Financial Statement Analysis

for Graduate Students

At The Ohio University

Summer, 2015David P. Kirch, PhD, CPA

CSC 001AKirch@ohio.edu740-707-1301

The Questions

Basic Accounting

1) A company’s chart of accounts is: 

A) used for entries that offset other accounts. 

B) the set of journal entries that makes up the components of owners’ equity. C) a detailed list of the accounts that make up the five financial statement elements. 

2) Accumulated depreciation and treasury stock are most likely to be shown as what types of accounts?

Accumulated depreciation Treasury stockA) Contra-asset EquityB) Contra-asset Contra-equityC) Liability Equity

3) Allowance for bad debts and investment in affiliates are most likely to be shown as what types of accounts?

Allowance for bad debts Investment in affiliatesA) Contra-asset AssetB) Contra-asset LiabilitiesC) Liabilities Asset

4) The following amounts were drawn from the records of JME Company: total assets = $1,200; total liabilities = $750; contributed capital = $600. Based on this information alone, retained earnings must be equal to: 

A) $150. B) $450. C) −$150. 

5) What is the fundamental balance sheet equation? 

A) Assets = Liabilities + Stockholders' Equity (A = L + E). B) Assets = Stockholders' Equity - Liabilities (A = E - L). C) Liabilities = Assets + Stockholders' Equity (L = A + E). 

6) Which of the following least accurately describes a correct use of double-entry accounting? 

A) A decrease in a liability account may be balanced by a decrease in another liability account. B) A transaction may be recorded in more than two accounts. C) An increase in an asset account may be balanced by an increase in an owner’s equity account. 

7) The purchase of equipment for $25,000 cash is most likely to be recorded as: 

A) an increase in one asset account and a decrease in another asset account. B) an increase in an asset account and an increase in a liability account. C) an increase in two asset accounts. 

8) Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and receives a $20,000 cash down payment from the buyer. How will the transaction most likely affect Washburn’s assets and liabilities?

Assets LiabilitiesA) Unchanged UnchangedB) Increase IncreaseC) Increase Unchanged

9) A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These transactions are most likely to affect which accounts?

Purchase SaleA) Assets only Assets, revenue, expenses, owners' equityB) Assets only Assets and revenues onlyC) Assets and expenses Assets, revenue, expenses, owners' equity

10) Which of the following is the least likely to be considered an accrual for accounting purposes? 

A) Accumulated depreciation. B) Wages payable. C) Unearned revenue. 

11) Accruals are best described as requiring an accounting entry: 

A) when an expense has been incurred. B) only when a good or service has been provided. C) when the earliest event in a transaction occurs. 

12) An accounting entry that updates the historical cost of an asset to current market levels is best described as: 

A) a contra account. B) a valuation adjustment. C) accumulated depreciation. 

13) Alpha Company reported the following financial statement information:

December 31, 2014:Assets $70,000Liabilities 45,000

December 31, 2015:Assets 82,000Liabilities 55,000

During 2015:Stockholder investments 3,000Net income ?Dividends 6,000

Calculate Alpha’s net income for the year ended December 31, 2015 and the change in stockholders’ equity for the year ended December 31, 2015.Net income Change in stockholders' equity

A) ($3,000) $2,000 increaseB) $5,000 $2,000 decreaseC) $5,000 $2,000 increase

14) Wichita Corporation reported the following balances as of December 31, 2015:

Cash $?Accounts payable 16,000Accounts receivable 58,000Additional paid-in capital 42,000Common stock 19,600Inventory 12,000Plant and equipment 26,800Notes payable 20,000Retained earnings 32,000

15) Calculate Wichita’s cash and total assets as of December 31, 2015 based only on these entries.Cash Total assets

A) $16,000 $129,600B) $32,800 $113,600C) $32,800 $129,600

16) Beta Company reported the following financial statement information:

December 31, 2014:Assets $58,000Liabilities 28,000

December 31, 2015:Assets ?Liabilities 38,000

During 2015:Stockholder investments 15,500Net income 18,000Dividends 7,750

Calculate Beta’s total assets and stockholders’ equity as of December 31, 2015.Total assets Stockholders' equity

A) $93,750 $55,750B) $93,750 $30,000C) $79,250 $55,750

17) Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by the CFO of Octabius to review all purchases that occurred between February 1 and February 8 to investigate an error on the receiving dock. Singh will most likely look at the: 

A) general journal. B) initial trial balance. C) general ledger. 

18) Which of the following is the best description of the flow of information in an accounting system? 

A) Journal entries, general ledger, trial balance, financial statements. B) General ledger, trial balance, general journal, financial statements. C) Trial balance, general ledger, general journal, financial statements. 

19) A listing of all the firm’s journal entries by date is called the: 

A) general ledger. B) adjusted trial balance. C) general journal. 

20) The best description of the general ledger is that it: 

A) sorts the entries in the general journal by account. 

B) groups accounts into the categories that are presented in the financial statements. C) is where journal entries are first recorded. 

21) Jack Rivers is an investment analyst for the equity fund of a family office. The head of the family, Charlotte Blackmon, is concerned that management may be manipulating the earnings of some of the companies that the fund invests in. Rivers explains to Blackmon, “Even though we don’t have access to the detailed transactions that underlie the financial statements, we can be sure that management is not manipulating earnings because I read the footnotes to the financial statements of every company we invest in. The footnotes would disclose any deviation from appropriate accounting parameters.” Rivers is: 

A) correct. 

B) incorrect because even within appropriate accounting parameters, management can manipulate earnings through the assumptions that rely on their discretion. 

C) incorrect because deviation from appropriate accounting parameters is addressed in the auditor’s report, so a qualified opinion in the auditor’s report ensures that management is not manipulating earnings. 

22) Sergey Martinenko is an investment analyst with Profis, Martinenko and Verona. He is explaining to his new assistant, John Stevenson, why it is crucial for an investment analyst to read the footnotes to a firm’s financial statement and the Management Discussion and Analysis (MD&A) before making an investment decision. Which rationale is Martinenko least likely to provide to Stevenson regarding the importance of analyzing the footnotes and MD&A? 

A) Accruals, adjustments and assumptions are often explained in the footnotes and MD&A. B) Evaluating the footnotes helps the analyst assess whether management is manipulating earnings. C) The footnotes disclose whether or not the company is adhering to GAAP. 

23) Reading the footnotes to a company’s financial statements and the Management Discussion & Analysis is least likely to help an analyst determine: 

A) the detailed information that underlies the company’s accounting system. 

B) the various accruals, adjustments and assumptions that went into the financial statements. 

C) how well the financial statements reflect the company’s true performance. 

24) Regarding the use of financial statements in security analysis and selection, it would be most accurate to say that: 

A) analysts can verify the accuracy of financial statements by using a firm’s detailed accounting system information. 

B) analysts can use footnotes and Management’s Discussion and Analysis to better understand assumptions used in the financial statements. 

C) further analysis of a firm’s financial statements is typically not necessary if the firm has conformed to applicable accounting principles. 

25) Which of the following statements about financial statements and reporting standards is least accurate? A) Financial statements could potentially take any form if reporting standards didn’t exist. 

B) The objective of financial statements is to provide economic decision makers with useful information. 

C) Reporting standards focus mostly on format and presentation and allow management wide latitude in assumptions. 

26) Which description of the objective of financial statements is most accurate? The objective of financial statements is: 

A) to provide economic decision makers with useful information about a firm’s financial performance and changes in financial position. B) to provide securities analysts with objective data about a firm’s financial prospects. C) to provide a wide range of users with information about a firm’s financial prospects. 

27) Which of the following statements about financial reporting standards is least accurate? Reporting standards: 

A) are disclosed on Form 8K by publicly traded firms in the United States. B) narrow the range within which management estimates can be seen as reasonable. C) ensure that the information is “useful to a wide range of users.” 

28) Which of the following is least likely to be considered a stated goal of the International Accounting Standards Board (IASB)? 

A) Remain neutral in the debate on the use of global accounting standards to avoid appearance of a conflict of interest. 

B) Develop global accounting standards requiring transparency, comparability, and high quality in financial statements. 

C) Account for the needs of emerging markets and small firms when implementing global accounting standards. 

29) Professional organizations of accountants and auditors that establish financial reporting standards are called: 

A) Regulatory authorities. B) International organizations of securities commissions. C) Standard setting bodies. 

30) Would an increase in the cost of raw materials used in the production of inventory and would an increase in marketing expenses result in lower gross profit? 

Increase in raw materials cost Increase in marketing expense A) Yes No B) No Yes C) Yes Yes 

31) Do gains and losses, as well as expenses appear on the income statement? A) Only expenses appear on the income statement. B) Only gains and losses appear on the income statement. C) Both appear on the income statement. 

32) During 2015, Topeka Corporation entered into the following transactions: Transaction #1 – Interest on a certificate of deposit owned by Topeka was credited to Topeka’s investment account. Transaction #2 – Topeka sold 10,000 shares of common stock at $30 that had been repurchased by Topeka last year for $20.

Should Topeka recognize the results of these transactions as income on the income statement for the year ended December 31, 2007? 

A) Only one should be recognized. B) Neither should be recognized. C) Both should be recognized. 

33) In accounting for long-term construction contracts, the percentage-of-completion method is preferable to the completed contract method when: 

A) the contracts are of a relatively short duration (less than one year). 

B) estimates of the costs to complete and the extent of progress toward completion are reasonably dependable. 

C) lack of dependable cost estimates cause forecasts to be doubtful. 

34) An airplane manufacturing company routinely builds fighter jets for the U.S. armed forces. It takes fourteen months to build one jet, and the government pays for them in installments over the fourteen-month period. Which revenue recognition method should be used?

A) Percentage-of-completion method. B) Installment sales method. C) Completed contract method. 

35) If a reliable estimate of total costs of the contract does not exist, which of the following revenue recognition methods should be used? A) Cost recovery method. B) Percentage-of-completion method. C) Completed contract method. 

36) If Jackson Ski Company issues common stock, and uses the proceeds to purchase fixed assets such as equipment: 

A) both cash flow from operations and cash flow from financing would increase. B) cash flow from financing would decrease and cash flow from investing would increase. C) cash flow from financing would increase and cash flow from investing would decrease. 

37) When a U.S. company pays dividends to its stockholders, which type of cash flow does this represent? 

A) Financing. B) Operating. C) Investing. 

38) Which of the following items would least likely be included in cash flow from financing?

A) Dividends paid to shareholders. B) Purchase of treasury stock. C) Gain on sale of stock of a subsidiary. 

39) Which of the following is NOT a category on the statement of cash flows? Cash flow from: 

A) sales. B) financing. C) operations. 

40) Which of the following items would NOT be included in cash flow from investing? 

A) Proceeds related to acquisitions. B) Buying or selling a building. C) Selling stock of the company. 

41) Which of the following is least likely a cash flow in the calculation of cash flow from operations under U.S. GAAP? 

A) Interest income. B) Dividends paid. C) Dividends received. 

42) Which of the following does NOT represent a cash flow relating to operating activity? 

A) Cash received from customers. B) Dividends paid to stockholders. C) Interest paid to bondholders. 

43) Holden Company’s fixed asset footnote included the following:During 20X7, Holden sold machinery for a gain of $100,000. The machinery had an

original cost of $500,000 and its accumulated depreciation was $240,000.At the end of 20X7, Holden purchased machinery at a cost of $1,000,000. Holden paid $400,000 cash. The balance was financed by the seller at 8% interest.Depreciation expense was $2,080,000 for the year ended 20X7.

Calculate Holden’s cash flow from investing activities for the year ended 20X7.

A) $360,000 inflow. B) $40,000 outflow. C) $300,000 outflow. 

44) Which of the following should be classified as cash flows from investing (CFI) by Elegant, Inc., which reports under U.S. GAAP? 

A) Elegant's payment to purchase equipment to be used in its business. 

B) Interest received by Elegant, Inc. on a bond Elegant, Inc. purchased from an outside investor. 

C) Dividends received by Elegant, Inc. from an investment in another firm. 

45) Which of the following items is NOT found in the financing cash flow part of the statement of cash flows? 

A) Change in long-term debt. B) Change in retained earnings. C) Dividends paid. 

46) Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole proprietorship. She is trying to educate the owner on the importance of monitoring cash

flows. Operating information as of the end of the most recent month appears below:Cash from sale of truck of $7,000.Cash salaries paid of $17,000.Cash from customers of $45,000.Depreciation expense of $5,500.Interest on bank line of credit of $1,000.Cash paid to suppliers of $22,000.Other cash expenses, including rent, of $6,300.No taxes due.

Using this information, what is the cash flow from operations for the month?

A) $11,200. B) -$1,300. C) -$300. 

47) An examination of the cash receipts and payments of Xavier Corporation reveals the following:

Cash paid to suppliers for purchase of merchandise $5,000 Cash received from customers 14,000 Cash paid for purchase of equipment 22,000 Dividends paid 2,000 Cash received from issuance of preferred stock 10,000 Interest received on short-term investments 1,000 Wages paid 4,000 Repayment of loan to the bank 5,000 Cash from sale of land 12,000 

Under U.S. GAAP, Xavier’s reported cash flow from operations will be: 

A) -$5,000. B) $5,000. C) $6,000. 

48) An examination of the cash receipts and payments of Xavier Corporation reveals the

following: 

Cash paid to suppliers for purchase of merchandise $5,000Cash received from customers 14,000Cash paid for purchase of equipment 22,000Dividends paid 2,000Cash received from issuance of preferred stock 10,000Interest received on short-term investments 1,000Wages paid 4,000Repayment of loan to the bank 5,000Cash from sale of land 12,000

Under U.S. GAAP, Xavier's cash flow from financing (CFF) and cash flow from investing (CFI) will be: 

CFF CFI

A) $3,000 -$10,000B) $10,000 $12,000C) $3,000 $12,000

49) The actual coupon payment on a bond is reported on the statement of cash flow as: 

A) a financing cash outflow. B) an investing cash outflow. C) an operating cash outflow. 

50)Which of the following transactions would least likely be reported in the cash flow statement as investing cash flows? 

A) Purchase of plant and equipment used in the manufacturing process with financing provided by the seller. 

B) Principal payments received from loans made to others. C) Sale of held-to-maturity securities for cash. 

51) What is the difference between the direct and the indirect method of calculating cash flow

from operations?

A) The indirect method starts with gross income and adjusts to cash flow from operations, while the direct method starts with gross profit and flows through the income statement to calculate cash flows from operations. 

B) Balance sheet items are not included in the cash flow from operations for the direct method, while they are included for the indirect method. 

C) The direct method starts with sales and follows cash as it flows through the income statement, while the indirect method starts with net income and adjusts for non-cash charges and other items. 

52) Consider the following:Argument #1: The indirect method presents a firm’s operating cash receipts and payments and is thus more consistent with the objectives of the cash flow statement. 

Argument #2: The indirect method provides more information than the direct method and is more useful to analysts in estimating future operating cash flows. 

Which of these arguments support the use of the indirect method for presenting cash flow from operating activities in the cash flow statement?

A) Argument #2 only. B) Neither argument. C) Argument #1 only. 

53)The difference between cash flow from operations (CFO) under the direct method and CFO under the indirect method is: 

A) balanced by an opposite difference in cash flow from investing. B) disclosed as a reserve in the footnotes to the cash flow statement. C) always equal to zero. 

54) Use the following information to calculate cash flows from operations using the ·indirect

method.·Net Income: $12,000·Depreciation Expense: $1,000·Loss on sale of machinery: $500·Increase in Accounts Receivable: $2,000·Decrease in Accounts Payable: $1,500·Increase in Income taxes payable: $500·Repayment of Bonds: $3,000

A) Increase in cash of $7,500. B) Increase in cash of $10,500. C) Increase in cash of $9,500. 

55) An analyst compiled the following information for Universe, Inc. for the year ended December 31, 20X4:

Net income was $850,000.

Depreciation expense was $200,000.

Interest paid was $100,000.

Income taxes paid were $50,000.

Common stock was sold for $100,000.

Preferred stock (eight percent annual dividend) was sold at par value of $125,000.

Common stock dividends of $25,000 were paid.

Preferred stock dividends of $10,000 were paid.

Equipment with a book value of $50,000 was sold for $100,000.

Using the indirect method and assuming U.S. GAAP, what was Universe Inc.’s cash flow from operations (CFO) for the year ended December 31, 20X4?A) $1,050,000.B) $1,015,000.C) $1,000,000.

56) When using the indirect method for computing cash flow from operating activities, a change in accounts payable will require which of the following? 

A) A negative (positive) adjustment to net income when accounts payable increases (decreases). B) A positive (negative) adjustment to net income when accounts payable increases (decreases). C) A negative adjustment to net income regardless of whether accounts payable increases or decreases. 

57) What is the impact on accounts receivable if sales exceed cash collections and what is the impact on accounts payable if cash paid to suppliers exceeds purchases?

A) Only accounts receivable will increase. B) Both accounts payable and accounts receivable will increase. C) Only accounts payable will increase. 

58)Pacific, Inc.’s financial information includes the following, with “change” referring to the difference from the prior year (in $ millions):

Net Income 27Change in Accounts Receivable +4Change in Accounts Payable +1Change in Inventory +5Loss on sale of equipment -8Gain on sale of real estate +4Change in Retained Earnings +21Dividends declared and paid +4

Pacific, Inc.’s cash flow from operations (CFO) in millions was:A) $23.B) $27.C) $15.

59)A company has the following changes in its balance sheet accounts:Net Sales $500An increase in accounts receivable 20A decrease in accounts payable 40An increase in inventory 30Sale of common stock 100Repayment of debt 10Depreciation 2Net Income 100Interest expense on debt 5

The company’s cash flow from financing is:A) $100.

B) $90.

