Chapter 2

Review of Accounting
 Financial
statements
Income Statement,

Balance Sheet

Statement of Retained
earnings
Statement of Cash Flows
 the Firm
Total Value of Total Liab. And Equity
Assets:
Current
Current Liabilities
Assets
Long-Term
Debt

Fixed
Assets
1 Tangible Shareholder
2 Intangible s’ Equity
 Statement
• Explains the changes in a company's cash balance.
• Cash flow is not the same as profit or net income!
• Divide into three part- Operating, Financing & Investing
• The cash flow statement answers the question: Is this
company generating cash or using cash !
• Discloses the total amount of cash used to purchase
assets or make other capital expenditures.
• The ending cash flow for a particular period must
equal the cash shown on the balance sheet for that
period.
 Lemon Auto Wholesale
Income Statement
12 - B For the year ended December 31,
2019

Content Total
Sales 10,50,900
Less: Cost of goods sold
( 10,50,900 * 74% ) (7,77,666)
Gross profit
Less: Selling and Admin. Exp. 2,73,234
Less : Depreciation (10,50,900 *
(1,47,126)
14% )
Operating profit/revenue (EBIT)
Less Interest exp. (11,000)

Earnings before Tax 1,15,108

Less Tax ( % ) (15,800)
Earnings after Tax (EAT) 99,308
Answer ( 99,308 *
30% )
(29,792)
Preferred stock dividends
69,516
Earnings available to common
stockholders (N/A)
(Net Profit) 69,516
Q. 27. For December 31, 20X1, the Balance sheet of Baxter
Corporation was as follows:

Assets Amount Liabilities Amount $

$
Current Assets Current 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
Shareholders’
equity
Fixed Assets Preferred stock 25,000
Plant and equipment 255,000 Common stock 60,000
(gross)
Less: Accumulated 51,000 Paid-in capital 30,000
depreciation
Net plant and equipment 204,000 Retained earnings 69,500
Total Assets 281,500 Total Liabilities & 281,500
Stockholders’
equity
Q.

27. for 20X2 were $245,000, and the cost of goods sold was 60
Sales
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.
 Baxter Corporation
Income Statement
27-A For the year ended December 31,
20x2

Content Total $
Sales
Less: Cost of goods sold
( 245,000 * 60% )
Gross profit
Less: Selling and Administrative Exp.
Less : Depreciation
Operating profit/revenue (EBIT)
(2,55,000 * 8% )
Less Interest exp.
Earnings before Tax
Less Tax ( % ) (25,000 * 10% + 55,000
*12%)
Earnings after Tax (EAT)
Preferred stock dividends
( 44,000 *
20% )
Earnings available to common
stockholders
(Net Profit / Income)
 Baxter Corporation
Income Statement
27-A For the year ended December 31,
20x2

Content Total $
Sales 2,45,000
Less: Cost of goods sold
(245,000 * 60% ) (1,47,000)
Gross profit
Less: Selling and Administrative Exp. 98,000
Less : Depreciation (24,500)
Operating profit/revenue (EBIT)
(2,55,000 * 8% ) (20,400)
Less Interest exp.
Earnings before Tax 53,100
Less Tax ( 20% ) (25,000 *10% + 55,000 (9,100)
*12%)
Earnings after Tax (EAT) 44,000
(44,000 *
Preferred stock dividends
20% ) (8,800)
Earnings available to common
35,200
stockholders
(Net Profit / Income) (2,500)

32,700
 Baxter Corporation
27- B Statement of Retained Earnings
For the year ended December 31,
20x2

Content $
Retained earnings , Beg. balance, 69,500
January 1
Add: Earnings available to common 32,700

stockholders (Net Profit)

5,500
Less: Cash Dividend
Retained earnings , Ending balance, 96,700
December 31
 Balance Sheet , For Dec 31,
27- 20x2
C Asset $ Liabilities & $
owner
equity
 Current Asset  Current
Liability:
Cash Accounts
payable
Account Receivable Notes payable
Inventory Total Cur. Lib.
Prepaid Expense Bonds payable
82,500
Total Current Asset  Owners
Equity
*
 Fixed Asset 295,000 Pref. Stock
Plant and Common Stock
Equipment *
(71,400) Paid in capital 2,11,70
Less: Accumtd. 0
Dep.
3,06,1 3,06,1
Net plant and Retained
00 00
equipment. earnings
 Balance Sheet , For Dec 31,
27- 20x2
C Asset $ Liabilities & $
owner
equity
 Current Asset  Current
15,000 Liability: 20,400
Cash 22,000 Accounts 31,500
payable
Account Receivable 33,000 Notes payable 51,000
Inventory 12,500 Total Cur. Lib. 42,500
Prepaid Expense Bonds payable
82,500
Total Current Asset  Owners
Equity 25,000
*
 Fixed Asset 2,95,000 Pref. Stock 60,000
Plant and Common Stock
Equipment * 30,000
(71,400)2,23,60 Paid in capital 96,700 2,11,70
Less: Accumtd. 0
0
Dep.
3,06,1 3,06,1
Net plant and Retained
00 00
equipment. earnings
 Workings

