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    Problem 12-15 Income Statement, Statement of Cash Flows (Direct Method) and Balance Sheet
    The following events occurred at Handsome Hounds Grooming Company during its first year of business:
    a. To establish the company, the two owners contributed a total of $50,000 in exchange for common stock.
    b. Grooming service revenue for the first year amounted to $150,000, of which $40,000 was on account.
    c. Customers owe $10,000 at the end of the year from the services provided on account.
    d. At the beginning of the year, a storage building was rented. The company was required to sign a three-year lease for $12,000 per year and make a $2,000 refundable security deposit. The first year's lease payment and the security deposit were paid at the beginning of the year.
    e. At the beginning of the year, the company purchased a patient at a cost of $100,000 for a revolutionary system to be used for dog grooming. The patent is expected to be useful for 10 years. The company paid 20% down in cash and signed a four-year note at the bank for the remainder.
    f. Operating expenses, including amortization of the patent and rent on the storage building, totaled $80,000 for the first year. No expenses were accrued or unpaid at the end of the year.
    g. The company declared and paid a $20,000 cash dividend at the end of the first-year.

    Required:
    1. Prepare an income statement for the first year.
    2. Prepare a statement of cash flows for the first year using the direct method in the Operating Activities section.
    3. Did the company generate more or less cash flow from operations than it earned in net income? Explain why there is a difference.
    4. Prepare a balance a sheet as of the end of the first year.

    Problem 12-1 Comparing Tow Companies in the Same Industry: Kellogg's and General
    Refer to the statement of cash flows for both Kellogg's and General Mills for the most recent year and any other pertinent information.
    Statement of Cash Flow for Kellogg
    Million 2006 2005 2004
    Operating activities
    Net earnings
    Adjustments to reconcile earnings to operating cash flows
    Depreciation and amortization
    Deferred income taxes
    Other (a)
    Pension and other postretirement benefit plan contribution
    Changes in operating assets and liabilities $1,004.1

    352.7
    (43.7)
    235.2
    (98.3)
    (38.5) $980.4

    391.8
    (59.2)
    199.3
    (397.3)
    28.3 $890.6

    410.0
    57.7
    104.5
    (204.0)
    (29.8)
    Net cash provided by operating activities $1,410.5 $1,143.3 $1,229.0
    Investing activities
    Additions to properties
    Acquisitions of businesses
    Property disposals
    Investment in joint venture and other $(453.1)
    -
    9.4
    (1.7) $(374.2)
    (50.4)
    9.8
    (.2) $(278.6)
    -
    7.9
    .3
    Net cash used in investing activities $(445.4) $(415.0) $(270.4)
    Financing activities
    Net increase (reduction) of notes payable, with maturities
    Less than or equal to 90 days
    Issuance of notes payable, with maturities greater than 90 days
    Reductions of notes payable, with maturities greater than 90 days
    Issuances of long term debt
    Reductions of long-term debt
    Issuances of common stock
    Common stock repurchases
    Cash dividends
    Other
    $(344.2)
    1,065.4
    (565.2)
    -
    (84.7)
    217.5
    (648.9)
    (449.9)
    21.9
    $360.2
    42.6
    (42.3)
    647.3
    (1,041.3)
    221.7
    (664.2)
    (435.2)
    5.9
    $388.3
    142.3
    (141.7)
    7.0
    (682.2)
    291.8
    (297.5)
    (417.2)
    (6.7)
    Net cash used in financing activities $(789.0) $(905.3) $(716.3)
    Effect of exchange rate changes on cash 15.4 (21.3) 33.9
    Increase (decrease) in cash and cash equivalents
    Cash and cash equivalents at beginning of year $191.5
    219.1 $(198.3)
    417.4 $276.2
    141.2
    Cash and cash equivalents at end of year $410.6 $219.1 $417.4

    Statement of Cash Flow for General Mills
    Million 2006 2005 2004
    Operating activities
    Net earnings
    Adjustments to reconcile earnings to operating cash flows
    Depreciation and amortization
    Deferred income taxes
    Changes in current assets and liabilities
    Tax benefit on exercised options
    Pension and other postretirement costs
    Restructuring and other exit costs
    Divestitures (gain)
    Debt repurchase costs
    Other, net $1,090

    424
    26
    184
    41
    (74)
    30
    -
    -
    50 $1,240

    443
    9
    258
    62
    (70)
    84
    (499)
    137
    47 $1,055

    399
    109
    (186)
    63
    (21)
    26
    -
    -
    16
    Net cash provided by operating activities 1,771 1,711 1,461
    Investing activities
    Purchases of land, buildings and equipment
    Investments of businesses
    Investments in affiliates, net of investment returns and dividends
    Purchases of marketable securities
    Proceeds from sale of marketable securities
    Proceeds from disposal of land, buildings and equipment
    Proceeds from disposition of businesses
    Other, net (360)
    (26)
    78
    -
    1
    11
    -
    4 (434)
    -
    84
    (1)
    33
    24
    799
    (9) (653)
    (10)
    32
    (7)
    129
    36
    -
    2
    Net cash used by investing activities (292) 496 (470)
    Financing activities
    Changes in notes payable
    Issuances of long term debt
    Payment of long-term debt
    Proceeds from issuance of preferred membership interests of subsidiary
    Common stock issued
    Purchases of common stock for treasury
    Dividends paid
    Other, net 1,197
    -
    (1,386)

    -
    157
    (885)
    (485))
    (3) (1,05.7)
    2
    (1,115)
    (42.3)
    835
    195-
    (771)
    (461)
    (13)
    (1,023)
    576
    (248)
    (141.7)
    -
    192
    (24)
    (413)
    (3)