C) -$10.

60) Which of the following characteristics are required for recognition of a balance sheet asset?

Characteristic #1: Future economic benefits to the firm are probable.Characteristic #2: The asset is tangible and is obtained at a cost.

Characteristic #1 Characteristic #2 A) Yes No B) Yes Yes C) No No 

61) Galaxy Corporation manufactures custom motorcycles. Galaxy finances the motorcycles over 36 months for customers who make a minimum down payment of 10%. Historically, Galaxy has experienced bad debt losses equal to 1% of sales. Galaxy also provides a 24 month unlimited warranty on all new motorcycles. In the past, warranty expense has averaged 3% of sales. Ignoring taxes, how does the recognition of bad debt expense and warranty expense at the time of sale affect Galaxy’s liabilities?

Bad debt expense Warranty expense

A) No effect No effectB) Increase IncreaseC) No effect Increase

62)Which of the following statements about a classified balance sheet is least likely accurate? A classified balance sheet: 

A) groups accounts by subcategories. B) presents the net equity of each asset by subtracting its related liability. C) distinguishes between current and noncurrent assets. 

63) Do the following characteristics have to be met in order to classify a liability as current on the balance sheet? Characteristic #1 – Settlement is expected within one year or operating cycle, whichever is less. Characteristic #2 – Settlement will require the use of cash within one year or operating cycle, whichever is greater.

Characteristic #1 Characteristic #2

A) Yes NoB) No YesC) No No

64)Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7,

Peterson’s net working capital was $350,000. The following transactions occurred during 20X7:

Performed services on credit $150,000Purchased office equipment for cash 10,000Recognized salaries expense 54,000Purchased paint supplies on on credit 25,000Consumed paint supplies 20,000Paid salaries 50,000Collected accounts receivable 157,000Recognized straight-line depreciation expense 2,000Paid accounts payable 15,000

Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7.Working capital Change in cash

A) $414,000 $82,000B) $416,000 $82,000C) $416,000 $80,000

65) GTO Corporation purchased all of the common stock of Charger Company for $4 million. At the time, Charger reported total assets of $3 million and total liabilities of $1 million. At the acquisition date, the fair value of Charger’s assets was $3.5 million and the fair value of Charger’s liabilities was $1.3 million. What amount of goodwill should GTO report as a result of the acquisition and is it necessary for GTO to amortize the goodwill?Goodwill Amortization required

A) $1.8 million NoB) $1.8 million YesC) $2.2 million No

Consider the following:Statement #1 – Copyrights and patents are tangible assets that can be separately identified. Statement #2 – Purchased copyrights and patents are amortized on a straight line basis over 30 years. With respect to the statements about copyrights and patents acquired from an independent third party: 

A) only statement #2 is incorrect. B) only statement #1 is incorrect. C) both are incorrect. 

66) According to the Financial Accounting Standards Board, what is the appropriate

measurement basis for equipment used in the manufacturing process and inventory that is held for sale?Equipment Inventory

A) Historical cost Lower of cost or marketB) Historical cost Historical costC) Fair value Lower of cost or market

Current assets that arise from the accrual process most likely include: 

A) cash equivalents. B) accounts receivable. C) marketable securities. 

67) On January 1, 20X7, Omega Corporation paid $45,000 to renew its property insurance for 3 years. What amount of insurance expense should Omega report for the year-ended December 31, 20X7 and what is the balance of Omega’s prepaid insurance account on December 31, 20X8?Insurance expense Prepaid insurance

A) $15,000 $30,000B) $15,000 $15,000C) $45,000 $15,000

68) At the beginning of 20X7, Bryan’s Bakery Company purchased a secret cookie recipe for $25,000. In addition, Bryan developed a new cake recipe at a cost of $5,000. Bryan expects to use both recipes indefinitely; however, the useful (economic) life of similar recipes has been 10 years. Assuming straight-line amortization, what amount of recipe expense should Bryan report for the year ended 20X7 and what amount should Bryan report as assets related to these recipes on its balance sheet at the end of 20X7?Recipe expense Balance sheet

A) $5,000 $25,000B) $7,500 $22,500C) $3,000 $30,000

69)At the beginning of the year, Alpha Corporation purchased 10,000 shares of Beta Corporation for $20 per share. During the year, Beta paid a $2,000 cash dividend to Alpha. At the end of the year, Beta’s stock was selling for $22 per share. What amount should Alpha recognize in its year-end income statement if the investment is treated as an available-for-sale security and what amount should be recognized in the income statement if the investment is treated as a trading security?

Available-for-sale Trading security

A) $2,000 $22,000B) $2,000 $20,000C) $0 $22,000

70) Consider the following statements.

Statement #1: Par value is a nominal dollar value assigned to shares of stock in a corporation’s charter. 

Statement #2: The par value of common stock represents the amount the corporation received when the stock was issued. 

With respect to these statements:

A) both statements are correct. B) only statement #2 is correct. C) only statement #1 is correct. 

71) Ascot Corporation has 4 million shares of common stock authorized, 2.4 million shares of common stock issued, and 1.8 million shares of common stock outstanding. How many shares of treasury stock does Ascot own and is the treasury stock reported as an asset in Ascot’s balance sheet?

Treasury shares Reported as an asset

A) 600,000 YesB) 600,000 NoC) 1.6 million No

72) Earlier this year, Slayton Corporation repurchased 5% of its total shares outstanding. At the time, the book value of Slayton shares exceeded their market value. The shares are expected to be reissued in the future when the market price of Slayton’s stock increases. Do Slayton’s repurchased shares continue to have voting rights and to pay cash dividends?

Voting rights Cash dividends paid

A) Yes NoB) No NoC) No Yes

73) Coleman Corporation’s unadjusted trial balance at the end of 2007 reflected compensation

expense of $90 million. The trial balance did not include the following:

Because of the holidays, no salary accrual was made for the last week of the year. Salaries for the last week totaled

$3.5 million and were paid on January 4, 2008.

Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008.

Ignoring payroll taxes, what is Coleman’s adjusted compensation expense for the year ended 2007 and what impact will the adjustment have on Coleman’s 2007 current ratio? Compensation expense Current ratio

A) $98.5 million DecreaseB) $94.5 million DecreaseC) $98.5 million No effect

74) The statement of changes in equity is least likely to provide information on the firm’s: 

A) payment of dividends. B) repayment of bond principal. C) comprehensive income. 

75) Bug-Be-Gone is a residential pest control company that offers a 12 month home-service contract to eliminate insect infestation. Customers are required to prepay for the service at the beginning of each year. If Bug-Be-Gone erroneously records these payments as revenue and include the estimated cost of performing the service, what is the most likely effect on the firm’s liabilities and equity compared to the correct treatment?

Liabilities Equity

A) Overstated OverstatedB) Overstated UnderstatedC) Understated Overstated

76) Common size balance sheets express all balance sheet items as a percentage of: 

A) sales. B) equity. C) assets. 

77) The following data is from Delta's common size financial statement:

Earnings after taxes 18%Equity 40%Current assets 60%Current liabilities 30%Sales $300Total assets $1,400What is Delta's total-liabilities-to-equity ratio?A) 1.5.B) 1.0.C) 2.0.

78)Given the following income statement and balance sheet for a company:Balance SheetAssets Year 2003 Year 2004Cash 500 450Accounts Receivable 600 660Inventory 500 550Total CA 1600 1660Plant, prop. equip 1000 1250Total Assets 2600 2910LiabilitiesAccounts Payable 500 550Long term debt 700 1002Total liabilities 1200 1552EquityCommon Stock 400 538Retained Earnings 1000 820Total Liabilities & Equity 2600 2910Income StatementSales 3000Cost of Goods Sold (1000)Gross Profit 2000SG&A (500)Interest Expense (151)EBT 1349Taxes (30%) (405)Net Income 944

What is the current ratio for 2004?A) 3.018.B) 0.331.C) 2.018.

79) An analyst has gathered the following information about a company:

Balance SheetAssets

Cash 100

Accounts Receivable 750

Marketable Securities 300

Inventory 850

Property, Plant & Equip 900

Accumulated Depreciation (150)Total Assets 2750Liabilities and Equity

Accounts Payable 300

Short-Term Debt 130

Long-Term Debt 700

Common Stock 1000

Retained Earnings 620Total Liab. and Stockholder's equity 2750Income StatementSales 1500COGS 1100Gross Profit 400SG&A 150Operating Profit 250Interest Expense 25Taxes 75Net Income 150

What is the quick ratio?

A) 1.53.B) 2.67.C) 0.62.

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80) Diabelli Inc. is a manufacturing company that is operating at normal capacity levels. Which of the following inventory costs is most likely to be recognized as an expense on Diabelli’s financial statements when the inventory is sold? 

A) Administrative overhead. B) Allocation of fixed production overhead. C) Selling cost. 

81) Goldberg Inc. produces and sells electronic equipment. Which of the following inventory costs is most likely to be recognized as an expense on Goldberg’s financial statements in the period incurred? 

A) Conversion cost. B) Selling cost. 

C) Freight costs on inputs. 

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82) When comparing capitalizing versus expensing costs which of the following statements is most accurate? 

A) Expensing costs creates lower cash flows from operations and lower cash flows from investing. 

B) Capitalizing costs creates higher cash flows from operations and lower cash flows from investing. 

C) Capitalizing costs creates lower cash flows from operations and higher cash flows from investing. 

83) Which of the following statements regarding capitalizing versus expensing costs is least accurate? 

A) Capitalization results in higher profitability initially. B) Total cash flow is higher with capitalization than expensing. C) Cash flow from investing is higher with expensing than with capitalization. 

84) Which of the following statements regarding the capitalization of an expense is least accurate? 

A) Capitalizing an expense creates an asset. B) Capitalizing an expense lowers current period net income. C) Capitalized expenses increases equity. 

85) Capitalizing interest costs related to a company’s construction of assets for its own use is required by: 

A) IFRS only. B) both IFRS and U.S. GAAP. C) U.S. GAAP only. 

86) Capitalized interest costs are typically reported in the cash flow statement as an outflow from: 

A) investing. B) operating. C) financing. 

87) Dobkin Company decides to expense costs that it would have otherwise capitalized. Compared to capitalizing, expensing these costs will result in: 

A) lower asset levels and lower equity levels. B) lower asset levels and higher equity levels. C) lower asset levels and lower liability levels. 

88) A firm that capitalizes rather than expensing costs will have: 

A) lower cash flows from investing. B) lower cash flows from operations. C) lower profitability in the earlier years. 

89 )Which of the following items is least likely an example of an intangible asset with an indefinite life? 

A) Goodwill. B) Acquired patents. C) Trademarks that can be renewed at minimal cost. 

90) During 2007, Big 4 Company’s warehouse was totally destroyed by a tornado. Tornados are very rare in the region where Big 4 is located. The book value of the warehouse at the time of the tornado was €10 million and Big 4 is self-insured. In addition, on June 30, 2007, Big 4 acquired one of its major suppliers. The fair value of the net assets acquired by Big 4 was greater than the purchase price. According to International Financial Reporting Standards, should Big 4 recognize an extraordinary item for tornado damage and should Big 4 recognize negative goodwill on its balance sheet due to the acquisition?Extraordinary loss Negative goodwill

A) No NoB) Yes NoC) No Yes

91) Lakeside Co. recently determined that one of its processing machines has become obsolete three years early and, unexpectedly, has no salvage value. Which of the following statements is most consistent with this discovery? 

A) Historically, economic depreciation was overstated. B) Lakeside Co. will owe back taxes. C) Historically, economic depreciation was understated. 

92) This information pertains to equipment owned by Brigade Company. 

·Cost of equipment: $10,000. ·Estimated residual value: $2,000. ·Estimated useful life: 5 years. ·Depreciation method: straight-line. The accumulated depreciation at the end of year 3 is: 

A) $1,600. B) $4,800. C) $5,200. 

93) JME acquired an asset on January 1, 2004, for $60,000 cash. At that time JME estimated the asset would last 10 years and have no salvage. During 2006 JME estimated the remaining life of the asset to be only three more years with a salvage value of $3,000. If JME uses straight line depreciation, what is the depreciation expense for 2006? 

A) $6,000. B) $15,000. C) $12,000. 

94) Allocating an intangible asset’s cost to the income statement over time is known as: 

A) depreciation. B) depletion. C) amortization. 

95) Intangible assets with finite useful lives are: 

A) amortized over their actual lives. B) not amortized, but are tested for impairment at least annually. C) amortized over their expected useful lives. 

96) Under normal circumstances, intangible assets with indefinite lives are: 

A) not amortized but subject to impairment. B) amortized over a reasonable period but not subject to impairment. C) amortized over a reasonable period and subject to impairment. 

97) Davis Inc. is a large manufacturing company operating in several European countries. Davis has long-lived assets currently in use that are valued on the balance sheet at $600 million. This includes previously recognized impairment losses of $80 million. The original cost of the assets was $750 million. The fair value of the assets was determined by in independent appraisal to be $690 million. Which of the following entries may Davis record under IFRS? 

A) $90 million gain on income statement. B) $80 million gain on income statement and a $10 million revaluation surplus. C) $90 million revaluation surplus. 

98) Under U.S. GAAP, an asset is impaired when: 

A) the firm can no longer fully recover the carrying amount of the asset. B) accumulated depreciation plus salvage value exceeds acquisition costs. C) the present value of future cash flows exceeds the carrying amount of the asset. 

99) An impairment write-down is least likely to decrease a company's: 

A)debt-to-equity ratio. B) assets. C) future depreciation expense. 

100) Spenser Inc. owns a piece of specialized machinery with a current fair value of $400,000. The original cost of the machinery was $500,000 and to date has generated accumulated depreciation of $140,000. Which of the following must Spenser record on the income statement if it decides to abandon the asset? 

A) Gain of $40,000. B) Loss of $100,000. C) Loss of $360,000. 

101) Felker Inc. owns a piece of specialized machinery. The original cost of the machinery was $500,000 and to date there is an accumulated depreciation balance of $140,000. Which of the following will Felker recognize on its income statement if it sells the machinery for $400,000? 

A) Gain of $40,000. B) Loss of $100,000. C) Loss of $360,000. 

102) Which of the following statements is CORRECT? Income tax expense: 

A) is the amount of taxes due to the government. B) is the reported net of deferred tax assets and liabilities. C) includes taxes payable and deferred income tax expense. 

103) Which of the following statements about tax deferrals is NOT correct?

A) A deferred tax liability is expected to result in future cash outflow. B) Income tax paid can include payments or refunds for other years. C) Taxes payable are determined by pretax income and the tax rate. 

104) The difference between income tax expense and taxes payable is a:

A) deferred income tax expense. B) deferred tax liability. C) timing difference. 

105) A tax loss carryforward is best described as the: 

A) net taxable loss that can be used to reduce taxable income in the future. B) net taxable loss that can be used to refund paid taxes from the previous year. C) difference of deferred tax liabilities and deferred tax assets. 

106) If timing differences that give rise to a deferred tax liability are not expected to reverse then the deferred tax:

A) should be considered an increase in equity. B) must be reduced by a valuation allowance. C) should be considered an asset or liability. 

107) Which of the following statements regarding deferred taxes is NOT correct?

A) If deferred tax liabilities are not included in equity, debt-to-equity ratio will be reduced. B) Only those components of deferred tax liabilities that are likely to reverse should be considered a liability. C) If deferred taxes are not expected to reverse in the future then they should be classified as equity. 

108) When analyzing a company's financial leverage, deferred tax liabilities are best classified as: 

A) a liability. B) neither as a liability, nor as equity. C) a liability or equity, depending on the company's particular situation. 

109) Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity? 

A) Return on assets (ROA). B) Return on equity (ROE). C) Debt-to-total assets. 

110) At the end of 20X8, Martin Inc. estimates that $26,000 of warranty repairs will be required in the future on goods already sold. For tax purposes, warranty expense is not deductible until the work is actually performed. The firm believes that the warranty work will be required over the next two years. The tax base of the warranty liability at the end of 20X8 is: 

A) zero. B) $13,000. C) $26,000. 

111) In 20X8, Oliver Ltd. received $80,000 cash from a customer for goods that it could not deliver until the next year and established a liability for unearned revenue. Oliver reports under U.S. GAAP, faces a 40% tax rate, and is located in a tax jurisdiction where unearned revenue is taxed as received. On their balance sheet for 20X8, what change in deferred tax should Oliver record as a result of this transaction? 

A) A deferred tax asset of $32,000. B) A deferred tax liability of $32,000. C) There is no effect on deferred tax items from this transaction. 

112) Alter Inc. determines that it has $35,000 of accounts receivable outstanding at the end of 20X8. Based on past experience, it recognizes an allowance for bad debt equal to 10% of its credit sales. The tax base of Alter’s accounts receivable at the end of 20X8 is closest to: 

A) $31,500. B) $3,500. 

C) $35,000. 

113) Nespa, Inc., has a deferred tax liability on its balance sheet in the amount of $25 million. A change in tax laws has increased future tax rates for Nespa. The impact of this increase in tax rate will be: 

A)a decrease in deferred tax liability and a decrease in tax expense. B) an increase in deferred tax liability and an increase in tax expense. C) a decrease in deferred tax liability and an increase in tax expense. 

114) On its financial statements for the year ended December 31, Jackson, Inc. listed $2,000,000 in post retirement benefits expense. Jackson, Inc. contributed $200,000 of the expense to its retirement plan during the year. Tax law recognizes cash contributions to a pension account as tax deductible, but not expense accruals. Jackson’s tax rate is 40%.For the year ended December 31, Jackson, Inc. should show, based on the above, an increase in its deferred tax:

A) asset account of $720,000. B) liability account of $720,000. C) liability account of $80,000. 

