EXERCISE 5-5 (3035 minutes)
Uhura Company
Balance Sheet
December 31, 2007
Assets
Current assets
Cash .................................................................. $230,000
Trading securitiesat fair value ............. 120,000
Accounts receivable .................................... $357,000
Less: Allowance for doubtful
accounts................................................ 17,000 340,000
Inventories, at lower of average
cost or market ............................................ 401,000
Prepaid expenses ......................................... 12,000
Total current assets .............................. $1,103,000
Long-term investments
Land held for future use............................. 175,000
Cash surrender value of life
insurance ..................................................... 90,000 265,000
Property, plant, and equipment
Building............................................................ $730,000
Less: Accum. depr.building........... 160,000 570,000
Office equipment .......................................... 265,000
Less: Accum. depr.office
equipment ............................................. 105,000 160,000 730,000
Intangible assets
Goodwill........................................................... 80,000
Total assets ............................................ $2,178,000
5-20
EXERCISE 5-5 (Continued)
Liabilities and Stockholders Equity
Current liabilities
Accounts payable ........................................ $ 135,000
Notes payable (due next year) ................. 125,000
Rent payable .................................................. 49,000
Total current liabilities......................... $309,000
Long-term liabilities
Bonds payable .............................................. $500,000
Add: Premium on bonds payable ........... 53,000 $553,000
Pension obligation....................................... 82,000 635,000
Total liabilities ........................................ 944,000
Stockholders equity
Common stock, $1 par, authorized
400,000 shares, issued 290,000
shares ........................................................... 290,000
Additional paid-in capital........................... 160,000 450,000
Retained earnings........................................ 784,000*
Total stockholders equity.................. 1,234,000
Total liabilities and stock-
holders equity .................................... $2,178,000
*$2,178,000 $944,000 $450,000
5-21
EXERCISE 5-6 (3035 minutes)
Geronimo Company
Balance Sheet
July 31, 2007
Assets
Current assets
Cash .................................................................. $60,000*
Accounts receivable .................................... $46,700**
Less: Allowance for doubtful
accounts................................................ 3,500 43,200
Inventories ...................................................... 65,300***
Total current assets .............................. $168,500
Long-term investments
Bond sinking fund........................................ 15,000
Property, plant, and equipment
Equipment....................................................... 112,000
Less: Accumulated depreciation
equipment..................................... 28,000 84,000
Intangible assets
Patents ............................................................. 21,000
Total assets ............................................ $288,500
*($69,000 $15,000 + $6,000)
**($52,000 $5,300)
***($60,000 + $5,300)
5-22
EXERCISE 5-6 (Continued)
Liabilities and Stockholders Equity
Current liabilities
Notes and accounts payable............................... $ 52,000****
Taxes payable........................................................... 6,000
Total current liabilities.................................... 58,000
Long-term liabilities ...................................................... 75,000
Total liabilities ................................................... 133,000
Stockholders equity ..................................................... 155,500
Total liabilities and stock-
holders equity ............................................... $288,500
****($44,000 + $8,000)
5-23
EXERCISE 5-11 (2530 minutes)
Kelly Corporation
Balance Sheet
December 31, 2007
Assets
Current assets
Cash.................................................................................. $ 6,850
Office supplies .............................................................. 1,200
Prepaid insurance........................................................ 1,000
Total current assets ............................................ $ 9,050
Equipment ............................................................................. 48,000
Less: Accumulated depreciation ................................... 4,000 44,000
Intangible assetstrademark ......................................... 950
Total assets............................................................ $54,000
Liabilities and Stockholders Equity
Current liabilities
Accounts payable ........................................................ $10,000
Wages payable.............................................................. 500
Unearned service revenue ........................................ 2,000
Total current liabilities ...................................... $12,500
Long-term liabilities
Bonds payable .............................................................. 9,000
Total liabilities ............................................................... 21,500
Stockholders equity
Common stock.............................................................. 10,000
Retained earnings ($25,000 $2,500*) .................. 22,500
Total stockholders equity.................................. 32,500
Total liabilities and stockholders equity............ $54,000
*[$10,000 ($9,000 + $1,400 + $1,200 + $900)]
5-29
EXERCISE 5-15 (2535 minutes)
(a) Zubin Mehta Corporation
Statement of Cash Flows
For the Year Ended December 31, 2007
Cash flows from operating activities
Net income...................................................................... $160,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense........................................... $17,000
Loss on sale of investments.............................. 10,000
Decrease in accounts receivable ..................... 5,000
Decrease in current liabilities............................ (17,000) 15,000
Net cash provided by operating activities............ 175,000
Cash flows from investing activities
Sale of investments ..................................................... 12,000
[($74,000 $52,000) $10,000]
Purchase of equipment .............................................. (58,000)
Net cash used by investing activities .................... (46,000)
Cash flows from financing activities
Payment of cash dividends....................................... (30,000)
Net increase in cash ........................................................... 99,000
Cash at beginning of year................................................. 78,000
Cash at end of year ............................................................. $177,000
