1.Bradley Bus Inc. had earnings last year of $600,000 with 300,000 shares outstanding.

On January 1 of
the current year, the firm issued 40,000 new shares. Earnings after tax increased by 25 percent over last
year.
a. Calculate earnings per share (EPS) for last year.
b. Calculate EPS for the current year.
2.Dover River Company has current operating profit of $200,000 before taxes. Interest expense is
$10,000, dividends paid on preferred shares were $18,750, and common dividends paid of $30,000. The
company paid taxes of $38,250. The company has 20,000 outstanding common shares.
a. Calculate the EPS and common dividends per share.
b. Calculate the payout ratio.
c. Determine the increase in retained earnings for the year.
d. If the share price is $41.23, calculate the price‐earnings (P/E) ratio.

3.Far East Fast Foods had earnings after taxes of $230,000 in the year 20XX with 200,000 shares
outstanding. On January 1, 20XY, the firm issued 30,000 new shares. Because of the proceeds from these
new shares and other operating improvements, earnings after taxes increased by 25 percent.
a. Compute EPS of the year 20XX.
b. Compute EPS of the year 20XY
4.Sheridan Travel had earnings after taxes of $700,000 in 20XX with 400,000 common shares
outstanding. On January 1, 20XY, the firm issued 50,000 new common shares. There is a 35 percent
increase in aftertax earnings resulting from the issue of the new shares.
a. Compute EPS for the year 20XX.
b. Compute EPS for the year 20XY.
5. Botox Facial Care had earnings after taxes of $370,000 in 20XX with 200,000 shares of stock
outstanding. The share price was $31.50. In 20XY, earnings after taxes increased to $436,000 with the
same 200,000 shares outstanding. The share price rose to $42.50.
a. Compute earnings per share and the P/E ratio for 20XX.
b. Compute earnings per share and the P/E ratio for 20XY.
c. Give a general explanation of why the P/E ratio changed.
6. Stillery Corporation had earnings after taxes of $436,000 in 20XX with 200,000 shares of stock
outstanding. The share price was $42.00. In 20XY, earnings after taxes declined to $206,000 with the
same 200,000 shares outstanding. The share price declined to $27.80.
a. Compute earnings per share and the P/E ratio for 20XX.
b. Compute earnings per share and the P/E ratio for 20XY.
c. Give a general explanation of why the P/E ratio changed.
7. Brad Gravel Pitt Company has sales of $327,000 and cost of goods sold of $135,000.
a. What is the gross profit margin?
b. If the average firm in the gravel industry has a gross profit margin of 52 percent, how is
this firm doing?
8. The Moore Enterprise has gross profit of $880,000 with amortization expense of $360,000. The
Kipling Corporation has $880,000 in gross profits but only $60,000 in amortization expense. The selling
and administration expenses are $120,000; the same for each company. If the tax rate is 40 percent,
calculate the cash flow for each company. Explain the causes of differences in cash flow between the two
firms.
9.The Aztec Book Company sold 1,400 finance textbooks to High Tuition College for $84 each in 20XX.
These books cost $63 to produce. In addition, Aztec Books spent $2,000 (selling expense) to persuade the
college to buy its books. Aztec Books borrowed $50,000 on January 1, 20XX, on which it paid 10 percent
interest. Both interest and principal were paid on December 31, 20XX. Aztec Books’ tax rate is 20 percent.
Amortization expense for the year was $5,000. Did Aztec Books make a profit in 20XX? Verify your
answer with an statement of income presented in good form.
10.Carr Auto Wholesalers had sales of $900,000 in 20XX, and cost of goods sold represented 65 percent
of sales. Selling and administrative expenses were 9 percent of sales. Amortization expense was $10,000,
and interest expense for the year was $8,000. The firm’s tax rate is 30 percent.
a. Compute earnings after taxes using percentage‐of‐sales method.
b. Assume the firm hires Ms. Hood, an efficiency expert, as a consultant. She suggests that
by increasing selling and administrative expenses to 12 percent of sales, sales can be
increased to $1,000,000. The extra sales effort will also reduce cost of goods sold to 60
percent of sales (there will be a larger mark‐up in prices as a result of more aggressive
selling). Amortization expense will remain at $10,000. However, more automobiles will
have to be carried in inventory to satisfy customers, and interest expense will go up to
$15,000. The firm’s tax rate will remain at 30 percent. Compute revised earnings after
taxes based on Ms. Hood’s suggestions for Carr Auto Wholesalers. How much will her
ideas increase or decrease profitability?
11. Arrange the following income statement items so they are in the proper order of an statement of
income:

Taxes Earnings after taxes

Shares outstanding Earnings available to common shareholders

Gross profit Cost of goods sold

Interest expense Earnings per share

Amortization expense Earnings before taxes

Preferred stock dividends Selling and administrative expense

Sales Operating profit

12.Dog River Company has an operating profit of $250,000. Interest expense for the year was $21,000;
preferred dividends paid were $23,450; and common dividends paid were $50,000. The tax was $45,550.
The Dog River Company has 40,000 shares of common stock outstanding.
a. Calculate the EPS and the common dividends per share for Dog River Company.
b. What is the payout ratio?
c. What was the increase in retained earnings for the year?
d. If Dog’s share price is $62.00 what is its price‐earnings ratio (P/E)?

13.Thermo Dynamics had $450,000 of retained earnings on December 31, 20XX. The company paid
dividends of $25,000 in 20XX and had retained earnings of $400,000 on December 31, 20XW.
a. How much did Thermo earn during 20XX?
b. What would EPS be if 20,000 shares of common stock are outstanding?
c. What is the payout ratio?
d. If Thermo’s share price is $30.00 what is its price‐earnings ratio (P/E)?
14.Brandon Fast Foods Inc. has operating profit of $210,000. The company has 16,000 common shares
outstanding and paid corporate taxes of $59,300. Interest expense for the year was $30,000, preferred
dividends paid were $24,700, and common dividends paid were $36,000.
a.Compute EPS and common dividends per share.
b.Calculate the increase in retained earnings for the year.
15.Given the following information, prepare an income statement for the Dental Drilling Company.
 Selling and administrative expenses $112,000

Amortization expense 73,000

Sales 489,000

Interest expense 45,000

Cost of goods sold 156,000

Taxes 47,000
16.Classify the following balance sheet items as current or noncurrent:

Common stock Investments

Accounts
Marketable securities
payable

Preferred stock Accounts receivable

Prepaid expenses Plant and equipment

Bonds payable Accrued wages payable

Inventory Retained earnings

17. Arrange the following items in proper balance sheet presentation:

Accumulated amortization $300,000

Retained earnings 96,000

Cash 10,000

Bonds payable 136,000

Accounts receivable 48,000

Plant and equipment—original cost 680,000

Accounts payable 35,000

Allowance for bad debts 6,000

Common stock, 100,000 shares outstanding 188,000

Inventory 66,000

Preferred stock, 1,000 shares outstanding 50,000

Marketable securities 20,000

 Investments 20,000

Notes payable 33,000

18. Bengal Wood Company has current assets of $100,000 and capital assets of $140,000. Current
liabilities are $60,000 and long‐term liabilities are $90,000. There is $20,000 in preferred stock
outstanding and the firm has issued 17,500 shares of common stock. Compute book value (net
worth) per share.
19. Monique’s Boutique has assets of $600,000, current liabilities of $150,000, and long‐term
liabilities of $120,000. There is $75,000 in preferred stock outstanding; 30,000 shares of
common stock have been issued.
a. Compute book value (net worth) per share.
b. If there is $33,600 in earnings available to common shareholders and Monique’s stock
has a P/E ratio of 12 times EPS, what is the current price of the stock?
c. What is the ratio of market value per share to book value per share?
20. Phelps Labs has assets of $1,800,000, current liabilities of $595,000, and long‐term liabilities of
$630,000. There is $165,000 in preferred stock outstanding; 20,000 shares of common stock
have been issued.
a.Compute book value (net worth) per share.
b.If there is $45,000 in earnings available to common shareholders and Phelp’s stock has a P/E ratio of 13
times EPS, what is the current price of the stock?
c.What is the ratio of market value per share to book value per share?
21. In the previous problem, what is the P/E ratio if the firm sells at two times book value per share?
22. Fill in the blank spaces with categories 1 through 7:
1Balance sheet (BS)
2Income statement (IS)
3Current assets (CA)
4Capital assets (Cap A)
5Current liabilities (CL)
6Long-term liabilities (LL)
7Shareholders’ equity (SE)
Indicate whether
23.Identify whether each of the following items increases or decreases cash flow:

Increase in inventory Increase in short-term notes payable

Decrease in prepaid expenses Amortization expense

Decrease in accounts
Decrease in accounts payable
receivable

Decrease in inventory Increase in long-term investments

Dividend payment

24. The Rogers Corporation has a gross profit of $880,000 and $360,000 in amortization expense.
The Evans Corporation has $880,000 in gross profit, with $60,000 in amortization expense.
Selling and administrative expense is $120,000 for each company. Given that the tax rate is 30
 percent, compute the cash flow for both companies. Explain the difference in cash flow between
the two firms.