115) Kruger Associates uses an accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers are $476,000, and accrued revenue is only $376,000. Assume expenses at 50% in both cases (i.e., $238,000 on cash basis and $188,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset or liability? A deferred tax:

A) asset of $48,960. B) liability of $17,000. C) asset of $17,000. 

116) Unit Technologies uses accrual basis for financial reporting purposes and cash accounting for tax purposes. So far this year, Unit Technologies has recorded $195,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $131,000. Assume expenses at 50 percent in both cases (i.e., $ 97,500 on accrual basis and $ 65,500 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax:

A) liability of $16,320. B) liability of $10,880. C) asset of $10,880. 

117) This year, Blue Horizon has recorded $390,000 in revenue for financial reporting purposes, but, on a cash basis, revenue was only $262,000. Assume expenses at 50% in both cases (i.e., $195,000 on accrual basis and $131,000 on cash basis), and a tax rate of 34%. What is the deferred tax liability or asset? A deferred tax: 

A) liability of $21,760. B)liability of $16,320. C)asset of $21,760. 

118) Camphor Associates uses accrual basis for financial reporting purposes and cash basis for tax purposes. Cash collections from customers is $238,000, and accrued revenue is only $188,000. Assume expenses at 50% in both cases (i.e., $119,000 on cash basis and $94,000 on accrual basis), and a tax rate of 34%. What is the deferred tax asset/liability in this case? A deferred tax:

A) asset of $48,960. B) liability of $8,500. C) asset of $8,500. 

119) Laser Tech has net temporary differences between tax and book income resulting in a deferred tax liability of $30.6 million. According to U.S. GAAP, an increase in the tax rate would have what impact on deferred taxes and net income, respectively: 

Deferred Taxes Net Income

A) Increase DecreaseB) Increase No effectC) No effect Decrease

An analyst gathered the following data for Alice Company.

·Alice Company reported a pretax income of $400,000 in its income statement for the period ended December 31, 2002. ·Included in its pretax income are: (1) interest received on tax-free municipal bonds $50,000 and (2) rent expense of $20,000. (Only $10,000 was paid in cash for rent during 2002). ·Alice follows cash basis for tax reporting. ·Assume a tax rate of 40%. 

What is the income tax expense that Alice should report on its income statement for the year ended December 31, 2002? 

A) $160,000. B) $140,000. C) $132,000. 

120) All else equal, when a company issues bonds at a premium, the debt/equity ratio will show: 

A) an increasing trend over the life of the bond. B) a decreasing trend over the life of the bond. C) stable trend over the life of the bond. 

121) Indata Company sold a specially manufactured item for $5,000,000 on December 31, 20X6. The item was sold on an installment sale basis, with $1,000,000 paid on the date of the sale and $4,000,000 to be paid in four annual installments of $1,000,000 plus interest at the market rate of 6%. Indata’s tax rate is 40% and its costs to construct the item were $2,500,000. Indata recognizes the entire amount of the sale as income on the date the sale is made for accounting purposes, but not until cash is received for tax purposes.On its balance sheet dated December 31, 20X6, Indata will, as a result of the transaction described above, increase its deferred tax: 

A) asset by $800,000. B) liability by $800,000. C) liability by $200,000. 

122) Graphics, Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31, it became more likely than not that $2,000,000 of the asset’s value may never be realized because of the uncertainty of future income. Graphics, Inc. should: 

A) not make any adjustments until it is certain that the tax benefits will not be realized. B) reduce the asset by establishing a valuation allowance of $2,000,000 against the asset. C) reverse the asset account permanently by $2,000,000. 

123) For the year ended 31 December 2004, Pick Co's pretax financial statement income was $400,000 and its taxable income was $300,000. The difference is due to the following:Interest on tax-exempt municipal bonds $140,000 Premium expense on key person life insurance $(40,000) Total $100,000 

Pick's statutory income tax rate is 30 percent. In its 2004 income statement, what amount should Pick report as current provision for tax payable?

A) $102,000. B) $90,000. 

C) $120,000. 

124) An analyst has gathered the following tax information:Year 1 Year 2

Pretax Income $60,000 $60,000Taxable Income $50,000 $65,000

The current tax rate is 40%. Assume the tax rate is reduced to 30% and the change is enacted at the beginning of Year 2.In year 1, what are the taxes payable and what is the deferred tax liability?Taxes Payable Deferred Tax Liability

A) $24,000 $3,000B) $20,000 $1,500C) $20,000 $3,000

C

Taxes Payable = Taxable Income × Current Tax Rate = $50,000 × 40% = $20,000. The taxes payable will be based on the current tax rate of 40%.

Deferred Tax Liability = (Pretax Income − Taxable Income) × 30% = ($60,000 − 50,000) × 30% = $3,000.

SFAS 109 requires adjustments to deferred tax assets and liabilities to reflect the impact of a change in tax rates or tax laws.

Total income tax expense for Year 1 is: A) $23,000.B) $17,000.C) $24,000.

125) If a firm overestimates its warranty expenses, which of the following results is least likely? 

A) Income tax expense will be greater than taxes payable. B) A deferred tax asset will result. C) A timing difference will result between tax and financial reporting. 

126) Habel Inc. owns equipment with a tax base of $400,000 and a carrying value of $600,000. Habel also has a tax loss carryforward of $200,000 that is expected to be utilized in the foreseeable future. Deferred tax items on the balance sheet are valued based on a tax rate of 30%. If the tax rate is expected to increase to 35%, the adjustments to the value of deferred tax items will most likely cause Habel’s total liabilities-to-equity ratio to: 

A) increase. B) decrease. C) remain unchanged. 

127) Firm 1 has a deferred tax liability and Firm 2 has a deferred tax asset. With respect to the taxes payable for each firm when these deferred tax items reverse, a decrease in the firms’ tax rates will lead to:

Firm 1 Firm 2

A) Lower taxes payable Lower taxes payableB) Higher taxes payable Lower taxes payableC) Lower taxes payable Higher taxes payableWhich of the following statements about deferred taxes is least accurate? Deferred taxes: 

A) arise primarily due to differences between GAAP and IRS code. B) may never “reverse” in the case of companies that are growing. C) can relate to either permanent or temporary differences. 

128) Which of the following statements regarding differences in taxable and pretax income is CORRECT? Differences in taxable and pretax income that: 

A) result in deferred taxes are called temporary differences. B) increase or reduce the effective tax rate are called temporary differences. C) are not reversed for five or more years are called permanent differences. 

128) Permanent differences in taxable and pretax income:

A) are considered as changes in the effective tax rate. B) are reported on both tax returns and financial statements. C) can be deferred in some cases. 

129) Which of the following statements best justifies analyst scrutiny of valuation allowances? 

A) If differences in taxable and pretax incomes are never expected to reverse, a company’s equity may be understated. B) Increases in valuation allowances may be a signal that management expects earnings to improve in the future. 

C) Changes in valuation allowances can be used to manage reported net income. 

Information flows through an accounting system in four steps:1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the journal entries in order by date is called the “general journal.”2. The general ledger sorts the entries in the general journal by account.3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If

any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance.4. The account balances from the adjusted trial balance are presented in the financial statements.

Accruals fall into four categories:1. Unearned revenue.2. Accrued revenue.3. Prepaid expenses. 4. Accrued expenses. Wages payable are a common example of an accrued expense. Accumulated depreciation is considered a contra-asset account to property, plant and equipment, not an accrual.R

The Accounting Process

Learning debits and credits

The Learning Modules

Day 1

What this course is and isn’t

The Plan

The website

Where are you now?

From the following information for 2014 for CoJo, Inc. prepare an Income Statement and a Balance Sheet. Assume a December 31 year end.

Accounts Payable $200,000Accounts Receivable 80,000Accumulated Depreciation (56,000)Administrative ExpensesAdvertising Expense

58,00020,000

Building 300,000Cash 106,000Common Stock 300,000Cost of Goods Sold 500,000Equipment 140,000Interest Expense 10,000Inventory 120,000Depreciation Expense 32,000Notes Payable, Long-Term 10,000Patent 50,000Rent Expense 36,000Retained Earnings 143,000Sales 900,000Salaries Payable 60,000Salary Expense 120,000Tax Expense 27,000Taxes Payable 27,000Utilities Expense 34,000

CoJo, Inc. issued 200 shares of common stock on June 30, 2014. There were 1,000 shares of common stock outstanding at the end of 2013 (last year).

Investment Readings

juggernaut Module 1 If you always do what you always did,

you’ll always get what you always got.

“But I think that there’s no magic to evaluating any financial asset. A financial asset means, by definition, that you lay out money now to get money back in the future. If every financial asset were valued properly, they would all sell at a price that reflected all of the cash that would be received from them forever until Judgment Day, discounted back to the present at the same interest rate.”

Warren Buffett

So what we will be doing

The Pedagogy

What your brains wants above all else is to ________________!

Your Brain

Front Brain Back Brain Decisions What we know Consequences Long-term memory Predicting Emotions related to experiences Creating Language

Tomorrow! Yesterday!

Learning depends on experience, but it also requires reflection, developing abstractions, and active testing of our abstractions. Often we will almost skip the reflective stage, and try a shortcut to an idea or even an action. AoCtB

-Sensory input goes primarily to the back half of the brain. It is where long-term memory is. It is about the past.

-The front integrative cortex is about the future. It is where we develop ideas and abstract hypotheses. Things are weighted here. It is where we take charge. AoCtB

How do I learn? I grope.

A. Einstein

Cognition requires:

Works or doesn’t (Modify Knowledge)

Try it Matches (Or Create Structures)

What if? (Hypothesis)

And we have such a challenge because what you know now, you _________________________. Only you can _____________________________.

AoCtB refers to The Art of Changing the Brain, James Zull, Stylus Publishing 2002

Ohhhh -about asking questions--- Neils Bohr

We start……………………..

Accounting Equation:

Assets = Liabilities + Owners’ Equity

We are going to start a corporation to sell hot dogs in a cart on the corner of Court and Union. We form a corporation, Hot Dogs, Inc. and you, and everyone in the class invests $100 and we each get one share of stock for that $100. Assume there are 20 of us. We elect a Board of Directors, a COO and start to do business. First we borrow $10,000 from the bank and buy a new cart for that amount. Next we buy 1,000 dogs and 1,000 buns. Dogs cost .15 and buns are .05 each. For our first month, we sell 900 dogs for $2 each. We pay our worker $600 and our other expenses are $300. How did we do? Are we rich yet? Was it a good investment?

We are going to start a corporation to sell hot dogs in a cart on the corner of Court and Union. We form a corporation, Hot Dogs, Inc. and you, and everyone in the class invests $100 and we each get one share of stock for that $100. Assume there are 20 of us. We elect a Board of Directors, a COO and start to do business. First we borrow $10,000 from the bank and buy a new cart for that amount. Next we buy 1,000 dogs and 1,000 buns. Dogs cost .15 and buns are .05 each. For our first month, we sell 900 dogs for $2 each. We pay our worker $600 and our other expenses are $300. How did we do? Are we rich yet? Was it a good investment?

Assets = Liabilities +Owners' Equity

CASH

+ -- --   + -- +

Earnings Per Share

The matching concept is: Expenses must be _______________________________________________

_______________________________________________.

How would the Hot Dog Inc. financials have changed if we owed our worker $100 at the end of January for work she did the last week of the month?

Seems appropriate------ The last thing Osama bin Laden saw on this earth was an American soldier with a gun.

Professional Tip: First Rule of the negotiator F_________ and S__________

Professional Tip: Be D_________. Both in speech and in action

Push through the discomfortNo elephants in the room here!!

epiphany Module #2 When mom’s on a diet,redoubt everyone’s on a diet.

The concept of future value:

If you have $100 today and put it in a bank, how much will you have in the future?

|------------------------------------------------------------------------------------|

In order to put this concept to practical work, I need to know

1) when in the future are you talking2) ____________________________3) ____________________________

a) So you have $100 today, the bank pays annual interest of 10%, how much will you have in one year?

b) Two years?

c) One year and the bank pays interest at 10% compounded semi-annually?Interest is normally stated on an _________________ basis.

d) If you have $1,000 today, how much will you have in 2 years, 12% interest, compounded quarterly?

The formula for FV is

The n is the number of ________________________________________________________.

If I put $100 in the bank today, the bank pays interest semi-annually at 8% how much will I have in one year?

If I put $100 in the bank today, the bank pays interest quarterly at 12%, how much will I have in one year?

From the following information for Mater, Inc., prepare the financial statements for the year ending December 31, 2014.

Cash 58,000 Common Stock 50,000Accounts Receivable 15,000 Retained Earnings 324,000Inventory 80,000 Sales 410,000Building 200,000 Cost of Goods Sold 200,000Equipment 100,000 Salary Expense 50,000Accumulated Depreciation 20,000 Rent Expense 36,000Security Deposit 3,000 Depreciation Expense 10,000Accounts Payable 12,000 Office Expense 10,000Salaries Payable 4,000 Interest Revenue 1,000Taxes Payable 6,000 Interest Expense 5,000Note Payable, Long-Term 40,000 Income Tax Expense 30,000

Mater Inc. declared and paid a $5,000 dividend in 2014. The beginning Common Stock was $40,000 and beginning Retained Earnings was $259,000.

From the following information for 2014 for CoJo, Inc. prepare Financial Statements. Assume a December 31 year end.

Accounts Payable $200,000Accounts Receivable 80,000Accumulated Depreciation 46,000Advertising Expense 19,000Building 300,000Cash 106,000Common Stock 300,000Cost of Goods Sold 500,000Equipment 140,000Interest Expense 5,000Inventory 120,000Depreciation Expense 28,000Notes Payable, Long-Term 10,000Patent 50,000Rent Expense 75,000Retained Earnings 171,000Sales 825,000Salaries Payable 60,000Salary Expense 100,000Tax Expense 18,000Taxes Payable 9,000Utilities Expense 40,000

Cojo, Inc. issued 200 shares of common stock on June 30, 2014. There were 800 shares of common stock outstanding at the end of 2013. The company declared and paid a $10,000 dividend during 2014. The beginning Common Stock was $240,000 and the beginning Retained Earnings was $141,000.

So…..

An Income Statement is _________________________________________________________________

Revenues are ________________________________________________________________

Expenses are _________________________________________________________________

Another name for the Income Statement is the ____ & _____ or ______________& ___________.

And the phrase ___________ _____ ___ ______ ___________ ________ comes from this.

A Balance Sheet is _____________________________________________________________________

We classify the Balance Sheet into sections or categories. Usually this segregation is done

according to L_____________________ on the Asset side and when they ______________ b__ p________ on the liability side.

An Asset is ___________________________________________________________________________

On the Asset side we have C ____________ A_____________ and other categories such as

F_____________ A____________ and O___________ A___________

A Liability is _________________________________________________________________________

And on the Liability side of the Balance Sheet we have

C___________________ L___________________

L___________________ L___________________

and maybe O___________________ L___________________

Owners’ Equity is _________________________________

Two types of capital C_____________________________ and E_____________________ which is termed R___________ E___________ in a corporation

A dividend is _______________________________________________________________.

Rule of the Professional: Second Rule of the Successful executive

Be ________________________________ (It is ok to fake it!!----------------, but

-never, never, ever be w__________ W____________!!)

Module # 2 Homework

I was taught that the way of progress is neither swift nor easy. Madame Marie Curie

Problem 1

From the following information for McStuffin Co. for the year ended 12/31/14, prepare the Financial Statements. There were 100 shares of common stock issued on April 1, 2014 and a dividend of $5,000 was paid on November 30, 2014. Beginning Common Stock was $9,000 and beginning Retained Earnings was $57,500.

Advertising Expense $ 1,000 Rent Expense 12,000Cash 47,000 Retained Earnings 63,000Common Stock (1,000 shares) 10,000 Sales 85,000Cost of Sales 40,000 Tax Expense 4,500Inventory 25,000 Utilities Expense 2,000Note Payable, Long-term 20,000 Wage Expense 10,000Interest Expense 5,000 Land 20,000Goodwill 10,000 Wages Payable 1,000 Accounts Payable 8,000

Problem 2

From the following information for John & Debbie’s Production Company for the year ended 12/31/14, prepare Financial Statements. The company issued 1,000 new shares of common stock for $10,000 on May 1, 2014 and declared and paid dividends of $2,000 in 2014. Beginning Common Stock was $90,000 and the beginning Retained Earnings was $90,600.

Accounts Payable 50,000 Interest Expense 8,000Accounts Receivable 40,000 Note Payable, Long-Term 80,000Advertising Expense 5,000 Rent Expense 36,000Cash 50,000 Retained Earnings 134,000Common Stock (10,000 Shares) 100,000 Sales 200,000Cost of Sales 72,000 Tax Expense 18,600Inventory 60,000 Utilities Expense 5,000Land 200,000 Wage Expense 10,000Patent 20,000 Wages Payable 6,000

ONLY THOSE WHO HAVE THE PATIENCE TO DO SIMPLE THINGS PERFECTLY WILL ACQUIRE THE SKILLS TO DO DIFFICULT THINGS EASILY

Frederick Schiller

Problem 3If I deposit $500 in the bank today and the bank pays interest of 6% compounded annually, how much will I have 3 years from today?

Problem 4If I deposited $2,000 in the bank today at 5%, how much would I have 8 years from today?

Problems 5If Mary deposits $200 in an account that pays interest annually at 12%, how much will she have in 2 years?

Problem 6If Mary deposits $200 in an account at12% that pays interest semi-annually, how much will she have in 2 years?

Problem 7 Jane will save for three years. The bank pays interest at 10% compounded semi-annually. How much will she have in three years if she deposits $1,000 today?

Problem 9 For Jane (6), what if the bank paid interest annually?