(b) Free Cash Flow Analysis
Net cash provided by operating activities .................. $175,000
Less: Purchase of equipment ........................................ (58,000)
Dividends................................................................... (30,000)
Free cash flow ...................................................................... $ 87,000
5-34
EXERCISE 5-16 (2025 minutes)
(a) Shabbona Corporation
Statement of Cash Flows
For the Year Ended December 31, 2007
Cash flows from operating activities
Net income........................................................................ $125,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense ............................................ $27,000
Increase in accounts receivable......................... (16,000)
Decrease in inventory............................................ 9,000
Decrease in accounts payable............................ (13,000) 7,000
Net cash provided by operating activities ............. 132,000
Cash flows from investing activities
Sale of land....................................................................... 39,000
Purchase of equipment ................................................ (60,000)
Net cash used by investing activities...................... (21,000)
Cash flows from financing activities
Payment of cash dividends ........................................ (60,000)
Net increase in cash............................................................. 51,000
Cash at beginning of year .................................................. 22,000
Cash at end of year............................................................... $ 73,000
Noncash investing and financing activities
Issued common stock to retire $50,000 of bonds outstanding
5-35
EXERCISE 5-16 (Continued)
(b) Current cash debt coverage ratio =
Net cash provided by operating activities
= Average current liabilities
$132,000
=
($34,000 + $47,000) / 2
= 3.26 to 1
Cash debt coverage ratio =
Net cash provided by operating activities
=
Average total liabilities
$184,000 + $247,000
$132,000 =
2
.61 to 1
Free Cash Flow Analysis
Net cash provided by operating activities .............................. $132,000
Less: Purchase of equipment .................................................... (60,000)
Dividends............................................................................... (60,000)
Free cash flow .................................................................................. $ 12,000
Shabbona has excellent liquidity. Its financial flexibility is good. It might be
noted that it substantially reduced its long-term debt in 2007 which will help
its financial flexibility.
5-36
EXERCISE 5-17 (3035 minutes)
(a) Grant Wood Corporation
Statement of Cash Flows
For the Year Ended December 31, 2007
Cash flows from operating activities
Net income.......................................................................... $55,000
Adjustments to reconcile net income
to net cash provided by operating
activities:
Loss on sale of equipment..................................... $ 2,000*
Depreciation expense .............................................. 13,000
Patent amortization................................................... 2,500
Increase in current liabilities ................................. 13,000
Increase in current assets (other than cash) ........ (29,000) 1,500
Net cash provided by operating activities ............... 56,500
Cash flows from investing activities
Sale of equipment ............................................................ 10,000
Addition to building......................................................... (27,000)
Investment in stock ......................................................... (16,000)
Net cash used by investing activities........................ (33,000)
Cash flows from financing activities
Issuance of bonds ........................................................... 50,000
Payment of dividends ..................................................... (30,000)
Purchase of treasury stock........................................... (11,000)
Net cash provided by financing activities................ 9,000
Net increase in cash............................................................... $32,500a
*[$10,000 ($20,000 $8,000)]
a
An additional proof to arrive at the increase in cash is provided as follows:
Total current assetsend of period $296,500 [from part (b)]
Total current assetsbeginning of period 235,000
Increase in current assets during the period 61,500
Increase in current assets other than cash 29,000
Increase in cash during year $ 32,500
5-37
EXERCISE 5-17 (Continued)
(b) Grant Wood Corporation
Balance Sheet
December 31, 2007
Assets
Current assets .......................................................... $296,500b
Long-term investments ......................................... 16,000
Property, plant, and equipment
Land ...................................................................... $ 30,000
Building ($120,000 + $27,000)....................... $147,000
Less: Accum. depreciation
($30,000 + $4,000).......................................... (34,000) 113,000
Equipment ($90,000 $20,000) .................... 70,000
Less: Accum. depreciation
($11,000 $8,000 + $9,000) ........................ (12,000) 58,000
Total property, plant, and equipment ........ 201,000
Intangible assetspatents
($40,000 $2,500).......................................... 37,500
Total assets ................................................ $551,000
Liabilities and Stockholders Equity
Current liabilities ($150,000 + $13,000) .......................... $163,000
Long-term liabilities
Bonds payable ($100,000 + $50,000)........................ 150,000
Total liabilities........................................................... 313,000
Stockholders equity
Common stock ................................................................ $180,000
Retained earnings ($44,000 + $55,000 $30,000) ......... 69,000
Total paid-in capital and retained earnings......... 249,000
Less: Cost of treasury stock....................................... (11,000)
Total stockholders equity .................................... 238,000
Total liabilities and stockholders equity......... $551,000
b The amount determined for current assets could be computed last and then is a
plug figure. That is, total liabilities and stockholders equity is computed because
information is available to determine this amount. Because the total assets amount is
the same as total liabilities and stockholders equity amount, the amount of total
assets is determined. Information is available to compute all the asset amounts except
current assets and therefore current assets can be determined by deducting the total
of all the other asset balances from the total asset balance (i.e., $551,000 $37,500
$201,000 $16,000). Another way to compute this amount, given the information, is
that beginning current assets plus the $29,000 increase in current assets other than
cash plus the $32,500 increase in cash equals $296,500.