25.The following information is provided for the Solitude Corporation.

Balance Sheets

December 31, 20XX December 31, 20XW

Assets

Cash $ 77,490 $ 29,520

Accounts receivable 59,040 66,420

Inventory 154,980 132,840

Equipment 136,530 110,700

Less: accumulated amortization 33,210 22,140

Net equipment 103,320 88,560

Total assets $394,830 $317,340

Liabilities and Equity

Accounts payable $ 62,730 $ 36,900

Taxes payable 7,380 14,760

Common stock 243,540 221,400

Retained earnings 81,180 44,280

Total liabilities and equity $394,830 $317,340

During 20XX, the following occurred:

1. Net income was $73,800.
2. Equipment was purchased for cash, and no equipment was sold.
3. Shares were sold for cash.
4. Dividends were declared and paid.
a. Prepare a statement of cash flows for the Solitude Corporation.
b. Identify the major accounts contributing to the change in cash position, from
the three different components of the cash flow statement.
 26. The following information is provided for the Waif Corporation.

Balance Sheets

December 31, 20XX December 31, 20XW

Assets

Cash $ 54,500 $ 17,400

Accounts receivable 64,800 52,200

Inventory 142,200 149,300

Land 60,000 87,000

Plant and equipment 206,000 158,000

Less: Accum. amortization 55,000 33,000

Net plant and equipment 151,000 125,000

Total assets $472,500 $430,900

Liabilities and Equity

Accounts payable $ 27,000 $ 37,000

Bonds payable 118,000 158,000

Common stock 170,000 130,000

Retained earnings 157,500 105,900

Total liabilities and shareholders’ equity $472,500 $430,900

Table Summary: The table has five columns with headers in row one, two, and ten. In row one, columns two
and three are merged, and columns four and five are merged. Row eight is indented under row seven. The
following cells are blank: row one, column one; column two, rows two to five, and eight to sixteen; column
three, rows two, six and seven, and ten; column four, rows two to five, eight to sixteen; column five, rows
two, six, seven, and ten.
During 20XX, the following occurred:
1. Net income was $91,000.
2. Bonds were retired by issuing new common stock.
3. No equipment was sold.
4. Cash dividends were paid.
a. Prepare a statement of cash flows for the Waif Corporation.
b. Identify the major accounts contributing to the change in cash position, from the three
different components of the cash flow statement.
 27. Prepare a statement of cash flows for the Maris Corporation.

MARIS CORPORATION

Income Statement

Year ended December 31, 20XX

Sales $3,300,000

Cost of goods sold 1,950,000

Gross profits 1,350,000

Selling and administrative expense 650,000

Amortization expense 230,000

Operating income 470,000

Interest expense 80,000

Earnings before taxes 390,000

Taxes 140,000

Earnings after taxes 250,000

Preferred stock dividends 10,000

Earnings available to common shareholders $ 240,000

Shares outstanding 150,000

Earnings per share $1.60

Statement of Retained Earnings

For the Year Ended December 31, 20XX

Retained earnings, balance, January 1, 20XX $800,000

Add: Earnings available to common shareholders, 20XX 240,000

Deduct: Cash dividends declared and paid in 20XX 140,000

Retained earnings, balance, December 31, 20XX $900,000

 Statement of Retained Earnings

For the Year Ended December 31, 20XX

Comparative Balance Sheets

December 31, 20XX December 31, 20XW

Assets

Current assets:

Cash $ 120,000 $ 100,000

Accounts receivable (net) 510,000 500,000

Inventory 640,000 610,000

Prepaid expenses 30,000 60,000

Total current assets 1,300,000 1,270,000

Investments (long-term
80,000 90,000
securities)

2,600,00 2,000,00
Plant and equipment
0 0

Less: Accumulated 1,230,00 1,000,00

amortization 0 0

Net plant and equipment 1,370,000 1,000,000

$2,750,00 $
Total assets
0 2,360,000

Liabilities and Shareholders’