Problem 10 How much will you have in three years if you put $100 in the bank today and the bank pays

A) 8% compounded annually?B) 16% compounded quarterly?C) 12% compounded semi-annually?D) 24% compounded quarterly?

Read & study pages 18 and 19

_________________________________________________________________________EPS for Bella (Problem on next page)

100,000/ 2/12 X 6,000 + 3/12 X 8,000 + 1/12 X 12,000 + 6/12 X 16,000

= 100,000/12,000

= $8.33

Calculating Weighted Average Earnings Per Share

Earnings Per Share (EPS)Types of EPS

Basic Diluted

We will only be using Basic during this class

EPS = Net Income Weighted Average Number of Shares Outstanding

Weighted Average EPS

Greges Corporation had net income for 2014 of $100,000. At the beginning of the year they had 10,000 shares of common stock outstanding. On April 1 they sold 4,000 shares to the public. On October 1, they sold 3,000 more shares. At December 31st, they had total assets of $1,000,000 and total Liabilities of $600,000. Calculate the EPS.

$100,000 1 (3/12 X 10,000)+ (6/12 X 14,000) + (3/12 X 17,000)

= 7.27

For 2014, Bella Company earned $100,000. The company had 6,000 shares outstanding on January 1, sold 2,000 shares on March 1 and sold 4,000 shares on June 1 and another 4,000 on July 1. Calculate the EPS for Bella. (Answer is on previous page.)

DepreciationWhen a company buys a fixed asset (accountanteze for buildings, machines, furniture, trucks and so forth) the cost of the asset, except land, must be allocated over the period the asset helps the company generate revenues. The period over which the asset is useful to the company in generating revenues is called its economic or useful life. Therefore, a definition of depreciation expense is the allocation of the cost of a fixed asset over its estimated useful life. To figure the amount of the expense for each year under the straight-line method of depreciation, we use the following formula:

Cost - Estimated Salvage ValueDepreciation Expense per year = Estimated Life of the Asset

Suppose we bought a truck to deliver our product. The truck cost us $30,000 and we estimate that we will use it for 3 years before it becomes too expensive to keep it going. We further estimate that at the end of the three years we will be able to sell it for $3,000. This $3,000 is the estimated salvage value (also termed the residual value).

Accumulated Depreciation is an enigmatic account for many students. It is a valuation account. It is also a contra account. Now let’s see what it really is. The truck account will remain the same, $30,000, until we sell or trade in the truck. The amount of depreciation we take on the truck will accumulate over the years we own it in the Accumulated Depreciation account. The cost minus the accumulated depreciation of any fixed asset is known as its book value. Consider the P & L and the Balance Sheet for each of the following years:

P&L Year 1 Year 2 Year 3 Sales

Cost of Good SoldGross MarginOperating Expenses: Xxxxx Expense Xxxxx Expense Depreciation Expense 9,000 9,000 9,000

Balance SheetCurrent Assets Xxxxxxx Xxxxxxx Xxxxxxx

Total Current Assets

Fixed AssetsTruck 30,000 30,000 30,000Less: Accumulated

Depreciation < 9,000> <18,000> <27,000>Net Fixed Assets 21,000 12,000 3,000

If we originally purchased the truck at a point in the year other than the beginning, we would adjust our depreciation for the period we used it. Many companies have special rules for these situations. A common one is that the company takes 1/2 of a year’s depreciation in the year they buy the asset, no matter when in the year that occurs, and they take 1/2 of a year’s depreciation in the year they sell the asset, again, no matter when in the year that occurs.

Hobson’s Choice Module #3 Friends come and go,exacerbate but enemies accumulate.

(Thomas F. Jones, Jr.)Earnings per Share

Primary and diluted

Convertible bonds, stock options and so forth

As if….

But never mind- we will only use basic…..

The Formula

Samsun Company earned $100,000 last year. The company had 5,000 shares of common stock outstanding on January 1, sold 8,000 shares on April 1 and sold 4,000 shares on October 1. Calculate the EPS for Samsun.

Ryan Corporation had 100,000 shares outstanding at the beginning of the year. On April 1, they issued 12,000 shares, on June 30, they issued 16,000 shares and on October 1, they issued 8,000 shares. The Company earned $300,000 for the year. What was the EPS?

DepreciationWhat it is, is

You bought a new truck to use to deliver the Whatevers that you sell. The truck cost $30,000, will last for 4 years. At the end of 4 years, you figure you could sell it for $2,000.

Formula for Straight-Line Depreciation:

Goes on the Balance Sheet

InventoriesSpecific Identification

Weighted Average

FIFO means ___________ ___, __________ _____.

The Inventory Turn is ----

And taking it one step further----------

Gives us a_________________ d_______ s__________ in i___________.

Before the homework--- Bubble Guppies---- current portion of long-term debt

And what about the dividend????

Time Value of Money

You have a choice- $100 today, $107 in one year or $115 in two years. You do not need money today and the money is safe if you decide to take it later. How would you make this decision?

Present valueFirst, back to an easy future value problem, how much will you have in one year if you put $100 in the bank today and the bank pays interest compounded annually at 10%?

How much do you need to put in the bank today to have $110 in one year if the bank pays interest at 10%, compounded annually?

What if you wanted to have $100 in one year, bank pays interest at 10% compounded annually?

The formula for present value

How to use the calculator:

How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays interest at 10% compounded annually?

2nd CLR TVM 1000 FV

3 N 10 I/Y CPT PV

How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays interest at 10% compounded semi-annually?

2nd CLR TVM 1000 FV

3 X 2= N 10÷2= I/Y

CPT PV

How about wanting $50,000 in 10 years bank pays interest 16% payable quarterly?

Or 2nd CLR TVM 50000 FV

10 X 4= N

16÷4= I/Y CPT PV

The tutorials and instruction book for your calculator make some easy calculations very difficult. If you do one or two additional steps, it all becomes easy.First, some basics The third line of the calculator is the one we will be using the most.

N is the number of compounding periodsI/Y is the interest rate per compounding periodPV is the present valuePMT is the payment per periodFV is the future value

To set your decimal points2nd Format (bottom middle key)

Enter number of decimal points you want to use.Enter (top line second key)

Future Value Problems

How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10% compounded annually?

1) 2nd clr tvm2) 100 PV 3) 1 N4) 10 I/Y 5) CPT FV FV = -110.00

How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10% compounded semi-annually?

1) 2nd clr tvm

2) 100 PV 3) 2 N4) 5 I/Y5) CPT FV FV = -110.25

Present Value Problems What is the present value of $1,000 to be paid to me in 2 years, bank pays interest annually at 10%.

2nd CLR TVM1000 FV2 N10 I/YCpt PV -826.45

What is the present value of $1,000 to be paid to me in 2 years, bank pays interest of 10% semi-annually?

2nd CLR TVM1,000 FV4 N5 I/YCpt PV -822.70 Payments

You want to buy a new car. The cost is $50,000. You make 5 equal annual payments which include interest at 10%. How much are the payments?

2nd CLR TVM50,000 PV5 N10 I/YCpt PMT -13,189.87

What would the payments be if they were monthly? 2nd CLR TVM

50,000 PV5X12 = N10/12 = I/YCpt PMT -1,062.35

Differential InterestBob will sell you a DooDad for $10,000 payable in 3 equal annual payments which include interest at 2%. The bank would charge you 10% for the same loan. How much are you really paying for the DooDad?

2nd CLR TVM10,000 PV3 N2 I/YCpt PMT 10 I/YCpt PV 8,623.28

How much would you pay for a 10 year, 100,000 bond, 10% interest payable annually, to earn 8% interest?

2nd CLR TVM100,000 FV10 N.10 X 100,000 = PMT8 I/YCpt PV 113,420.16

You are buying a 10 year, $100,000 Note issued 5 years ago. The Note is being paid in equal annual payments which included interest at 10%. Current interest rates are 12%. The Note has exactly 5 years of payments left and you will get the first in 1 year. How much do you pay to earn 12%?

2nd CLR TVM100,000 PV10 N10 I/Y Cpt PMT5 N12 I/YCpt PV 58,666.07

Problems

1) How much do you need to put in the bank if you want to have $1,000,000 in 5 years, bank pays interest at 4% compounded annually?

2) Compounded semi-annually?

3) How much if you want to have $100,000 in 15 years, the bank pays interest at 8% compounded annually?

4) What if you want $1,000,000 in 20 years at 12% compounded semi-annually?

5) Problem 4 compounded quarterly?

Annuities 1) How much do you need to put in the bank today so you can take out $100 per year

for each of the next two years? The bank pays interest at 12% compounded annually. You will make your first withdrawal exactly one year from today.

2) How about $1,000 per year for next 4 years, bank pays interest at 10% compounded annually?

3) How much do you need to put in the bank today so you can take out $10,000 per year for the next five years? The bank pays interest at 8% compounded annually.

4) How about $100 for 10 years, same bank and interest?

5) How about $500 per year for the next 30 years, bank pays interest at 8%, compounded annually?

Module 3 Homework

Bubble Guppies, Inc.

Listed below are the accounts for Bubble Guppies, Inc. at December 31, 2013 and their balances.

Accounts Payable $ 40,000Accounts Receivable 143,000Accumulated Depreciation 85,000Advertising Expense 8,000Building 200,000Cash 185,000Common Stock 210,000Cost of Goods Sold 440,000Equipment 100,000Interest ExpenseInsurance Expense

8,000 3,000

Inventory 62,000Depreciation Expense 46,000Note PayablePrepaid Rent

100,000 4,000

Rent Expense 36,000Retained Earnings 272,000Sales 880,000

Salaries PayableSalary Expense

8,000 200,000

Security Deposit 40,000Tax Expense 38,000Taxes Payable 19,000Utilities Expense 12,000

Bubble Guppies’s beginning balance (12/31/12) in Retained Earnings was $193,000 and the beginning Common Stock balance was $60,000. The company had 6,000 shares of common stock outstanding at the beginning of the year. The corporation issued 4,000 shares of common stock on April 1, 2013. The Note Payable requires annual payments of $20,000 on principal plus interest at 8% on December 31st. During the year the company paid a $10,000 dividend.

Prepare financials statements (3) for Bubble Guppies’s

There are more Problems on the next page

Problem 2

How much do I need to deposit in the bank today at 8% compounded quarterly so that I will have $100,000 one year from today?

Problem 3How much do I need to invest today at 4% compounded annually in order to have $1,000,000 five years from today?

Problem 4How much do I need to put in the bank today in order to have $10,000 two years from today if interest is 8% compounded semi-annually?

Problem 5The Arsen Co. earned $500,000 last year. The company had 100,000 shares outstanding on January 1, sold 6,000 shares on July 1 and sold 6,000 shares on October 1. The Arsen Co. stock sells for $50 per share. Calculate the EPS.

ONLY THOSE WHO HAVE THE PATIENCE TO DO SIMPLE THINGS PERFECTLY WILL ACQUIRE THE SKILLS TO DO DIFFICULT THINGS EASILY

Frederick Schiller

Module 4

What built this country over time is tens of thousands of people who want to live better tomorrow than they did today and go to work on it.

Warren Buffett

Payments and amortizations

You are buying a Mercedes for $65,000. You pay $5,000 down and will pay the rest in five annual payments of $15,027.39 beginning one year from today. The payments include interest at 8%. Prepare an amortization schedule.

How did I get the payment amount?

Now Amortize the loan

Ending or Unpaid Applied to Principal

Periods Payments Interest 8% Principal Balance

Total Cost 65,000.00

Down Payment 5,000.00 5,000.00 60,000.00

1 15,027.39_______________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

Go back to the Mercedes- how would we do monthly payments?.......

Now Amortize the loan Ending or Unpaid

Applied to Principal Periods Payments Interest 12% Principal Balance

Total Cost 65,000.00

Down Payment 5,000.00 5,000.00 60,000.00

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

6 ________________________________________________________

Sharon wants to buy a new red dress (which her dad and uncle think is way too short and too tight). The cost is $600, 10% down and the rest in 3 equal annual payments which include interest at 8%. How much are the payments? Prepare an amortization schedule.

You want to buy a cow. Price is $10,000 to be paid $1,000 down and the rest in three equal

annual installments which include interest at 10%. How much are the payments? Prepare an amortization schedule.

You have just purchased a new car for $40,000. You pay no money down and will make 60 equal monthly payments starting next month. The interest rate is 12% per year. Amortize the first three months of your loan. (Did you get $889.78 as your payments?)

Professional tip # 1 Honor the ____________________________.

#2 Business lunches are not for e_________________!! Decide what you want

B___________ you g____ t______.

# 3 At the restaurant- show some ________________.

Don’t c___________ the _____________!!

If you can’t a_______________ t__ b__ t__________, DON’T G___!

And never, ever, take home ______________________________!!Module 4 Homework

Problem 1

John wants to buy a new gas Barbeque. The cost is $659.98. He will have to pay for it with10% down and 5 equal annual payments that include interest at 10%. Calculate the payments. Amortize the payments.

Problem 2

You, on the other hand, want a new Jeep. The cost is $ 29,000. You pay 5% down and the rest in five equal annual payments which include interest at 8%. Calculate the payments. Amortize the payments.

Problem 3

Megan has just purchased a new goat. The cost was $ 1,000. She paid 10% down and will pay the rest in 4 equal annual installments which include interest at 6%. Calculate her payments and prepare an amortization schedule

Problem 4You want to buy a bus. The cost is $769,000. You pay $69,000 down and the rest in five equal annual payments which include interest at 8%. Calculate the payments. Amortize the payments.

Without data, you are just another person with an opinion.Extra Calculator Problems

Eric wants to buy a new Mercedes. The cost is $80,000. Eric will put 10% down and pay the rest in 5 equal annual payments which include interest at 8%. How much are the payments?

If Eric amortizes the above loan correctly, what would be the interest expense for the second year?

If Eric amortizes the loan correctly, what would be the principal balance after the third payment?

If Eric made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be the amount of the each payment?

Still on monthly payments, what would be the interest expense for the second month?

Suzie wants to have $1,000,000 in the bank in thirty years. If the bank pays interest at 6% compounded semi-annually, how much does she need to deposit today to reach her goal?

Cindy wants to withdraw $1,000 per month for the next 5 years. She will withdraw her first amount in one month. The bank pays interest at 12% compounded monthly. How much does she need to deposit today to do this?

Heather hit the lottery!! She has the option of taking 560,000 today or 100,000 per year for the next 8 years, or $1,000,000 in ten years. If she can deposit her money at 8%, ignoring taxes, which deal should she take?

Extra Extra Calculator Problems

Bob wants to buy a new Harley. The cost is $60,000. Bob will put 10% down and pay the rest in 3 equal annual payments which include interest at 8%. How much are the payments?

Amortize the loan

If Bob made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be the amount of the each payment?

Still on monthly payments, what would be the interest expense for the second month?

Suzie wants to have $10,000,000 in the bank in thirty years. If the bank pays interest at 8% compounded semi-annually, how much does she need to deposit today to reach her goal?

vicarious Module #5 Happiness is different from pleasure. Cash Flows Happiness has something to do with

struggling and enduring and accomplishing.

George SheehanTwo Types __________________ and __________________

Bobcat Bob, Inc. Bobcat Bob, Inc. Income Statement Balance Sheet

For the Year Ended December 31, 2014 December 31,

Sales $ 48,000 2014 2013Cost of Goods Sold 24,000 Assets Gross Margin 24,000 Current AssetsOperating Expenses Cash $ 38,880 $ 26,800 Salary Expense $ 12,700 Accounts Receivable 5,000 8,000 Insurance Expense 1,200 Inventory 2,000 1,000 Depreciation Expense 2,400 Prepaid Insurance _ 100 ______ Total Operating Expenses 16,300 Total Current Assets 45,980 35,800 Operating Income 7,700 Property and EquipmentOther Revenues & <Expenses> Furniture & Fixtures 26,000 12,000 Interest Expense < 300> Less: Accumulated Taxable Income 7,400 Depreciation (3,400) (1,000) Tax Expense 2,960 Net Property & Equipment 22,600 11,000

Net Income $ 4,440 Other Assets Patents 500 100

Earnings Per Share $ 4.04 Total Assets $69,080 $ 46,900

Liabilities

Current Liabilities Accounts Payable $ 7,000 $ 5,000 Salaries Payable 1,000 Taxes Payable 2,960 3,120 Advertising Payable _____ 100 Total Current Liabilities 10,960 8,220

Long-Term Debt Note Payable-Bank 15,000 4,000

Total Long-Term Debt 15,000 4,000 Total Liabilities 25,960 12,220 Owners’ Equity Common Stock 34,000 30,000

Retained Earnings 9,120 4,680 Total Owners’ Equity 43,120 34,680

Total Liabilities & Owners’ Equity $ 69,080 $ 46,900

The Note Payable-Bank is interest only at 6% with the principal balance due December 31, 2018. During the year the company purchased a piece of office furniture worth $2,500 by issuing 500 shares of common stock for it.

A word to the wise ain't necessary -- it's the stupid ones that need the advice. - Bill Cosby When you’re on the phone

with the man, you’re all alone. The Las Vegas Bookie

Now you do one -

The following balances are for Misty Company at December 31,

2013 2014Cash 10,000 30,000Accounts Receivable 40,000 50,000Inventory 80,000 60,000Prepaid Rent 6,000 3,000Equipment 180,000 210,000Accumulated Depreciation-Equipment 50,000 60,000Security Deposit 8,000 9,000Accounts Payable 40,000 50,000Salaries Payable 10,000 -0-Interest Payable -0- 5,000Taxes Payable -0- ______?Note Payable 100,000 70,000Common Stock 10,000 50,000Retained Earnings 114,000 124,000Sales 200,000

Cost of Goods Sold 100,000Salary Expense 40,000Rent Expense 24,000Interest Expense 6,000Depreciation Expense 10,000Tax Expense ______?