5-38
EXERCISE 5-18 (2535 minutes)
(a) Madrasah Corporation
Statement of Cash Flows
For the Year Ended December 31, 2007
Cash flows from operating activities
Net income...................................................................... $44,000
Adjustment to reconcile net income
to net cash provided by operating activities:
Depreciation................................................................... $ 6,000
Increase in accounts payable .................................. 5,000
Increase in accounts receivable ............................. (18,000) (7,000)
Net cash provided by operating activities ........... 37,000
Cash flows from Investing activities
Purchase of equipment .............................................. (17,000)
Cash flows from financing activities
Issuance of stock ......................................................... 20,000
Payment of dividends ................................................. (33,000)
Net cash used by financing activities ................... (13,000)
Net increase in cash........................................................... $ 7,000
Cash at beginning of year ................................................ 13,000
Cash at end of year............................................................. $20,000
2007 2006
(b) Current ratio 6.3 6.73
$126,000 $101,000
$ 20,000 $ 15,000
Free Cash Flow Analysis
Net cash provided by operating activities ................................. $ 37,000
Less: Purchase of equipment....................................................... (17,000)
Pay dividends ......................................................................... (33,000)
Free cash flow ..................................................................................... $ (13,000)
(c) Although, Madrasahs current ratio has declined from 2006 to 2007, it is
still in excess of 6. It appears the company has good liquidity and
financial flexibility.
5-39
PROBLEM 5-4
Russell Crowe Corporation
Balance Sheet
December 31, 2007
Assets
Current assets
Cash............................................................... $175,900
Accounts receivable................................. 170,000
Inventories................................................... 312,100
Total current assets........................... $658,000
Long-term investments
Assets allocated to trustee for
expansion:
Cash in bank ............................................... 70,000
U.S. Treasury notes, at fair value......... 138,000 208,000
Property, plant, and equipment
Land............................................................... 750,000
Buildings ...................................................... $1,070,000a
Less: Accum. depreciation
buildings ............................................ 410,000 660,000 1,410,000
Total assets .......................................... $2,276,000
Liabilities and Stockholders Equity
Current liabilities
Notes payablecurrent installment....... $100,000
Federal income taxes payable .............. 75,000
Total current liabilities...................... $ 175,000
5-47
PROBLEM 5-4 (Continued)
Long-term liabilities
Notes payable ............................................... 500,000b
Total liabilities......................................... 675,000
Stockholders equity
Common stock, no par; 1,000,000
shares authorized and issued;
950,000 shares outstanding................... $1,150,000
Retained earnings ........................................ 538,000c
1,688,000
Less: Treasury stock, at cost (50,000
shares) .......................................................... (87,000)
Total stockholders equity .................. 1,601,000
Total liabilities and
stockholders equity.......................... $2,276,000
a
$1,640,000 $570,000 (to eliminate the excess of appraisal value over cost
from the Buildings account. Note that the appreciation capital account is
also deleted.)
b
$600,000 $100,000 (to reclassify the currently maturing portion of the
notes payable as a current liability.)
c
$658,000 $120,000 (to remove the value of goodwill from retained
earnings. Note 2 indicates that retained earnings was credited. Note that
the goodwill account is also deleted.)
Note: As an alternate presentation, the cash restricted for plant expansion
would be added to the general cash account and then subtracted. The
amount reported in the investments section would not change.
5-48
