Exercise 1 - An analysis of comparative balance sheets, the current year's income statement, and the general ledger accounts of Wellman Corp. uncovered the following items. Assume all items involve cash unless there is information to the contrary. Indicate how each item should be classified in the statement of cash flows using these four major classifications: operating activity (indirect method), investing activity, financing activity, and significant noncash investing and financing activity.
(a) Payment of interest on notes payable.
(b) Exchange of land for patent.
(c) Sale of building at book value.
(d) Payment of dividends.
(e) Depreciation.
(f) Receipt of dividends on investment in stock.
(g) Receipt of interest on notes receivable.
(h) Issuance of common stock.
(i) Amortization of patent.
(j) Issuance of bonds for land.
(k) Purchase of land.
(l) Conversion of bonds into common stock.
(m) Sale of land at a loss.
(n) Retirement of bonds.
Exercise 2 - Below is the comparative balance sheets and income statement of Cheng Inc. From this information prepare a statement of cash flows for the year ended December 2017.
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CHENG INC. Comparative Balance Sheets December 31
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Assets
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2017
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2016
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Cash
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$80,800
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$48,400
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Accounts receivable
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92,800
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33,000
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Inventory
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117,500
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102,850
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Prepaid expenses
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28,400
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26,000
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Investments
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143,000
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114,000
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Equipment
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270,000
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242,500
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Accumulated depreciation-equipment
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(50,000)
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(52,000)
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Total
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$682,500
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$514,750
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Liabilities and Stockholders' Equity
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Accounts payable
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$112,000
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$67,300
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Accrued expenses payable
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16,500
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17,000
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Bonds payable
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110,000
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150,000
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Common stock
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220,000
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175,000
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Retained earnings
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224,000
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105,450
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Total
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$682,500
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$514,750
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CHENG INC. Income Statement For the Year Ended December 31, 2017
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Sales revenue
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$392,780
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Less:
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Cost of goods sold
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$135,460
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Operating expenses, excluding depreciation
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12,410
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Depreciation expense
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46,500
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Income tax expense
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27,280
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Interest expense
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4,730
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Loss on disposal of plant assets
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7,500
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233,880
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Net income
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$158,900
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Additional information:
1. New equipment costing $85,000 were purchased for cash during the year.
2. Old equipment having an original cost of $57,500 was sold for $1,500 cash.
3. Bonds matured and were paid off at face value for cash.
4. A cash dividend of $40,350 was declared and paid during the year.
Further analysis reveals that accounts payable pertain to merchandise creditors.
Requirement - Prepare a statement of cash flows using the indirect method.
Exercise 3 -
Year 1
Net income-year ended 12/31 $12,500
Dividends 3,000
Return on net operating assets 13%
Return on equity 15%
Cost of equity 12%
What is Yutter's sustainable equity growth rate?
A. 9.12%
B. 9.88%
C. 11.4%
D. 12.0%
Exercise 4 - Below are selected ratios for Manufacturers Corporation. Use this information answer the following questions.
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Year 1
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Year 2
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Year 3
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1. Net operating asset turnover
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1.4
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1.31
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1.25
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2. Inventory turnover
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5.6
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5.0
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4.6
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3. Accounts receivable turnover
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12.1
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11.9
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12.1
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4. Fixed assets turnover
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1.3
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1.29
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1.29
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5. Net operating profit margin
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4.5%
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4.6%
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4.8%
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6. Net operating assets/equity
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2.10
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1.98
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1.77
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7. EBIT/revenues
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8.9%
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8.6%
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8.6%
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8. Gross margin
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20.1%
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19.9%
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19.8%
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9. Income tax rate
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35%
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35%
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35%
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a. Calculate return on net operating assets for all three years. Identify reasons for any changes.
b. Calculate return on equity for all three years. Comment on changes.