The common stock outstanding was 10,000 shares on January 1, 2014. On April 1, 2014, Misty issued 10,000 shares of common stock in exchange for $10,000 of equipment. On July 1, 2014, Misty sold an additional 30,000 shares of common stock. During 2014, the company paid a dividend of _____________. No equipment was sold during the year. The tax rate is 30% and 1/2 of 2014 taxes were paid in 2014, the rest will be paid in 2015.

On the next page, prepare a Statement of Cash flows in good form using the indirect method.

93

"When it becomes more difficult to suffer than to change... you will change."-- Dr. Robert Anthony The Direct Method

94

Cindy wants to withdraw $10,000 per month for the next 5 years. She will withdraw her first amount in one month. The bank pays interest at 12% compounded monthly. How much does she need to deposit today to do this?

Chris hit the lottery!! She has the option of taking $520,000 today or $90,000 per year for the next 8 years, or $85,000 per year for the next nine years or $1,000,000 in ten years. If she can deposit her money at 6%, ignoring taxes, which deal should she take?

And a note to the ladies............ “Before you meet the handsome prince you really have to kiss a lot of toads.”

Professional tip Men communicate to __________, woman communicate to ______________. Cite: “You Just Don’t Understand”, Deborah Tannen

#2 Hands to face, in men, is a sign of ___________. Hand, fingers right under nose is a sign of i________________________.

95

An Extra Cash Flow Problem

CoJo’s Colts, Inc. Balance Balance

12/31/13 12/31/14Cash 88,900 97,600Accounts Receivable 50,000 90,000Allowance for Doubtful Accounts 2,000 3,600Inventory 40,000 120,000Prepaid Insurance 3,600 2,900Prepaid Rent 3,000 -0-Equipment 220,000 320,000Accumulated Depreciation 20,000 50,000Land 100,000

Security Deposits 10,000 8,000 Accounts Payable 30,000 35,000

Salaries Payable 10,000 6,000Rent Payable -0- 3,000Interest Payable 10,000 9,000Taxes Payable 5,000 10,000Note Payable 200,000 180,000Common Stock ($1 each) 50,000 160,000Retained Earnings 88,500 281,900Sales 1,400,000Cost of Goods Sold 700,000Salary Expense 185,000Rent Expense 36,000Advertising Expense 85,000Office Expenses 27,000Depreciation Expense 30,000Utilities Expense 12,000Bad Debt Expense 6,500Insurance Expense 6,000Miscellaneous Expense 3,000Interest Expense 9,500Income Tax Expense 90,000

The land was acquired on June 30, 2014 by exchanging 80,000 shares of common stock worth $80,000 and cash for the balance of the purchase price. The additional common stock (other than that issued for the purchase of the land) was sold on September 30, 2014 for $1 per share. The company did not sell any equipment during the year. All equipment purchased during the year was purchased for cash. The balance in retained earnings for each year is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on June 30th of each year.

96

Some fun stuff

Comparative Balance Sheets for Darby’s Doodles, Inc. are listed below:

December 31, 2013 2014

Cash 400 650Accounts Receivable 600 800Inventory 1,000 1,300Plant and Equipment 1,000 1,050Accumulated Depreciation 325 600Accounts Payable 600 640Common Stock 1,000 1,000Retained Earnings 900 1,560

The following data relate to 2014:a) collections from credit customers, $30,000, cash sales $6,000b) payments to suppliers of merchandise $ 40,000c) purchases of equipment for cash, $50d) dividends paid to shareholders $500e) no plant and equipment was retired or sold during the year

1) For Darby, the Depreciation Expense for 2014 was

2) For Darby, the Sales Revenue for 2014 was

3) For Darby, the Net Income for 2014 was

97

4) The Cost of Goods Sold for 2014 was

More Professional Tips Look them in _______ _________!

Guys, save that other stuff for ____ _________!

And people who will not look people in the eye are perceived as weak, wishy washy!! The greatest gift you can give is the purity of your a_______________!

So let the d______ phone _________!

Don’t answer with a b_________________ s__________.

As a common courtesy, introduce yourself- save embarrassment Module 5 Homework

98

Problem 1 From the following information for Kevin’s Kennels, prepare a Statement of Cash Flows for the year ended December 31, 2014 using both the indirect method.

The land was acquired on March 31, 2014 by exchanging 60,000 shares of common stock worth $60,000 and cash for the balance of the purchase price. The additional common stock (other than that issued for the purchase of the land) was sold on September 30, 2014 for $1 per share. The company did not sell any equipment during the year. All equipment purchased during the year was purchased for cash. The retained earnings balance for both years is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on June 30th of each year. Current stock price (12/31/14) is $4.00 per share.

Balance 12/31/14

Balance 12/31/13

Cash 71,900 18,900Accounts Receivable 78,000 45,000Inventory 70,000 90,000Prepaid Insurance 3,600 2,600Equipment 340,000 290,000Accumulated Depreciation 80,000 20,000Land 120,000Security Deposits 12,000 10,000Accounts Payable 35,000 30,000Wages Payable 6,000 10,000Rent Payable 8,000 4,000Interest Payable 6,500 7,500Taxes Payable 10,000 5,000Note Payable 130,000 150,000Common Stock ($1 each) 300,000 160,000Retained Earnings 120,000 70,000Sales 1,200,000Cost of Goods Sold 700,000Wage Expense 220,000Rent Expense 48,000Office Expenses 46,000Depreciation Expense 60,000Utilities Expense 15,000Insurance Expense 6,000Interest Expense 15,000Income Tax Expense 27,000

99

Problem 2 From the following information for Molly’s Munchies, prepare a Statement of Cash Flows for the year ended December 31, 2014 using the indirect method.

The following data is for Molly’s Munchies: Balance Balance 12/31/14 12/31/13

Cash 80,000 20,000Accounts Receivable 68,000 35,000Inventory 70,000 90,000Prepaid Insurance 500 3,000 Equipment 340,000 270,000Accumulated Depreciation 80,000 20,000Land 120,000

Security Deposits 12,000 10,000 Accounts Payable 35,000 30,000

Wages Payable 6,000 10,000Rent Payable 7,500 6,000Interest Payable 6,000 7,000Taxes Payable 16,000 5,000Note Payable 120,000 140,000Common Stock ($1 each) 300,000 160,000Retained Earnings 120,000 50,000Sales 1,200,000Cost of Goods Sold 575,000Wage Expense 260,000Rent Expense 24,000Office Expenses 70,000Depreciation Expense 60,000Advertising Expense 15,000Insurance Expense 9,000Interest Expense 14,000Income Tax Expense 52,000

Some of the equipment was acquired on March 31, 2014 by exchanging 60,000 shares of common stock worth $60,000. The additional common stock (other than that issued for the purchase of the equipment) was sold on June 30, 2014 for $1 per share. The company did not sell any equipment during the year. All the rest of the equipment and the land purchased during the year was purchased for cash. The retained earnings balance for both years is after all closing entries have been made. The Note Payable requires payments of $20,000 principal plus interest at 10% on June 30th of each year. Current market price is $5.00 per share

Format for the Indirect Cash Flow Statement

100

Company NameStatement of Cash Flows

For the (Period) Ending (Date)

Operating ActivitiesNet Income $ xx,xxxAdd: Depreciation Expense x,xxxAdd: Amortization Expense x,xxxAdd: Loss on Sale of Fixed Asset(s) x,xxxLess: Gain on Sale of Fixed Asset(s) <x,xxx>Increase in (current asset account name) < x,xxx>Decrease in (current asset account name) x,xxxDecrease in (current asset account name) x,xxxIncrease in (current liability account name) x,xxxDecrease in (current liability account name) < x,xxx>

Increase in (current liability account name) x,xxx Cash Provided By Operating Activities -or-Cash Used For Operating Activities xx,xxx or <xx,xxx> Investing Activities

Purchase(s) of (fixed asset account name) <$ xx,xxx>Purchase(s) of (fixed asset account name) < xx,xxx>Sale(s) of (fixed asset account name) x,xxxPayment of Security Deposit < x,xxx>Refund of Security Deposit x,xxx

Cash Provided By Investing Activities -or- Cash Used For Investing Activities xx,xxx or <x,xxx>

Financing ActivitiesNew Borrowing(s) xx,xxxPayment(s) on (description of debt) < x,xxx>Issuance(s) of Common Stock x,xxxPurchase(s) of Treasury Stock < x,xxx>Payment of Dividends < x,xxx>Issuance(s) of Bonds x,xxxRedemption of Bonds < xx,xxx>

Cash Provided By Financing Activities -or- Cash Used for Investing Activities xx,xxx or <xx,xxx>Increase in Cash -or- Decrease in Cash xx,xxx or <xx,xxx>Beginning Cash, (Date) xx,xxxEnding Cash, (Date) $ xx,xxx

Supplemental Cash Flow Information Cash payments for income taxes $ x,xxx Cash payments for interest x,xxx Noncash investing and financing activities

(Description of transaction) x,xxx(Description of transaction) x,xxx

101

gonzo Module 6 The race is not always to the swift,bifurcate nor the battle to the strongest,

but that’s the best way to win. Daniel Runyon

(as told to the Las Vegas Bookie)Accounts Receivable Controlling and subsidiary accounts

Slammin’ Sammy had $600,000 in Accounts Receivable at the beginning of the year. He also had $12,000 in the Allowance for Doubtful Accounts. Allowance for Doubtful Accounts is

and the Balance Sheet looks like

102

2014 - Simms had total sales of $300,000. All of the company’s sales are on credit with terms of 2/10, net 30. At the beginning of the year, the company had a balance in Accounts Receivable of $26,000 and an Allowance for Doubtful Accounts of $1,000. At the end of the year, Accounts Receivable had a balance of $37,000 and an Allowance for Doubtful Accounts of $2,000.

First as to terms- 2/10 n/30 means

and costs

so why do?

now as to the receivable turn

Which tells us

and dividing the turn into 365

gives us A__________________ C___________________ P___________________.

Also known as D___________ S________________ O____________________.

103

What is an aging schedule?

Total Receivable Current 30-60 60-90 over 90

Able Co. 60,000.0

0 60,000.0

0

Acme Corp 40,000.0

0 38,000.0

0 2,000.

00

Baker Co 20,000.0

0 12,000.0

0 4,000.

00 4,000.

00

Zollar Co 80,250.0

0 60,250.0

0 20,000.0

0

 Totals

236,965,374.87

223,885,462.25

9,000,486.57

3,236,582.95

842,843.10

Professional tipGroups are fine, but

A leader takes r_____________________________ and f____________ t____________!

“The difference between the right word and the almost right word is the difference between lightning and a lightning bug.” Mark Twain

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Once upon a time….

Once upon a time…..Suzie had just graduated from medical school and was set to begin a five year ENT internship at a hospital in Pontiac Michigan. Interns earn comparatively little and Suzie was a little apprehensive about her money situation. When she arrived in Michigan, the housing market was such that she could buy a really nice condo for a really good price. The payments on the condo would be less than rent payments. The problem was the down payment and the furnishing. She decided that if she could borrow $100,000, she would be set. After her internship, her first year pay would be about $400,000 per year and she figured she could pay off the loan easily. Debbie, her sister was flush with cash and so Suzie approached her for a possible loan. Debbie’s money was currently sitting in the bank earning 2%. Suzie asked the bank what they would charge for a six year, interest only loan and they told her 10% per year. Debbie offered to loan her the money at 8%. The terms were that Suzie would pay 8% on December 31st of each year. Then with the sixth interest payment, Suzie would repay the $100,000. The note was signed and Suzie got her money and bought her house.

Time has passed, three interest payments have been made by Suzie on time. (The note would now be considered seasoned.) Debbie is about to have her fourth child, Colton, and wants to move. A new house would deplete her savings and so she decided to sell the Suzie note. She had just received the third payment of interest yesterday. Debbie called a loan broker, a company that specializes in selling debt such as this. They told her that notes such as hers currently earn 12%. So if Debbie sells the note so that it earns 12%, how much will she get?

Kirch’s Third Law of the Universe You ______ ___________ ______ ________!

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Amortize the deal

How about if you wanted to earn 8%? Amortize it.

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What if the Suzie/ Debbie note was for 100,000 payable in six equal annual payments which included interest at 8% and you purchased it to yield 8%. How much would you pay? Amortize it.

Same problem, but now interest rates have changed and you purchase it to yield 12%. How much would you pay? Amortize it.

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Sally wants to sell you a note. It is a $100,000, 12% note she bought at par (for face value) last year. The note was originally for seven years, is seasoned, and has four years to run, pays interest only annually and the principal due with the last payment in four years. She received last year’s interest on time yesterday. Current interest rate on this quality of note is 8%. If you buy the note to yield 8%, how much will you pay Sally?

Amortize your purchase of the Sally note.

How much would you pay Sally if current interest rates are 14%? Amortize it.

You can’t do everything at once, but you can do one thing at once.” Calvin Coolidge

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visceral Module 7 Don’t tell me how rough

onomatopoeia the seas are son, just bring the darn ship in.

Rules, Leases and Goodwill Lou Holtz

Rules of the Game

Rules from where?GAAP

G______________ A_____________ A_______________P________________

Who sets GAAP? FASB

F____________ A_______________ S________________ B________________

General Principals

Assets and Liabilities measured in H_________________ C_____________ Exceptions

DepreciationADA

Measureable in D_______________________

G_____ C_______________ (Unlimited Life)

Disclosure and Measurement Puzzlements

Contingent Liabilities

Gift Cards

GAAP vs Non-GAAP???

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http://www.youtube.com/watch?v=7P2-vEtXSug

(IFRS????)

Internal control....... another illusion the shoe store, estimated inventory and perpetual?????

Parking (Channel Stuffing)

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Leases - Two types O___________________________ and C_________________.

Operating is the U-__________.

Capital is when you are really _____________________ ____ _____________.

For instance……. You want to buy Copeland Hall. The cost is $30,000,000 to be paid in 360 monthly payments that include interest at 4.6%.

As an alternative to the purchase, you have been offered the chase to lease the building for $153,794 per month. At the end of the lease you can buy Copeland for $1.

What’s up with that??

What your momma told you…

How do we know which is which? Accountants have their ways!!!!

And IFRS is changing everything!!

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Now some lease problems…

You are trying to decide whether to buy or lease a truck. The following information is available to you:

The manufacturer’s suggested retail price is $26,459.00.You can actually buy it for $22,880.00.The current bank interest rate for truck loans is 9% and you will put 10% down and pay

the balance over 36 months starting one month from signing.It is raining while you make the deal.You can lease the truck for $700.00 per month for 36 months. The lease requires a

down payment of $1,200 due at signing. You can purchase the truck at the end of the lease for $2,000.

You would rather have a Lexus.

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You are trying to decide whether to buy or lease a new machine. The machine costs $700,000.

1) You can buy it, borrowing money from the bank. If you borrow from the bank, the interest rate will be 10%.

You can also- 2) lease it for five years, $10,000 down and five annual payments of $179,000. At the end of

the 5th year you can buy the equipment for $5,000.

3) Lease it for seven years, $20,000 down and seven payments of $133,300 After making the last payment, you may purchase the equipment for $50,000.

What should you do?

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Goodwill is _______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

First – Rate of Return

Freeland Company wants to enter the Athens’ market. Freeland is one of the largest distributors of greeting cards in Ohio. They have been looking at Garven Distributing, a smaller greeting card company that services the Athens’ area. The following is a summary of Garven’s balance sheet.

Accounts Receivables $ 50,000 Accounts Payable 60,000Inventory 60,000 Note Payable 150,000Fixed Assets $500,000 Owners’ Equity 200,000Accum Deprec 200,000 300,000

$410,000 $410,000 Garven’s Net Income for the last twelve months was $100,000. If Freeland wants to earn 20% on any investment, how much should Freeland offer for Garven’s?

Assume that Garvin’s accepts the offer. Freeland goes through the Balance Sheet carefully and determines that the Accounts Receivable are worth about $40,000 because?_____________________), that the Inventory is worth $75,000 and the Fixed Assets are worth $375,000. Everything else is worth its book value. How much would Freeland charge to Goodwill?

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When and how do you write off goodwill? Each year you must test for I_______________.

Another Case: JD’s Tractor Company

Accounts Receivable $400,000 Accounts Payable 50,000Inventory 175,000 Note Payable 450,000Fixed Assets $800,000 Common Stock 300,000 Accum Deprec 200,000 600,000 Retained Earnings 375,000

Your company will buy this company for $3,000,000. You estimate that the receivables are worth about $375,000, the inventory is worth $150,000 (how could that be?) and the fixed assets are worth $500,000. Everything else is worth its book value. How much of the purchase price is Goodwill?

Go back to the previous problem (JD’s Tractor Company). Assume the Note Payable is interest only at 8% with exactly five years left before the principal is due. Current interest rates are 12%. Redo the goodwill calculation using this information.

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Other AssetsIntangible Assets

Other Intangibles:

Organization Costs

Patents, Trademarks and Copyrights

Franchises Research and Development (R&D)???

and a consolidated statement is _________________________________________________.

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Professional tips Dress for the _____________ _____ ____________,

not the ________________ ____ ________. (It is always better to be _______ ____________)

Guys remember the __________. Ladies remember the ______________.

One ___________ per ______ and one _________ per _______. (Earrings should be ______________________________________).

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How you dress and carry yourself accounts for ____% of others assessment of you!

