2015,
Cathy Chen, a self-employed redefining certified public
accountant (CPA), completed her first full year in business. During
the year, she billed $360,000 for her accounting services. She had
two employees, a bookkeeper and a clerical assistant. In addition
to her monthly salary of $8,000, Ms. Chen
paid annual salaries of $48,000 and $36,000 to the
bookkeeper and the clerical assistant, respectively. Employment
taxes and benefit costs for Ms. Chen and her employees totaled
$34,600 for the year. Expenses for office supplies, including
postage, totaled $10,400 for the year. In addition, Ms. Chen spent
$17,000 during the year on tax-deductible travel and entertainment
associated with client visits and new business development. Lease
payments for the office space rented (a tax deductible expense)
were $2,700 per month. Depreciation expense on the office
furniture and fixtures was $15,600 for the year. During the year,
Ms. Chen paid interest of $15,000 on the $120,000 borrowed to start
the business. She paid an average tax rate of 30% during 2015.
a. Prepare an income statement for Cathy Chen, CPA, for the
year ended December 31, 2015.
b. Evaluate her 2015 financial performance.
P3-6 Balance sheet preparation Use the appropriate
items from the following list to prepare in good form
Mellark’s Baked Goods balance sheet at December 31, 2015.
Item Value at ($000) December 31, 2015 Item Value
($000) at December 31, 2015
Accounts payable $ 220
Inventories $375
Accounts receivable 450
Land 100
Accruals 55
Long-term debts 420
Accumulated depreciation 265
Machinery 420
Buildings 225
Marketable securities 75
Cash 215
Notes payable 475
Common stock (at par) 90
Paid in capital in excess Cost of goods sold 2,500
of par 360
Depreciation expense 45
Preferred Stock 100
Equipment 140
Retained Earnings 210
Furniture and fixtures 170
Sales Revenue 3,600
General expense 320
Vehicles 25
P3-10 Statement of retained earnings Hayes Enterprises
began 2015 with a retained earnings balance of $928,000.
During 2015, the firm earned $377,000 after taxes. From this
amount, preferred stockholders were paid $47,000 in dividends. At
year-end 2015, the firm’s retained earnings totaled $1,048,000. The
firm had 140,000 shares of common stock outstanding during 2015.
a. Prepare a statement of retained earnings for the year
ended December 31, 2015, for Hayes Enterprises. (Note: Be sure
to calculate and include the amount of cash dividends paid in
2015.)
b. Calculate the firm’s 2015 earnings per share (EPS).c. How
large a per-share cash dividend did the firm pay on common stock
during 2015?P3-16 Accounts receivable management An evaluation
of the books of Blair Supply, which follows, gives the
end-of-year accounts receivable balance, which is believed to
consist of amounts originating in the months indicated. The company
had annual sales of $2.4 million. The firm extends 30-day credit
terms.
Month of origin Accounts
receivable
July
$ 3,875August
2,000September
34,025October
15,100November
52,000December
193,000Year-end accounts receivable $300,000
a. Use the year-end total to evaluate the firm’s collection
system.
b. If 70% of the firm’s sales occur between July and
December, would this information affect the validity of your
conclusion in part a? Explain.
P3-18 Debt analysis Springfield Bank is evaluating Creek
Enterprises, which has requested a $4,000,000 loan, to assess
the firm’s financial leverage and financial risk. On the basis of
the debt ratios for Creek, along with the industry averages (see
the top of the next page) and Creek’s recent financial statements
(following), evaluate and recommend appropriate action on the loan
request
Creek Enterprises Income Statement for the Year Ended
December 31, 2015
Sales
revenue
$30,000,000
Less: Cost of goods
sold 21,000,000
Gross
profits $
9,000,000
Less: Operating expenses
Selling expense
$3,000,000
General and administrative
expenses 1,800,000
Lease
expense
200,000
Depreciation
expense
1,000,000
Total operating
expense $
6,000,000
Operating profits
$ 3,000,000
Less: Interest expense
1,000,000
Net profits before
taxes
$
2,000,000
Less: Taxes (rate 5
40%) 800,000
Net profits after
taxes
$ 1,200,000
Less: Preferred stock
dividends 100,000
Earnings available for
common stockholders
$
1,100,000
P3-20 Common-size statement analysis A common-size
income statement for Creek Enterprises’ 2014 operations
follows. Using the firm’s 2015 income statement presented in
Problem 3–18, develop the 2015 common-size income statement and
compare it with the 2014 statement. Which areas require further
analysis and investigation?
Creek Enterprises Common-Size Income Statement
for the Year Ended December 31, 2014
Sales revenue ($35,000,000)
100.0%
Less: Cost of goods sold
65.9
Gross profits
34.1%
Less: Operating expenses
Selling expense
12.7%
General and
administrative expenses
6.3
Lease
expense
0.6
Depreciation
expense
3.6
Total operating
expense
23.2
Operating
profits
10.9%
Less: Interest
expense 1.5
Net profits before
taxes
9.4%
Less: Taxes (rate 5
40%)
3.8
Net profits after
taxes
5.6%
Less: Preferred stock
dividends 0.1
Earnings available for common
stockholders
5.5%
P3-21 The relationship between financial leverage and
profitability Pelican Paper, Inc., and Timberland Forest,
Inc., are rivals in the manufacture of craft papers. Some financial
statement values for each company follow. Use them in a ratio
analysis that compares the firms’ financial leverage and
profitability.
Item
Pelican Paper,
Inc.
Timberland Forest, Inc.
Total assets
$10,000,000
$10,000,000
Total equity (all
common)
9,000,000
5,000,000
Total
debt
1,000,000
5,000,000
Annual
interest
100,000
500,000
Total
sales
25,000,000
25,000,000
EBIT
6,250,000
6,250,000
Earnings available for
common
stockholders
3,690,000
3,450,000
a. Calculate the following debt and coverage ratios for the
two companies. Discuss their financial risk and ability to cover
the costs in relation to each other.
1. Debt ratio
2. Times interest earned ratio
b. Calculate the following profitability ratios for the two
companies. Discuss their profitability relative to one another.
1. Operating profit margin2. Net profit margin3. Return on
total assets4. Return on common equity
c. In what way has the larger debt of Timberland Forest made
it more profitable than Pelican Paper? What are the risks that
Timberland’s investors undertake when they choose to purchase its
stock instead of Pelican’s?
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