Equity

Current liabilities:

Accounts payable $550,000 $ 300,000

Notes payable 500,000 500,000

Accrued expenses 50,000 70,000

Total current liabilities 1,100,000 870,000

Long-term liabilities:

Bonds payable, XX +10 160,000 100,000

Total liabilities 1,260,000 970,000

 Statement of Retained Earnings

For the Year Ended December 31, 20XX

Shareholders’ equity:

Preferred stock 90,000 90,000

Common stock 500,000 500,000

Retained earnings 900,000 800,000

Total shareholders’ equity 1,490,000 1,390,000

Total liabilities and shareholders’ $2,750,00 $

equity 0 2,360,000

The following questions apply to the Maris Corporation, as presented in the previous problem.
28. Describe the general relationship between net income and net cash flows from operating activities
for the firm.
29. Has the buildup in plant and equipment been financed in a satisfactory manner? Briefly discuss.
30. Compute the book value per common share for 20XW and 20XX for the Maris Corporation.
31. If the market value of a share of common stock is 2.8 times book value for 20XX, what is the
firm’s P/E ratio for 20XX?
32. Prepare a statement of cash flows for the Winfield Corporation for 20XX.

WINFIELD CORPORATION

Balance Sheets

December 31, 20XX December 31, 20XW

Assets

Current Assets:

Cash $ 1,750 $ 1,400

Accounts receivable 7,875 5,425

Inventory 33,250 28,000

Prepaid expenses 1,225 1,050

Total current assets 44,100 35,875

Investments (long-term) 17,500 21,000

Capital assets:

Land 15,750 7,000

Buildings 100,000 100,000

Less: accumulated amortization 61,500 58,000

 WINFIELD CORPORATION

Balance Sheets

December 31, 20XX December 31, 20XW

Net buildings 38,500 42,000

Equipment 36,750 28,000

Less: accumulated amortization 10,500 7,000

Net equipment 26,250 21,000

$142,10
Total assets $126,875
0

Liabilities and Shareholders’

Equity

Current liabilities:

Accounts payable $ 15,750 $ 17,500

Notes payable 8,750 6,125

Accrued expenses 9,275 7,350

Interest payable 1,225 1,400

Total current liabilities 35,000 32,375

Long-term liabilities:

Bonds payable, XX + 8 43,750 38,500

Total liabilities 78,750 70,875

Shareholders’ equity:

Common stock 24,500 24,500

Retained earnings 38,850 31,500

Total shareholders’ equity 63,350 56,000

$142,10
Total liabilities and shareholders’ equity $126,875
0

WINFIELD CORPORATION

Income Statement

Year Ended December 31, 20XX

Sales $210,000
 WINFIELD CORPORATION

Balance Sheets

December 31, 20XX December 31, 20XW

Cost of goods sold 87,500

Gross profits 122,500

Selling and administrative expense 95,900

Amortization expense 10,500

Operating income 16,100

Interest expense 3,500

Other income and losses:

Gain on sale of investment 5,250

Dividend income. 1,575

Loss on sale of equipment 1,050

Net other income and losses 5,775

Earnings before taxes 18,375

Income taxes 4,375

Net income $ 14,000

During 20XX, the following occurred:
1. From the long‐term investments, a dividend of $1,575 was received. Shares originally
costing $3,500 were sold for $8,750 from the investment account.
2. Land was purchased for $8,750. Purchase was completed with a note payable of $8,750,
with interest and principal due in 12 months.
3. New equipment was purchased for $15,750 cash. Old equipment originally costing
$7,000 with accumulated amortization of $3,500 was sold for $2,450.
4. Notes payable at $6,125 were paid.
5. Bonds were sold at par for $5,250.
6. A dividend of $6,650 was paid.
The 20XX amortization expense was $3,500 for buildings and $7,000 for equipment.
33.For December 31, 20XX, the balance sheet of the Gardner Corporation is as follows:
 Balance Sheet