Module 7 Homework

Problem 1 Consider Dezie’s Company

Accounts Receivables $300,000 Accounts Payable 150,000Inventory 200,000 Note Payable 400,000Fixed Assets $900,000 Owners’ Equity Accum Deprec 100,000 800,000 Common Stock 200,000

Retained Earnings 350,000

Hayley’s Company will buy this company (Dezie’s) for $1,000,000. Hayley estimates that the Accounts Receivables are worth $290,000, the Inventory is worth $220,000 and the Fixed Assets are worth $750,000. The Note Payable is interest only at 10% with exactly ten years left before the principle is due. Current interest rates are 8%. Everything else is worth its book value. How much is the charge to goodwill on Hayley’s books?

Problem 2

Consider the case:

Below is financial information from John’s Company

Accounts Receivables $100,000 Accounts Payable 50,000Inventory 200,000 Note Payable 500,000Fixed Assets $900,000 Owners’ Equity Accum Deprec 100,000 800,000 Common Stock 200,000

Retained Earnings 350,000

Debbie’s Company will buy John’s Company for $1,500,000. You estimate that the Inventory is worth $175,000 and the Fixed Assets are worth $700,000. The Note Payable is interest only at 8% with exactly ten years left before the principal is due. Current interest rates are 10%. Everything else is worth its book value. How much does Debbie charge to Goodwill when she records the purchase of John’s?

Problem 3

On January 1, Joey, Inc. buys equipment for $10,000. Terms are 10% down the rest in 3 equal annual payments which include interest at 12%. The payments start December 31. Prepare an amortization schedule.

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Problem 4

Baker Company needs to decide whether to buy or lease office equipment. Baker can buy the office equipment for $250,000 today, which would require that they borrow the funds from the bank. The bank will charge them 8% and require equal monthly payments over 4 years. They also have the option of leasing the office equipment for either 3 years or 5 years. If they choose to lease for 3 years, they will have to put $10,000 down today and make monthly lease payments of $7,500 and they can purchase the office equipment after the last payment for $5,000. If they opt for the 5-year lease, they need to put $6,000 down today and make monthly payments of $5,000 and they can purchase the office equipment after the last payment for $3,000. Which option is best? Explain with numerical analysis.

Problem 5

Sally sold $300,000 worth of stuff last year. Her beginning balance in Accounts Receivable was $200,000 and her beginning credit balance in Allowance for Doubtful Accounts was $6,000. During the year she collected $280,000 on her receivables, and wrote off $9,000. She estimates that 3% of her receivables at any one time will not be collectable.How much is her charge to Bad Debt Expense?

Problem 6

What is Sally’s average collection period?

Problem 7

At December 31, 2013 Makenna’s balance in Accounts Receivable was $200,000 and the balance in Allowance for Doubtful Accounts was $4,000. During 2014 she had credit sales of $1,000,000. She collected $850,000 on her accounts receivable during 2014. She wrote off $3,000 of accounts receivable during 2014. Makenna estimates that 2% of her receivables will never be collected. How much would the charge to Bad Debt Expense be for 2014. Show how this information will appear on the financial statements and calculate the accounts receivable turn and the average collection period.

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Module 8Differential InterestSam will sell you a Bopper for $8,000. No money down and 5% per year for five years. At the end of the fifth year, you send him both that year’s interest and the $8,000. You send him the 5% each year. How much are you really paying for the Bopper? (The bank would charge you 10% interest for a loan of this type).

Kirch’s 2nd Law of the Universe:

T___________________________________________________

and it___________________________________________________!

Amortize it. Ending or Unpaid

Applied to Principal Periods Payments Interest 10% Principal Balance

BB

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

What if the Sam deal had been for five equal payments that included interest at 5%? Current rate for similar loans is 10%

Amortize it. Ending or Unpaid

Applied to Principal Periods Payments Interest 10% Principal Balance

BB

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

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124What a deal!! Buddy will sell you an airplane for $250,000. $50,000 down and the rest in five equal easy payments which include interest at 5%. A realistic interest rate would be 10%. How much are you really paying? Record the purchase and prepare the amortization schedule. (How do you handle the down payment ____________________________________)

Buddy wants to sell you a car. $20,000, no money down and you pay interest of only 4% for one year. At the end of the year along with your 4% interest, you pay Buddy $20,000 for the car. You think this is a heck of a deal because if you borrowed the money from a bank it would cost you 12%. What a deal? Or,.. how much are you really paying for the car? And Sam has offered you the same car for $18,000 cash - what to do, what to do............

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126Nick also wants to sell you a thing-a-ma-jig for $100,000! He tells you that you can pay in three equal annual payments which start in one year and include interest at 5%. You have seen the same item on sale for $85,000. If you bought the item for $85,000, you would have to borrow the money from the bank at 12%. Which is the better deal?

Buddy will sell you some carpet. $20,000. No money down and only 1% interest per year for two years. (You send him the 1% at the end of each year). At the end of the 2nd year, you send him the $20,000 along with the interest. If you borrowed from the bank you would have to pay 12%- a heck of a deal... or is it? (How much are you really paying for the carpet?)

You want to buy a motorcycle from JD. The cost is $20,000, $2,000 down and the rest in three equal annual payment beginning one year from today. Interest is included in the payments at 10%. How much are the payments? Amortize the loan.

Professional Tips

#1 The Effective Leader is D________________ without being D____________________.

(The latter is a sign of weakness)

#2 The Effective leaders makes s__________________, does not generally ask q____________.

And seldom ap_______________ as this is perceived as weakness.

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Module 8 HomeworkProblem 1Colton wants to sell you a Bubble Guppie $89,000! He tells you that you can pay in three equal annual payments which start in one year and include interest at 5%. You have seen the same item on sale for $79,000. If you bought the item for $79,000, you would have to borrow the money from the bank at 8%. Which is the better deal?

Problem 2 Ryan will sell you a Thing for $30,000. No money down and only 1% interest per year for two years. (You send him the 1% at the end of each year). At the end of the 2nd year, you send him the $30,000 along with the interest. If you borrowed from the bank you would have to pay 6%- a heck of a deal... or is it? (How much are you really paying for the Thing?)

Problem 3What if the original Sally note (around page 59) had called for seven equal payments including interest at 12% and now has four more years left to run. How much would you be willing to pay Sally if you wanted to earn

A) 8%? Amortize it.B) 14%? Amortize it.

Problem 4Doozer wants to sell you a note with a face value of $1,000,000. The face rate on the note is 10% and is payable in 4 equal payments which include interest at 10%. The note has four years left to run and is seasoned.

A. How much would you pay for the note to earn 12%? Amortize it.

B. How much would you pay for the note to earn 8%? Amortize it.

Problem 5You want to buy a motorcycle from JD. The cost is $20,000, $2,000 down and the rest in three equal annual payment beginning one year from today. Interest is included in the payments at 10%. How much are the payments? Amortize the loan.

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Surfeit Module 9 Our most important thoughts areHubris those that contradict our emotions. cornucopia Valarie

BondsWhat is a bond?

The bond agreement is full of c________________.

The coupon is

Bonds can have S______________. (Convertibility, security, extra covenants)

On January 1, 2014, Lucky Company of Las Vegas, Nevada, issues $100,000 of 8% bonds for par. The bonds pay interest annually and mature in three years. Interest is to be paid on December 31 of each year. (First interest is to be paid 12/31/14)

How much does Lucky receive?

On January 1, 2014, Lucky Company of Las Vegas, Nevada, issues $100,000 of 8% bonds. At the time of the issue, interest rates had risen to 10%. The bonds pay interest annually and mature in three years. Interest is to be paid on December 31 of each year. (First interest is to be paid 12/31/14)

How much does Lucky receive?

Bonds issued for less than the face are said to be issued at d__________.

Amortize the bond

Show how the Bond Accounts appear on the Balance Sheet for each year.

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132What if the current interest rate was 6%?

(Calculate issuance amount and amortize the bond)

Bonds sold for an amount higher than the face are said to sell at a p________________.

Show how the Bond Accounts will appear on the Balance Sheet for each year.

What if the original Lucky note called for equal payments- everything else is the same.

How much would you pay to earn 8%

Amortize it

How much would you pay to earn 6%?

Amortize it

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134Still lucky equal payments, How much would you pay to earn 6%

Amortize it

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136A Zero Coupon bond is

Also called a D________ D_____________ B________

Why issue/buy?

Clarence Co. issues a $100,000 zero on 12/31/14, interest rate 10% per annum, bond is due in three years. How much do they get? Amortize it

How will the bonds appear on the Balance Sheet each year?

Professional Tips:

#1 In negotiating, go B_______ then S_________.

#2 When you are late, just say ___ s_______, lets get t___ w____.

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Module 9 Homework Problems

Problem 1Darby Company issues a $100,000 on 12/31/14, 15%, bond that matures in 5 years. Interest is paid on December 31st of each year. What would be the amount they receive given the following interest rates:

10% 15% 20%

Problem 2

Still Darby Company - How about an 8% zero issued on 12/31/14 due in 3 years, face amount of $100,000. How much would you pay? Amortize it.

Problem 3

Ryan Company issues a $100,000 zero coupon bond on 12/31/14. The face interest rate is 10% and the bond that matures in 4 years. How much would you pay to yield*:

8% 10% 14%

Amortize all three bonds

*is the face interest rate relevant?

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Obdurate The Purpose of the CourseEveryone has a strategy until they get punched in the mouth.

Mike Tyson

Your education is for ………………………………

Back to what makes a leader

What is your real style????

A Leader

Takes r________________

And f________U__

Is D___________________

Always s______________ even when you are not

Makes st___________________

Limited q_________________

Talks straight forward, not generally

Now….. signaling

When you are talking, sitting working………………………..

Not something you can turn off and on

October, Seattle and Dan Wilson

So always be the h______________ w__________ P_________ I__ the R_______

Can you change??? The past is o________________ but you can.

Do you judge others on their actions and judge yourself on your intentions?

Module 10 Courage is not the absence of fear,taciturn Owners’ Equity1 but rather the judgment that

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Tuesday, October 17, 1995 5:08, KingdomeAttendance: 58,489, Time of Game: 2:54

Indians4 at Mariners

0W: Dennis Martinez (1-1)L: Randy Johnson (2-1)

1 2 3 4 5 6 7 8 9 R H E

- - - - - - - - - - - -

Indians 0 0 0 0 1 0 0 3 0 4 8 0

Mariners 0 0 0 0 0 0 0 0 0 0 4 1

Top of the 8th, Indians Batting, Ahead 1-0, Mariners' Randy Johnson facing 9-1-2Felix Fermin replaces Luis Sojo playing SS batting 8th

t8 1-0 0 --- 1,(0-0) CLE T. Pena R. Johnson 7% 80% Double to RF (Line Drive to Deep CF-RF)Ruben Amaro pinch runs for Tony Pena (C) batting 9th

t8 1-0 0 -2- 2,(0-1) CLE K. Lofton R. Johnson 6% 86% Single to P (Bunt to P's Right); Amaro to 3Bt8 1-0 0 1-3 1,(0-0) CLE O. Vizquel R. Johnson 1% 87% Lofton Steals 2Bt8 1-0 0 -23 3,(2-0) RR CLE O. Vizquel R. Johnson 5% 92% Passed Ball; Amaro Scores; Lofton Scorest8 3-0 0 --- 6,(3-2) O CLE O. Vizquel R. Johnson -1% 91% Lineout: LF (Deep LF)t8 3-0 1 --- 4,(2-1) R CLE C. Baerga R. Johnson 4% 95% Home Run (Fly Ball)

Norm Charlton replaces Randy Johnson pitchingt8 4-0 1 --- 6,(2-2) O CLE A. Belle N. Charlton -0% 95% Popfly: 2B (Deep SS-2B)t8 4-0 2 --- 7,(3-2) O CLE E. Murray N. Charlton -0% 95% Popfly: 2B (Deep 2B-1B)

3 runs, 3 hits, 0 errors, 0 LOB. Indians 4, Mariners 0.

142 something is more important the fear. From the Princess Diaries

Types of Business Organizations

Advantages of the _____________________________________

Your own corporation

Don’t ever give ___________________ ___________________

Always have a __________/ ______________ before you __________________!!!

How about disputes?

Partnership always have a _______________ _______________ before you start!!

Corporation always _____________________ itself back.

Common stock

Par is

Issuance of Common Stock

A Company issue 10,000 shares of $1 par value stock for $10 per share.

On January 1, Annabella Co. issued 50,000 shares of $5 par value stock for $20 per share.

Good luck comes to the saucy and the bold. (Welsh Proverb)

Dividends

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144Cash

Annabella Co., declares a $.10 per share dividend on September 1, payable on October 1 to shareholders of record September 15

|---------------------------------------------------------|-------------------------------------------------------|

date of _____________

date of _____________

date of _____________

Stock Dividends are

So why issue?

The purpose of management is…………………………………………

Horse puckey!!!

The real purpose of managers is more likely to be

Signaling and information theories

Finishing the Owners’ Equity Section

Treasury stock is

Treasury Stock goes __________________________________

Module 11

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146

Refreshing on Present Value, Payments and Amortization

You have found a camel you really just must have! Which is the best deal? Why? Amortize all the deals.

Deal #1. Cost is $20,000, four equal payments which include interest at 4%. Payments begin one year from today. (Realistic rate is 12% for all the deals)

Deal #2 The camel costs $25,000, BUT you pay interest only at 4% for six years. With the last interest payment, you also pay the $25,000.

Deal #3 The camel is $30,000, NO INTEREST for five years and then you pay the 30,000.

Deal #4 $17,000 cash.

Certainties are arrived at only on foot.

You have seen an ad for a used Mercedes in the Athens Messenger. The car is for sale for $40,000. You believe you could make a buck by renting the car out. You figure you could rent the car to the semi-rich on a daily basis for three years. You think you could rent the car for $100 per day for the first

147

148year and $80 per day the second year and $60 per day for the third year. You expect that the car will be rented out about 70% of the time for each year. At the end of the third year, you figure you can sell the car for $20,000. You estimate that the repairs and maintenance on the car will be about $1,000 for the first year, $2,000 the second year and $3,000 the third year. Licenses and fees will run $2,000 per year for all three years. You will pay a rental company 10% of the gross rents you receive each year to take care of all the paper work and the renting of the car to the students. How much can you pay for the car today and make 20% on your investment?

149

Mercedes

Year 1 Year 2 Year 3

Rents 25,550

Cash Expenditures:

Repairs & Maintenance

Licenses & Fees

Rental Company Fees

Total Cash Expenditures

Net Cash Flow

150

The IRR What rate of return are you earning?

Use excel for instance =IRR(c15:f15)

The critical assumption

Professional Tip #1 In negotiating, use s__________ a__________________.

Professional Tip #2 Beware of S__________________ people-you cannot change them!!!

And speaking of this…. Never try to I________________ someone. There are enough other people in the world!

It never works and trying injures your s__________.

And the leaders does not seek a_____________________

struthious Module 12 Lazy people aresycophant Financial Statement Analysis always anxious

151

152pugnacious to be doing something.

Marquis De Vauvenargues

Hermi’s Bumbles, Inc.

Hermi’s Bumbles is a company that has been in business for three years. The company is a wholesaler of Bumbles. Bumbles are bulbs which grow into beautiful, sweet smelling plant-trees. They are a cross between a hyacinth and a buckeye. They are refrigerated and must be planted within one year of when they are harvested. Hermi buys the bumbles from a grower when they are one month old. Hermi has one location in Columbus, Ohio. It has three refrigerated trucks which deliver the Bumbles throughout Ohio. The financial statements on the previous page summarize Hermi’s operations for its first three years.

Hermi began operations with individuals investing $120,000 for 12,000 shares of common stock and a small business loan of $200,000 from the bank. The loan carries interest at 12%. Hermi must pay the interest plus $10,000 on the principal on January 1 of each year. Hermi sells using terms of 2/10 n/30. The latest sale of stock between individuals was yesterday at $85.00 per share. There are more shares available from the other investors for this amount. The tax rate is 30%.

Analyzing Hermi’s

Current Ratio

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154

Which tells us?

Calculate the Current Ratio for 2012 and 2013

The Quick or “Acid Test” Ratio

“Occam’s Razor”

Calculate the Accounts Receivable Turn for 2012 and 2013

And the average collection period for the two years

Calculate the Inventory Turn

Calculate the Average Days Sales In Inventory

Calculate Book Value Per Share

Return on Assets ROA

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156

Which tells us?

Return on Equity ROE

Which tells us?

Leverage What causes the difference between the ROA and the ROE??

Debt Ratio

Debt to Equity

Which tells us?

Use of Leverage

You have decided to open a hot dog stand at the corner of Court and Union. The following is your opening balance sheet. You own the only 50,000 shares of stock outstanding for your company. You

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158sell the dogs for $2.00 each. You pay your worker a fixed salary of $20,000 plus $.10 for each dog she sells.

AssetsCash 5,000Inventory 10,000Cart 35,000 Total 50,000

Liabilities -0-

Owners’ EquityCommon Stock 50,000Retained Earnings -0- Total 50,000

Expand using Expand using Stock Loan

For the First Year Sales 60,000 Cost of Sales 12,000 Gross Margin 48,000 Operating Expenses Wages 23,000 Other 10,000 Total Operating Expenses 33,000 Operating Income 15,000

Net Income Before Taxes ______ Tax Expense Net Income .

EPS .

You paid all your income out as a dividend. You want to expand to Oxford. You will need to invest a total of $60,000. You expect your sales and cogs to double with the new operation. Your wage expense for Oxford will be based the same as it is in Athens. Your other expenses will increase to $12,000. Your tax rate is 30%. You can either sell 60,000 shares of stock for $1 each or you can borrow the money from the bank. The bank will charge you 8% interest on the loan. Prepare the income statement for next year if you do the deal under each of the alternatives. Assume the deal is done on January 1st.