New Total Plant and Equipment in 20x2 = [ 2,55,000 (old) +

40,000 (new) ]
= 2,95,000
Depreciation of Plant and Equipment in 20x2 = [2,55,000 * 8% ]
= 20,400

Note: No depreciation will be charge for new machine

40,000 in 20x2, because this machine purchased at the last
date of 20x2 (31 December)

So, Accumulated Depreciation of 20x2 = [ 51,000 old +

20,400 new ]
= 71,400
Cash Flow from Operating activities Step-Wise
Net income (* Earnings after tax ) [IS] Step
Cash Flow
Add back Depreciation [IS] 1
Statement
* Change of All Current Assets
* Change of All Current Liabilities
Net Cash flow from operating activities (A)

Cash Flow from Investing activities

Step
* Change of All Fixed Assets 2
Net Cash flow from Investing activities (B)

Cash Flow from Financing activities

* Change of Long Term Liabilities Step
* Preferred Stock dividend paid [IS] 3
* Common Dividend paid [ Ret. Earnings St.]
Net Cash flow from Investing activities (C)

Net Increase ( or Decrease) in Cash Flow Resul

(A+ B +C ) t
 Rules of Cash In And Cash
Out

Asset Cash Asset

Cash IN
Increase OUT Decrease

Assets and cash are inversely

related

Lib or OE Asset Cash

Cash IN
Increase Decrease OUT

Liability & OE and cash are positively

related
28. Refer to the following financial statements for Crosby Corporation:
a. Prepare a statement of cash flows for the Crosby Corporation.

CROSBY CORPORATION
Income Statement
For the Year Ended December 31, 20X2
Sales ................................................................................................... $2,200,000
Cost of goods sold ............................................................................. 1,300,000
Gross profit ....................................................................................... $ 900,000
Selling and administrative expense ...................................................... 420,000
Depreciation expense ............................................................................ 150,000
Operating income .............................................................................. $330,000
Interest expense ...................................................................................... 90,000
Earnings before taxes ........................................................................ $240,000
Taxes ....................................................................................................... 80,000
Earnings after taxes (EAT) .............................................................. $160,000
Preferred stock dividends ...................................................................... $10,000
Earnings available to common stockholders ........................................ $150,000
Shares outstanding ................................................................................. 120,000
Earnings per share ............................................................................... $ 1.25
 Statement of Retained Earnings

For the Year Ended December 31, 20X2

Retained earnings, balance, January 1, 20X2 .................................... $500,000
Add: Earnings available to common stockholders, 20X2 .................. 150,000
Deduct:
Cash dividends declared and paid in 20X2 ........................... 50,000
Retained earnings, balance, December 31, 20X2 .............................. $600,000
 Comparative Balance Sheets
For 20X1 and 20X2

Year-End 20X1 Year-End 20X2

Assets
Current assets:
Cash ........................................................................... $70,000 $100,000
Accounts receivable (net)........................................... 300,000 350,000
Inventory ........................................................................ 410,000 430,000
Prepaid expenses .......................................................... 50,000 30,000
Total current assets .................................................... $ 830,000 $ 910,000

Investments (long-term securities) ................................ 80,000 70,000

Plant and equipment ..................................................... 2,000,000 2,400,000
Less: Accumulated depreciation ............................... 1,000,000 1,150,000
Net plant and equipment ............................................... $1,000,000 $1,250,000
Total assets .................................................................... $1,910,000 $2,230,000
(continued)
 Liabilities and Stockholders’ Equity
Current liabilities: Year-End 20X1 Year-End 20X2
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:
Bonds payable, 20X2 ................................................. 70,000 120,000
Total liabilities ......................................................... $ 790,000 $1,010,000

Stockholders’ equity:
Preferred stock, $100 par value ................................. $ 90,000 $ 90,000
Common stock, $1 par value ..................................... 120,000 120,000
Capital paid in excess of par ..................................... 410,000 410,000
Retained earnings ...................................................... 500,000 600,000
Total stockholders’ equity ...................................... $1,120,000 $1,220,000
Total liabilities & stockholders’ equity ............... $1,910,000 $2,230,000
 28
CROSBY CORPORATION
Statement of cash flows
For the year ended December 31, 20X2

Cash flow from Operating activities:

Net income (EAT)* (IS) $160,000
Adjustments to determine cash flow from operating activities
Add back depreciation (IS) 150,000
Increase in accounts receivable (50,000)
Increase in inventory (20,000)
Decrease in prepaid expenses 20,000
Increase in accounts payable 190,000
Decrease in accrued expenses (20,000)

Total adjustments 270,000

Net cash flows from operating activities 430,000

* Next page
 Continuation of 28
Cash flows from Investing activities
Decrease in Investment 10,000
Increase in Plant and Equipment (400,000)
Net cash flows from Investing activities (390,000)

Cash flows from Financing activities

Increase in bonds payable 50,000
Preferred stock dividend paid (IS) (10,000)
Common stock dividend paid (RE St) (50,000)
Net cash flows from Financing activities (10,000)

Net increase (decrease) in cash flows - $30,000