Current Assets Liabilities

Cash $ 10,000 Accounts payable $ 12,000

Accounts receivable 15,000 Notes payable 20,000

Inventor 25,000 Bonds payable 50,000

Prepaid expenses 12,000

Capital Assets Shareholders’ Equity

Plant and equipment 250,000 Common stock 75,000

Acc. amortization 50,000 Retained earnings 105,000

Net plant and equipment 200,000

Total liabilities and

Total assets $ 262,000 $262,000
shareholders’ equity

Sales for 20XY were $220,000, with cost of goods sold being 60 percent of sales. Amortization expense
was 10 percent of plant and equipment (net) at the beginning of the year. Interest expense for the bonds
payable was 8 percent, while interest on the notes payable was 10 percent. These are based on December
31, 20XX, balances. Selling and administrative expenses were $22,000, and the tax rate averaged 18
percent.
During 20XY, the cash balance and prepaid expense balance were unchanged. Accounts receivable and
inventory each increased by 10 percent, and accounts payable increased by 25 percent. A new machine
was purchased on December 31, 20XY, at a cost of $35,000. A cash dividend of $12,800 was paid to
common shareholders at the end of 20XY. Also, notes payable increased by $6,000 and bonds payable
decreased by $10,000. The common stock account did not change.
a.Prepare an income statement for 20XY.
b.Prepare a balance sheet as of December 31, 20XY.
c.Prepare a statement of cash flows for the year ending December 31, 20XY.
Identify the major accounts contributing to the change in cash position, from the three different
components of the cash flow statement.
34.Ron’s Aerobics Ltd., a CCPC located in downtown Winnipeg, Manitoba, has the following taxable
income for 20XX.

20XX $ 95,000
a. Compute the total tax obligation for Ron’s Aerobics in 20XX and income after taxes
(assume 9 percent tax rate).
b. If Ron pays a dividend of $95,000, what are the total taxes paid (corporate and individual
as medium income)? What is the combined tax rate? Assume that Ron’s Aerobics has
accumulated retained earnings from previous periods.
c. If Ron pays a salary of $95,000 what are the total taxes paid (corporate and individual as
medium income)? What is the combined tax rate?
d. Would Ron’s taxes be less if he operated as a proprietorship instead of a corporation?
35.Coastal Pipeline Corp. anticipates cash flows from operating activities of $8 million in 20XX. It will
need to spend $1.5 million on capital investments in order to remain competitive within the industry.
Common share dividends are projected at $0.6 million and preferred dividends at $0.25 million.
a. What is the firm’s projected free cash flow for the year 20XX?
36.Inland Fisheries Corp. anticipates cash flows from operating activities of $6 million in 20XX. It will
need to spend $2 million on capital investments in order to remain competitive within the industry.
Common share dividends are projected at $0.75 million and preferred dividends at $0.35 million.
a.What is the firm’s projected free cash flow for the year 20XX?
b.What does the concept of free cash flow represent?
37.Given the following information, prepare, in good form, an income statement for the Nix Corporation.
Use the corporate tax rates in Chapter 2 (11%) to calculate taxes. Nix is a CCPC manufacturer in
Vancouver.
Selling and administrative expense $ 70,000

Amortization expense 60,000

Sales 485,000

Interest expense. 25,000

Cost of goods sold 205,000

38.For Nix Corporation, what is the tax savings due to amortization expense?
39R. E. Forms Ltd., a CCPC, had taxable income of $75,000 from an active business in 20XX. Calculate
both federal and provincial tax payable if it operates in Alberta (10.0%) as compared to operating in
Ontario (12.5%).
40.J. B. Wands has $14,000 to invest. He lives in Saskatchewan and has other income of $90,000 for the
year. A current bond issue is paying 6 percent, while a popular share issue offers a 4.7 percent dividend
return.
a.Calculate the better return on an aftertax basis (assume 33.0% marginal rate on bonds and 9.63% on
shares). What is the aftertax yield?
b.What other factors should be considered?
41.Billie Fruit lives in Alberta and her income fluctuates from year to year, ranging from over $320,000 to
about $90,000. She has two investments of $20,000 each in shares, both achieving a return of 7 percent;
one by dividend, the other by capital gain.
a.Calculate the higher return on an aftertax basis if this is a high income year (assume 31.71% tax on
dividends and 24.00% on capital gains). What is the aftertax yield?
b.Calculate the higher return on an aftertax basis if this is a middle income year (assume 7.56% tax on
dividends and 15.25% on capital gains). What is the aftertax yield?
42.Jasper Corporation has determined that its average bondholder has a marginal tax rate of 45 percent.
Jasper’s corporate tax rate is 27 percent. A current bond issue would require a 7 percent yield.
Considering the tax savings to the firm and the taxes to be paid by the individual bondholder, what are the
overall tax consequences of this issue from the government’s perspective?