Window Dressing

Cash $300,000 Accounts Payable $200,000 Accounts Rec 100,000 Other payables 200,000

Inventory 100,000 Total Current Assets 500,000 Total Current Liabilities 400,000

Current Ratio is

Now pay off the Accounts Payable

The Current Ratio is

The probability of someone watching you is proportional

to the stupidity of your action.

Professional tip # 1 In negotiations use time ____ a t____________.

# 2 Create an issue……Then you can t_______ it a_________.

(no winners or losers here!!!) Module 12 Homework

Problem 1

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160Calculate all the ratios you have learned for both Kevin’s Kennels and Molly’s Muchies (Cash Flow Homework). Compare and contrast the two companies using the ratios you have learned. Use a market price per share of $5 for Kevin’s and $4 per share for Molly’s.

Explanations and Calculations of the Ratios

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162Susanne Freeland

Current Ratio = Working Capital RatioCurrent AssetsCurrent Liabilities

Measure of liquidity – a company has sufficient liquid assets to cover its current obligations.

The higher the ratio the better able a company can meet its current obligations.

Return on Assets = Net Income Ave. Total Assets

Measure of how well a company uses its assets to create profits.

The company wants to create a return that satisfies its shareholders (owners).

Investors use this ratio to evaluate company leadership.

Return on Equity = Net Income Ave. Equity

Measures the success of company’s financing, investing and operating activities.

A company that generates a high return relative to its shareholders equity is considered a sound investment. The original investors will be repaid with the proceeds from business operations.

Debt Ratio = Total Liabilities Total Liabilities + Total Owners’ Equity

= Total Liabilities Total Assets

Debt to Equity Ratio = Total Liabilities Total Owners’ Equity

The more outstanding debt a company has, the more its earnings must go to making the payments on this debt load. This limits the amount of capital available to grow the business or pay dividends to the shareholders.

The more debt a company carries, the more risk is being taken by the creditors as opposed to the shareholders.

Inventory Cost of Goods SoldTurnover Average Inventory

Average Inventory = Inventory @ BOY + Inventory @ EOY/2

Measures the success a company has in converting (turning) its investment in inventory into sales.The number of times a company sells and replaces its inventory during a given period.

Average Days = __ 365_____ Sales in Inventory Inventory Turn

The number of days sales, on average, that a firm carries in inventory.

Acid Test Ratio = Quick RatioCurrent Assets - Inventory

Current Liabilities

A stringent test that indicates whether a company has enough current assets to cover immediate liabilities without selling inventory.

Accounts Receivable Turnover

Sales / Average Net Accounts Receivable

The number of times the accounts receivable are turned over or are collected during the period.

Average Collection Period

365 days per year / Accounts Receivable Turn

The number of days it takes on average to collect an account receivable.

Earnings Per Share

163

164 Net IncomeWeighted Average number of shares of common stock

The dollar amount of earnings that is associated with each share of stock.

Book Value per Share

Assets – Liabilities Number of shares of common stock at the end of the year

The dollar amount of equity that is associated with each share of stock.

Price Earnings Ratio

Market Price per share Earnings per share

This tells you how expensive a share of stock is in relation to its earnings.

A Look At Whether Ford Is Firing On All CylindersOctober 10, 2011  | 13 comments  |  about: F, includes: GM, TMDisclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Shares of US Automaker Ford (F) have fallen nearly 43% from its 52-week high reached at the beginning of this year. With it's new dealsigned with the UAW, the company has essentially started a new era with its workers, but it's too early to tell how it will all work out. With those labor negotiations now in the rear view mirror, I wonder if the company is doing all that it currently can. Let's take a look at some products first, and then we'll take a look at the financials.The problem I see with Ford right now in terms of products is that they are lesser quality for a higher price. I'll use the example of the Ford Fusion (manual) versus the Hyundai (HYMLF.PK)Sonata (manual). If you'd like to do the same comparison, click here. Both manuals are the base models. The MSRP and "comparably equipped pricing" have the Fusion about $200 more with no incentives. The Sonata has an extra 23 horsepower, a lower turning radius, and more interior space and room for occupants. And the gas mileage: Sonata gets 24/35 while the Fusion gets 22/32. And the Sonata's gas tank is a gallon bigger so you can go even further.According to Consumer Reports, the Sonata also has better crash test ratings, better acceleration, better braking, and a better warranty. So I'll sum everything up. The Sonata is a much better car, will cost you less in fuel and maintenance, and is safer. And you can get it for the same price. That's a no brainer to me. For those of you who may question this example, I also observed both of these cars at the New York International Auto Show earlier this year. I was more impressed with the Sonata.That's just one example based on similar cars. I provided that comparison just to show you the one main thing Ford needs to do: build a better quality car at a better price. That may be easier said than done. However, if you look at the competitors page on Yahoo Finance, you will notice that Ford has higher margins than both Toyota (TM) and General Motors (GM). Good for them. They need to keep it going though, and right now, there is a ton of competition. So my main point is that Ford will be a winner if they can control their costs and increase quality. We'll see how this deal with the UAW works out. But for now, why not focus on how Ford has done recently. Here's some selected financial data over the past eight quarters.Selected Financial Data ($B)

3Q 2009

4Q 2009

1Q 2010

2Q 2010

3Q 2010

4Q 2010

1Q 2011

2Q 2011

Revenues

$30,892

$35,449

$31,566

$35,067

$29,893

$32,428

$33,114

$35,527

Gross Profit

$5,716

$5,717

$6,427

$7,239

$5,660

$5,177

$6,338

$6,274

Net Income

$997 $868 $2,085

$2,599

$1,687 $190 $2,55

1$2,398

Current Assets

$62,222

$55,865

$59,456

$53,787

$59,371

$48,875

$51,279

$50,030

Total Assets

$203,106

$194,850

$191,968

$179,750

$177,078

$164,687

$167,391

$168,086

Current Liabilities

$70,360

$61,193

$60,056

$59,674

$61,100

$60,206

$62,076

$62,686

Total $210, $201, $197, $183, $178, $165, $164, $162,

165

166Liabilities 376 365 405 291 818 329 926 736

As you can see, the company has done fairly well, and has reduced the size of its balance sheet quite a bit over the past 2 years. So let's look at some financial metrics, and we'll focus on profitability first.

Profitability

3Q 2009

4Q 2009

1Q 2010

2Q 2010

3Q 2010

4Q 2010

1Q 2011

2Q 2011

Gross Margin

18.50%

16.13%

20.36%

20.64%

18.93%

15.96%

19.14%

17.66%

Operating Margin

2.89%

2.14%

5.32%

7.41%

5.26%

2.50%

7.50%

6.25%

Profit Margin

3.23%

2.45%

6.61%

7.41%

5.64%

0.59%

7.70%

6.75%

Return on Assets

0.49%

0.44%

1.08%

1.40%

0.95%

0.11%

1.54%

1.43%

Gross margins have come down in the year over year numbers, but operating margins have been quite decent despite those declines. Profit margins have also faired fairly well, as well as the return on assets ratio. I excluded the return on equity ratio from this analysis because the company has had a negative shareholder's equity book balance for seven of the past nine quarters, so the numbers look a bit distorted. We'll look at liquidity and coverage next.

Liquidity

3Q 2009

4Q 2009

1Q 2010

2Q 2010

3Q 2010

4Q 2010

1Q 2011

2Q 2011

Current Ratio 0.88 0.91 0.99 0.90 0.97 0.81 0.83 0.80

Quick Ratio 0.79 0.82 0.89 0.80 0.86 0.71 0.71 0.69

Working Capital ($B)

($8.14)

($5.33)

($0.60)

($5.89)

($1.73)

($11.33)

($10.80)

($12.66)

Coverage

3Q 2009

4Q 2009

1Q 2010

2Q 2010

3Q 2010

4Q 2010

1Q 2011

2Q 2011

Debt Ratio

103.58%

103.34%

102.83%

101.97%

100.98%

100.39%

98.53%

96.82%

Cash Debt Coverage

7.44% 7.79% 1.35% 3.39% 5.65% 0.72% 1.51%

3.80%

Both the current and quick ratio have come down from last year's levels, but have stayed fairly even over the past couple of quarters. I don't like how the working capital number has gotten worse, but as I said before, the company has reduced the size of its balance sheet. Also, I'm not as concerned with the short term numbers getting worse, because the long term numbers have gotten better.

The debt ratio, or liabilities to asset ratio, has improved every quarter. Ford has essentially reduced its long term liabilties, shifting some of them to short term liabilities in the process. I like what it is doing here, and I hope it can keep it going. The final check will be some activity ratios.

Activity 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q

2009 2009 2010 2010 2010 2010 2011 2011Receivables Turnover 4.43 4.76 4.35 4.70 3.66 4.12 4.04 3.85

Inventory Turnover 3.83 4.95 4.28 4.50 3.75 4.27 4.02 4.05

Asset Turnover 0.15 0.18 0.16 0.19 0.17 0.19 0.20 0.21

The receivables turnover has declined a little, meaning that Ford's accounts receivable are growing faster than its revenues. It's not a problem yet, but if the number starts moving closer to 3 it might bring up a little concern. The inventory turnover has remained fairly strong, which is a good sign that it is getting its products out there and sold. Their asset turnover has definitely improved, meaning they are doing more with less. I'd like to see this improvement continue.

So, where is Ford going from here? Well, it is projected for 14% revenue growth in 2011 and 7% revenue growth in 2012. Unfortunately, it doesn't look like it will be translating that growth to the bottom line. EPS estimates call for only 1% growth this year, and about an 8% decline next year. Like I've said before, it needs to control its costs. At a forward P/E of 6, it is trading at a premium to GM's forward P/E of 5. Ford has a slight advantage in revenue growth expectations, while GM has the advantage in EPS growth. And right now, the analysts like GM a little better, but say Ford has more upside.

So what's my overall opinion now? I would rate Ford a short term hold with a medium to long term buy. Ford just reached an agreement with the UAW, and it remains to be seen how that will work out. Also, despite gas prices being down about 25 cents in the past month, they are still up 60 cents year over year. Ford has been pushing its more fuel efficient cars lately, but it still trails some of its international counterparts in fuel economy.

I like the balance sheet work it has done, and I like the profitability, but it needs to continue. But right now, I'm not sold on the US economy and the unemployment picture. In my opinion, that will probably pressure the shares for the next couple of months. However, I think this is a great stock for a period of economic improvement. Remember, it did go from under $2 to $19 after we climbed out of the recession. For now, it needs to get those long term liabilities under control, keep costs in check, and improve quality.

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Module 13 Valuing

Part IThe P/E Ratio

The inverse of the P/E actually tells us……………………….

And our formula for the return on an investment is:

So differences in P/E ratios implies……………………………

Operations for profit should be based not on optimism but on arithmetic.

Benjamin Graham

Kirch’s First Law of the Universe

The financial worth ______________________________________

________________________________________________________

Now we go back to the apartment building

Once upon a time the following add appeared in the Athens newspaper-

For Sale: Apartment Building 30 UnitsAverage Rent for 2014 is expected to be $600 per month per unit2 years oldPrice __________

Upon investigation you found that it would require little or no work on your part. There was a rental agency which would keep the books, rent apartments, do evictions and other administrative tasks for 10% of the rent. Your investigation showed that the apartments stayed about 95% occupied and that occupancy rate is likely to continue. Additionally, the rental agency told you that you can expect rents to increase about 5% per year after 2014 year for the following three years (2015, 2016, and 2017) because the building is new. The repairs and maintenance costs are about $800 per month for 2014, 2015, 2016, and 2017. You want to earn at least 20% on your investment. You figure you will hold on to the apartment for four years and then sell it for $600,000 (on Dec 31, 2017). All other cash expenses run $1,000 per month and will rise at 5% per year after 2014. Assume it is Jan 1, 2014- what is the price you would pay for the apartment? Ignore taxes.

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Apartment2014 2015 2016 2017

Rents

Cash Expenditures: Rental Company Fees Repairs & Maintenance Other Cash ExpensesTotal Cash Expenditures

Net Cash Flow

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Module 14Risk and Terminal Value

The concept of terminal valueAnd if we expected the investment to last forever, how would we value it?

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Apartment2014 2015 2016 2017

Rents 30(95%)(600)(12) 205,200 194,400 + 194,400(5%) 215,460 204,120 + 204,120(5%) 226,233 214,326 + 214,326(5%) 237,545

Cash Expenditures: Rental Company Fees 20,520 21,546 22,623 23,754 Repairs & Maintenance 9,600 9,600 9,600 9,600 Other Cash Expenses 12,000 12,600 13,230 13,892Total Cash Expenditures 42,120 43,746 45,453 47,246

Net Cash Flow 163,080 171,714 180,780 190,299

PV of Net Cash Flows @ 20% 135,900 119,246 104,618 91,772 = 451,536

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Can you actually beat the markets?First As to Market Efficiency (Shiller vs. Fama)

George Soros 29% for 37 yearsEddie Lampert 29% for 18 yearsPeter lynch 29% for 18 YearsDavid Tepper 27% for 15 yearsWarren Buffett 21% for 40 years

Risk and ReturnI would like to take time to describe another aspect of investing-

risk versus return.

Say you have the option of putting your money in a federally insured bank earning less than 1%. This is our starting point and carries no risk. From this ultra-safe extreme we move up the investment spectrum. At the other end of the spectrum,

Lower Level of Risk Higher

Low

er

R

etur

n

High

er

Federally US Insured Bank wins World Cup

Systemic risk unsystematic (idiosyncratic) risk (market) (individual stock or investment risk)

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Variability

Sharpe Ratio

CapM

the Capital Asset Pricing Model (CAPM).

where:

 is the expected return on the capital asset

 is the risk-free rate of interest such as interest arising from government bonds

 (the beta) is the sensitivity of the expected excess asset returns to the expected excess market returns, or

also  ,

 is the expected return of the market

 is sometimes known as the market premium (the difference between the expected market rate of return and the risk-free rate of return).

 is also known as the risk premium

Restated, in terms of risk premium, we find that:

which states that the individual risk premium equals the market premium times β.

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TimingIt is far from certain that the typical investor should regularly hold off buying until low market levels appear, because this may involve a long wait, very likely the loss of income, and the possible missing of investment opportunities. On the whole it may be better for the investor to do his stock buying whenever he has money to put in stocks, except when the general market level is much higher than can be justified by well-established standards of value. If he wants to be shrewd he can look for the ever-present bargain opportunities in individual securities. (Benjamin Graham)

If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume. (Benjamin Graham)

Professional Tip Find the one with power by w______________ the e________!

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Module 15 Valuation- Part IIYou and Your Money

Stocks or Mutual Funds??

Remember 5% do!!!

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Mutual Funds

Load vs. No-Load

Do expense ratios matter?

Manager tenure

Finding a Mutual Fund using a screener

Professional Tip

When You apologize, do not t_________________ the ______________________! The best way to get in the last word is to say “I’m sorry”!!

Module 16Managerial Part I

temerity Concentration comes out of a combination of confidence

and hunger. (Arnold Palmer)

We have been studying Financial Accounting

Which deals with ___________________________________________

Managerial accounting is __________________________________________________

Cost BehaviorWe sell Tasteys. They cost $90 to make and sell for $ 300 each. Our only other expenses are the rent of $400 per month and a $10 per unit sales commission we pay to the salespeople.

Fixed Costs are

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Variable Costs are

The relevant range

Calculating Break-even

Target Profit

Break-even using Contribution Margin %

Now go back to the Hot Dog Stand

You have decided to open a hot dog stand at the corner of Court and Union. The following is your opening balance sheet. You own the only 50,000 shares of stock outstanding for your company. You sell the dogs for $2.00 each. You pay your worker a fixed salary of $20,000 plus $.10 for each dog she sells. (Dogs cost $.40 each- how do I know that?)

AssetsCash 5,000Inventory 10,000Cart 35,000 Total 50,000

Liabilities -0-

Owners’ EquityCommon Stock 50,000Retained Earnings -0- Total 50,000

Income Statement Using For the First Year Contribution Margin Format Sales 60,000 Sales Cost of Sales 12,000 Gross Margin 48,000 Operating Expenses Wages 23,000 Other 10,000 Total Operating Expenses 33,000 Operating Income 15,000

How many hot dogs do you need to sell to break-even Per Year

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Per Month Per Week Per Day Per Hour

Gracie Company sells Dodds. The following is an income statement for a recent month.

Sales $250,000 Cost of goods sold 150,000 Gross Margin 100,000 Operating Expenses Salaries and commissions $42,000 Rent 18,000 Utilities 7,000 Other 3,000 70,000

Net Income $30,000

Gracie sells one product, Dodds at $20 each. Cost of goods sold is variable. A 10% sales commission, included in salaries and commissions, is the only other variable cost. Gracie tells you that the income statement is not helpful, for she cannot determine such things as the break-even point.

Redo the statement using the contribution margin format.

What is the breakeven in units and dollars

Acme Company sells anvils and the following is per anvil

Unit Selling Price $20Variable Costs 12

Total fixed costs $ 400,000

Total volume 100,000 units

Prepare an income statement using the contribution margin format

What is Acme’s Break Even point in units

In $

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Using the contribution margin % to calculate Break-even in dollars

Now assume that Acme wants to make $1,000,000 per year. How many anvils does the company need to sell to accomplish this (in units and dollars).

The CFO of Laurel Company provides the following per-unit analysis, based on a volume of 100,000 units

Selling Price $30Variable Costs $12

Fixed Costs 9 Total Costs 21 Profit per unit $ 9

Answer each of the following questions independent of your answers to the other questions

1) What total profit does Laurel expect to earn?

2) What would be the total profit at 110,000 units?

3) What is the break-even point in units?

4) Laurel’s managers think they can increase volume to 120,000 units by spending an additional $ 60,000 on salespeople. What total profit would they earn if they make this move?

Ryan, Inc. manufactures lamps and expects to sell 350,000 units in 2015 at $21 per unit. Planned per- unit manufacturing costs at that level of production are as follows:

Variable manufacturing costs $9Fixed manufacturing costs $5

Early in 2015, a new customer approaches Ryan offering to buy 15,000 lamps at $11 each. Ryan can produce the additional units with no change in fixed manufacturing costs or per-unit variable costs. The only additional fixed cost for this order is for packing and shipping, estimate at $3,800, Accept?

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Professional tip In negotiating, go ___________ then ________________.

` Module 16 Homework Problem 1. Salmon Company makes Things. Things sell for $30 each and cost $10 each to make. Fixed costs are estimated to be $1,500,000 next year.

What is the breakeven point for Salmon based on the above information

How many Things must Salmon sell to make $1,200,000 next year?

Problem 2 Billy Bob’s has given you the following income statement for June 2013.

Sales $ 500,000Cost of goods sold 300,000

Gross margin 200,000

Operating expenses: Salaries and commissions $ 80,000 Utilities 20,000 Rent 22,000

Other 18,000 Total operating expenses 140,000 Income 60,000

Billy Bob sells one product, a running shoe for $100 per pair. A 10% sales commission, included in Salaries and commissions is the only other variable cost. The manager tells you that this financial statement is not very helpful to her.

Redo the income statement using the contribution margin format.

For Billy Bob’s determine the break-even in sales dollars and units

Module 17struthious Managerial Lazy people are always anxious sycophant Part 2 to be doing something. pugnacious Marquis De Vauvenargues

Susie is the new manager of Acme Clothing. The controller has given her the following information based on expected operations for the coming year.

Shirts Pants PulloversSelling Price $ 20 $ 30 $ 60Variable Costs 10 12 15Contribution Margin 10 18 45

Sales mix percentage, in dollar sales 50% 30% 20%

Total fixed costs are $1,189,000

What is the weighted average contribution margin?

What is the break-even in sales?

At the break-even point, how many of each item will be sold?

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The CEO wants a profit of $800,000. Determine the sales needed to achieve this goal?

The sales manager believes she can increase the sales of any of the three products by 20% by spending $25,000 in advertising on that product. Which product should she choose for the promotion?

Cleveland Cliffs produces three models of gel pens, regular, silver and gold. Price and costs of the three are as follows

Regular Silver GoldSelling Price $ 20 $ 30 $60Variable Costs 12 15 21

Monthly fixed costs are $600,000

Suppose the sales mix is Regular 50%, Silver 30% and Gold 20% What is the breakeven in sales dollars?

How much must the sales volume be to make $300,000 per month?

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Freeland Company makes three products, Alpha, Beta, and Gamma

Below are the income statement for a recent month:

May Sales $160,000

Costs 120,000 Net Income 40,000

Selling price and cost data by product are as follows.Alpha Beta Gamma

Selling Price $40 $20 $10Variable costs 16 6 6Contribution margin 24 14 4

Sales mix (in dollars) 40% 40% 20%

1) Determine the break-even point in dollars*

2) Which product is most profitable per unit sold?

3) Which product is most profitable per dollar of sales?

4) What sales dollars are needed to earn $70,000 per month, and how many units of each product will be sold at that sales level if the usual mix is maintained?

5) The sales manager believes that he could increase sales of Gamma by 10,000 units per month if more attention were devoted to is and less to Beta. Sales of Beta would fall by 2,000 units per month. What change in income would occur if this action were taken?

6) June sales were $200,000 with a mix of 40% Alpha, 30% Beta and 30% Gamma. What was the income?

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7) Suppose the company is currently selling 12,000 units of Gamma. Because this is the least profitable product, management believes it should be dropped from the mix. If Gamma is dropped, it is expected that sales of Beta would remain the same and those of Alpha would rise. By how much would sales of Alpha have to rise to maintain the same total income?

(Did you figure out that the fixed costs were $56,000? If yes, you are really good. If no, use the $56,000 as fixed costs anyway).

Professional Tip #1 The urge to talk is the urge to r______________ c_____________.

#2 The second rule of the negotiator: Never get down to _______ _________. If necessary, ____________ __________!!

Module 17 HomeworkProblem 1. Jenkins company sells three different laundry baskets. The controller has prepared the following estimates for next year

A B CSelling Price $12 $20 $30Variable Costs 4 5 8

Estimated sales mix 60% 30% 10%

Estimated Fixed Costs $1,590,000

What is the weighted average contribution margin?

How many of each of the laundry baskets does Jenkins have to sell for the company to make $1,590,000?

Problem 2

Aisha Exterminating Company performs a wide variety of pest control services. Aisha, the owner, has been examining the following forecasts for 2013.

Type of Service Expected $ volume Contribution Margin %

Termites $480,000 60% Lawn Pests 360,000 50 Interior Pests 360,000 70

1) What is the weighted average contribution margin?

2) If Fixed Costs are $560,000, what profit does Aisha expect?

3) The actual sales mix turned out to be 20% termites, 30% lawn pests and 50% interior pests. Total actual sales were $1,200,000 and total fixed costs were $560,000. Determine the actual weighted-average contribution margin and the net income.

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Module 18Managerial Part 3

Cost Allocation

Kreutzer’s Klutz Company sells backpacks, tote-bags and book-bags. The cost structure is as follows:

Backpacks Tote-bags Book-bagsSelling Price $40 $32 $40Variable Costs 24 8 20

Sales Mix 60% 10% 30%

Additionally, the company spends $4,000 per year advertising Backpacks, $1,000 per year advertising Tote-bags, and $3,000 to advertise book-bags. All other administrative costs equal $112,000. Sales are $400,000.

Prepare the contribution margin format income statement

Backpacks Tote-bags Book-bags Total

Sales

Variable Costs

Contribution Margin

Fixed Costs Direct CommonTotal

Net Income

Direct Fixed Costs are

Common Costs are

What is the breakeven?

Module 19 That was talking, this is doing.

Doing is different than talking. Curly Sue

Capital Budgeting Kreutzer Industries is introducing a new product expected to sell for $14 and to have variable costs of $7. The managers expect to sell 20,000 per year for 10 years. Making the product requires machinery that costs $400,000. Will last for 10 years, and will increase annual fixed operating costs by $30,000. The machinery will be depreciated using the straight-line method. The tax rate is 30% and the required return is 12%Evaluate the feasibility of the project.

What is the expected increase in after-tax cash flows for the project?

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The Net Present Value

Payback

IRR

Using Excel

Colton Company makes high-quality workshoes. Its managers believe the company can increase productivity by acquiring some new machinery but are unsure whether it would be profitable. The machinery costs $ 1,000,000, has a five-year life with no salvage value, and should save about $ 400,000 in operating costs annually. The company uses straight-line depreciation and has a 40% income tax rate and a 12% cost of capital.

What is the expected increase in after-tax cash flows for the project?

Calculate the NPV of the project

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What is the Payback?

What is the IRR?

JD Company has the opportunity to introduce a new radio with the following expected results.Annual unit sales volume 300,000 Selling price per unit $60Annual cash fixed costs $ 4,200,000 Variable cost per unit $35

The product requires equipment costing $8,000,000 and having a four-year life with no salvage value. The company has a 12% hurdle rate. The tax rate is 40% and the company uses straight line depreciation.

What is the expected increase in after-tax cash flows for the project?

What is the NPV of the project?

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What is the Payback?

What is the IRR of the project?

Stowe Company has the following three investment opportunities.

A B CCost $70,000 $70,000 $70,000

Cash inflow by year

Year 1 $35,000 $35,000 $4,000Year 2 35,000 10,000 8,000Year 3 - 45,000 10,000Year 4 5,000 20,000 98,000Total 75,000 110,000 120,000

Rank the investment opportunities in order of desirability using (a) payback, (b) NPV and, (c) irr.For the NPV, use a hurdle rate of 16%.

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Gabriel company currently makes 200,000 large strawberry jars per year at a variable cost of $9.75. Equipment is available for $500,000 that will reduce the variable cost to $7.50 while increase cash fixed costs by $200,000. The equipment will have not salvage value at the end of its four-year life and will be depreciated using the straight-line method. Gabriel has a 30% tax rate and a 12% hurdle rate. Do it????

Debbie Stickle owns a driving range. She present pays several high school students $.8 a bucket to pick up the golf balls that his customers hit. A salesperson has shown her a machine that will pick up balls at an a cash cost of $6,600 plus $.05 per bucket. The machine costs $10,000 and has a five year life. Debbie would us straight line depreciation. Volume for the driving range is 21,000 buckets per year. Debbie’s combined state and federal tax rate is 30%. She believes the appropriate discount rate is 16%.

Do it? Other factors??

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Module 20Budgeting Part 1

Use the following data for Doozer Company, prepare a budgeted income statement and a purchases budget in units and dollars for January 2015.

Budgeted sales for January 5,000 units at $20 $100,000Budgeted sales for February 6,000 units at $20 $120,000

Cost Data: Purchase price of product $5 per unit Commission to salespeople 10% of sales Depreciation $2,000 per month Other operating expenses $40,000 per month plus 5% of sales

Doozer’s policy is to maintain inventory at 150% of the coming month’s sales requirements, Inventory at December 31, 2014, is $30,000 (6,000 units at $5), which is less than budgeted.

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The following data relate to the operations of Jarrett Company, a retail store.

January $200,000February 240,000March 150,000

April 160,000

Cost of sales is 40% of sales. Other variable costs are 30% of salesInventory is maintained at twice the budgeted sales requirements for the following month.

The beginning inventory is $160,000.Fixed costs are $50,000 per month.

a) Prepare a budgeted income statement of the first three months of 2015.b) Prepare a purchase budget, by month for the first quarter.

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Banana City is a wholesaler of bananas and nuts. Mr. George Jones, the company’s president, has asked for your assistance in preparing budgets for fiscal year 2015, which begins on September 1, 2015. He has gathered the following information for your use.

a) Sales are expected to be $8,800,000 for the year, of which bananas are expected to be 50%, nuts, 50%.

b) Sales are somewhat seasonal, Banana sales are expected to be 770,000 in November, with the rest spread evenly over the remaining eleven months. Sales of nuts are expected to be $400,000 per month except in October and May, when they are expected to be $350,000 per month.

c) Cost of sales, the only variable cost, is 40% of both products.d) Inventory of bananas is generally kept equal to a one-month supply. Inventory of nuts is usually

held at a two-month supply.e) Income taxes are 30% of income before taxesf) Annual fixed costs, all incurred evenly throughout the year, are expected to be as follows:

Rent $240,000 Depreciation $ 360,000Insurance $120,000 Interest $ 60,000Wages and salaries $1,200,000 Other fixed costs $1,560,000

g) Inventories expected at August 31, 2015, are bananas. $143,000 and nuts, $275,000.h) The company expects to sell some land that it purchased several years ago for $80,000. The

sale is expected to occur in October at a price of $60,000.

Required1) Prepare a budgeted income statement for the fiscal year ending August 31, 2016.2) Prepare a budgeted income statement for each month of the first quarter of the fiscal year and for

the quarter as a whole.3) Prepare a purchases budget by product for each month of the first quarter of the fiscal year and

for the quarter as a whole.

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Module 21Budgeting Part 2

Still working on Doozer Co. (budgeting Part 1) Using the following additional data, prepare a cash budget for January 2015 and a pro forma balance sheet for January 31, 2015. Prepare a supporting budgets for cash receipts and cash disbursements.

Doozer Co. Balance Sheet

Assets Liabilities Cash $20,000 Accounts Payable $12,000 Acct Rec 30,000 Owners’ Equity Inventory (6,000 units) 30,000 Common Stock 200,000 Building and Equip- net 200,000 Retained Earnings 68,000

Total Assets $280,000 Total Liabilities and Owners’ Equity $280,000

A) Sales are collected 40% in the month of sale, 60% in the following month.B) Purchase are paid 40% in the month of purchase, 60% in the following month.C) All other expenses requiring cash are paid in the month incurred.D) The board of directors plans to declare a $3,000 dividend on January 10, payable January 31.E) The following is from Budget Day 1 for Doozer.

January FebruarySales $ 100,000 $ 120,000

InventoryCogs 25,000Target Inventory 45,000Inventory Needed 70,000Less Beg Inventory (35,000)Required Purchases 35,000

Income StatementSales $ 100,000Variable Costs Cost of Sales 25,000 Commission 10,000 Other 5,000Total Variable Costs 40,000

Contribution Margin 60,000Fixed Costs Depreciation 2,000 Other 40,000Total Fixed 42,000Net Income $ 18,000

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Continuation of Jarrett Company from Budget Part 1Jarrett pays for its purchases 40% in the month of purchase and 60% in the following month. Accounts Payable at December 31, 2014, were $18,000. The company collects 60% of its sales in the month of sale and 40% in the following month. Receivables at December 31, 2014 to be collected in January, were $30,000. All of its fixed costs require cash disbursements and are paid as incurred. Its cash balance at December 31, 2014, was $20,000.

Required1) Prepare a cash budget for the first three months of 2015.

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Continuation of Banana City. The following additional information about Banana City is available

A) Sales of bananas are for cash only. Sales of nuts are on credit and are collected two months after sale.

B) Banana City’s suppliers give terms of 30 days for payments of accounts payable. Banana City takes full advantage of the 30-day payments. (Assume all months have 30 days).

C) The Company mys make quarterly payments on its income taxes. The payment for the first quarter of fiscal year 2015 is due on January 15, 2015. The liability shown on the balance sheet below is to be paid on October 15.

D) Fixed expenses that require cash disbursement are paid as incurred with the follow exceptions:a) Insurance premiums are all paid on November 1 in advance for the next 12 months

and b) b) interest payments are all made on January 1. The $156,000 “other fixed

expenses” in the income statement require cash disbursements evenly on the year.

E) Sales expected in the last part of fiscal year 2015 are as follows:

June July August Bananas $31,000 $34,000 $32,500

Nuts 37,000 41,000 34,000

F) The company to pay a dividend of $12,000 in October.G) The Balance Sheet at August 31, 2015 is as follows:

Cash $15,000 Accounts Payable (merchandise) $26,000Accounts Rec 75,000 Taxes Payable 31,000Inventories 41,800 Accrued Interest 4,000Prepaid Insurance 2,000 Long-term Debt, 6% 100,000Land 8,000 Common Stock 150,000Equipment (net) 210,000 Retained Earnings 40,800

Total $ 351,800 Total $ 351,800

Required:A) Prepare a cash budget for the first three months of fiscal year 2016 and for the quarter

as a whole.

B) Prepare a pro forma balance sheet for November 30, 2015.

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1The following page is a copy of a purchase agreement for a Dr. Kirch’s car. The second page has data for leasing the same car. Dr. Kirch financed the car at 2.9% over 60 months. Under these terms, was it better for him to purchase the car or should he have leased it? Support your answer with figures.

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228Dear Dave:

 Here is a lease based on an in stock car that is within $175 of the price of the car you have on order. We did this because it is considerably simpler with the particular software that we employ to quote an in stock car. I have also attached your partial payment receipt. Thanks again for your business.

 

MSRP:                                $48,980.00

Sale price:                          $46,702.00

Use tax financed in lease:     $1,513.89

Acquisition fee in lease:       $1,095.00

36 months/15,000 miles        $665.00

Due at signing                         $0

Purchase option at lease end $28,898.00 plus applicable sales tax

.25 (cents) per mile penalty for each mile over 45,000 (assuming vehicle is returned)

Turn in (disposition fee) : $595.00

 

Mit freundlichen Grüßen / with kind regards,

Stephen F.H. Revard

Master Certified Mercedes-Benz Representative

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ipse dixit Learning Module #19 You get more cooperation (Being the last module) with a smile and a gun than

Internal Control and Fraud you do with a smile alone. (Al Capone)

Let’s do the car first

As to change….. create ________________________________________________.

Internal control

the three requirements of the thief1)

2)

3)

so where should the bank statement go?

The illusion of Internal Control

the sign “all returns must be accompanied by a receipt”

The z total

oh and what should you do with a returned check?

The rule of 78s, Simple Interest and other nefarious interest scams

A Ponzi Scheme is

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232The Cookies

A woman was waiting at an airport one night, With several long hours before her flight. She hunted for a book in the airport shops. Bought a bag of cookies and found a place to drop. She was engrossed in her book but happened to see, That the man sitting beside her, as bold as could be. Grabbed a cookie or two from the bag in between, Which she tried to ignore to avoid a scene. So she munched the cookies and watched the clock. As the gutsy cookie thief diminished her stock. She was getting more irritated as the minutes ticked by, Thinking, "If I wasn't so nice, I would blacken his eye." With each cookie she took, he took one too, When only one was left, she wondered what he would do. With a smile on his face, and a nervous laugh, He took the last cookie and broke it in half. He offered her half, as he ate the other, She snatched it from him and thought... oooh, brother. This guy has some nerve and he's also rude, Why he didn't even show any gratitude! She had never known when she had been so galled, And sighed with relief when her flight was called. She gathered her belongings and headed to the gate, Refusing to look back at the thieving ingrate.

#1 P____________ is an active NOUN !!!! Be slow to A______ and to A_______ The other 90% rule

90% of the time your ____________________________________________!!!

#2 When you are ___________, you are __________!!! Or, get your free floor mats here.

#3 Ethics are not hard, just D___ the r________ t_________. (has a period like the first law!

And the most important professional tip

#4 -- True evil is _____________________ until _____ ____________!!! (Andrew Vachss)

You've got to promise me if . . . you ever get to the point in your life where you are so puzzled, confused and frightened that you feel the only way out is to abuse or molest a little kid, well then, you have got to kill yourself. You have got to lean into the strike zone and take one for the team." (Dennis Miller).

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