    Net cash used by financing activities (1,405) (2385) (943)
    Increase (decrease) in cash and cash equivalents
    Cash and cash equivalents - beginning of year 74
    $73 (178)
    751 48
    703
    Cash and cash equivalents - end of year $647 $573 $751
    Cash Flow from Changes in Current Assets and Liabilities
    Receivables
    Inventories
    Prepaid expenses and other current assets
    Accounts payable
    Other current liabilities
    $ (18)
    (6)
    (7)
    14
    201
    $ (9)
    30
    9
    (19)
    247
    $ (22)
    24
    (15)
    (161)
    (12)
    Changes in Current Assets and Liabilities $ 184 $ 258 $ (186)
    Required:
    1. Which method, direct or indirect, does each company use in preparing the Operating Activities section of their statements of cash flow? Explain.
    2. By what amount did net cash provided by operating activities increase or decrease from the prior year for each company? What is the largest adjustment to reconcile net income to net cash provided by operating activities for each company?
    3. What amount died each company spend during the most recent year to acquire property and equipment? How does this amount compare with the amount that each company spent in the prior year?
    4. What is the primary source of financing for each of the two companies? Did either or both companies buy back some of their own shares during the most recent year? If so, what might be some reasons for doing this?

    Problem 10-3 Amortization of Premium
    Stacy Company issued five-year 10% bonds with a face value of $10,000 on January 1, 2008. Interest is paid annually on December 31. The market rate of interest on this date is 8%, and Stacy Company receives proceeds of $10,803 on the bond issuance.
    Required:
    1. Prepare a five year table to amortize the premium using the effective interest method.
    2. What is the total interest expense over the life of the bonds? Cash interest payment? Premium amortization?
    3. Identify and analyze the effect of the payment of interest and the amortization of premium on December 3, 2010 (the third year), and determine the balance sheet presentation of the bonds on that date.

    Problem 11-5 Dividends and Stock Splits
    On January 1, 2008, Fredericksen Inc's.Stockholders' Equity category appeared as follows:
    Preferred stock, $80 par value, 7%,
    3,000 shares issued and outstanding $240,000
    Common stock, $10 par value,
    15,000 shares issued and outstanding 150,000
    Additional paid-in capital - Preferred 60,000
    Additional paid-in capital - Common 225,000
    Total contributed capital $675,000
    Retained earnings 2,100,000
    Total stockholders' equity $2,775,000

    The preferred stock is noncumulative and nonparticipating. During 2008, the following transactions occurred:
    a. On March 1, declared a cash dividend of $16,800 on preferred stock. Paid the dividend on April 1.
    b. On June 1, declared a 5% stock dividend on common stock. The current market prior of the common stock was $18. The stock was issued on July 1.
    c. On September 1, declared a cash dividend of $0.50 per share on the common stock, paid the dividend on October 1.
    d. On December 1, issued a 2-for-2 stock split of common stock when the stock was selling for $50 per share.

    Required:
    1. Explain each transaction's effect on the Stockholders' Equity accounts and the total stockholders' equity.
    2. Develop the Stockholders' Equity category of the December 31, 2008, balance sheet. Assume that the net income for the year was $650,000.
    3. Explain the difference between a stock dividend and a stock split.

    Problem 13-7 Comparison with Industry Averages
    Heartland Inc. is a medium-size company that has been in business for 20 years. The industry has become very competitive in the last few years, and Heartland Inc. decides that it must grow if it is going to survive. It has approached the bank for a sizable five-year loan and the bank has requested Heartland's most recent financial statements as part of the loan package.
    The industry in which Heartland operates consists of approximately 20 companies relatively equal in size. The trade association to which all of the companies belong publishes an annual survey of the industry, including industry averages for selected ratios for the competitors. All companies voluntarily submit their financial statements to the association for this purpose.
    Heartland's controller is aware the bank has access to this survey and is very concerned with how the company fared this past year compared to the rest of the industry. The ratios included in the publication this past year are as follows:

    Ratio Industry Average
    Current ratio 1.23
    Acid test (quick) ratio 0.75
    Accounts receivables turnover 33 times
    Inventory turnover 29 times
    Debt-to- equity ratio 0.53 times
    Interest earned 8.65 times
    Return on sales 6.57%
    Assets turnover 1.95 times
    Return on assets 12.81%
    Return on common stockholder's equity 17.67%

    The financial statements to be submitted to the bank in connection with the loan follow:

    Heartland Inc.
    Statement of Income and Retained Earnings
    For the Year Ended December 31, 2008
    (thousands omitted)
    Sales revenue $542,750
    Cost of goods sold (435,650)
    Gross profit $107,100
    Selling, general and administrative expenses $(65,780)
    Loss on sales and securities (220)
    Income before interest and taxes $41,100
    Interest expense (9,275)
    Income before taxes $31,825
    Income tax expense (12,730)
    Net income $19,095
    Retained earnings, January 1, 2008 58,485
    $77,580
    Dividends paid on common stock (12,000)
    Retained earnings December 31, 2008 $65,580

    Heartland Inc.
    Comparative Statements of Financial Position
    (thousands omitted)

    2008 2007
    Assets
    Current assets:
    Cash
    Marketable securities
    Accounts receivable, net of allowances
    Inventories
    Prepaid items
    Total current assets
    Long term investments
    Property, plant, and equipment:
    Land
    Buildings and equipment, net of accumulated depreciation
    Total property, plant, and equipment
    Total assets
    $ 1,135
    1,250
    15,650
    12,680
    385
    $ 31,100
    $ 425

    $ 32,000
    216,000
    $248,000
    $279,525
    $ 750
    2,250
    12,380
    15,870
    420
    $ 31,670
    $ 425

    $ 32,000
    206,000
    $238,000
    $270,095

    Liabilities and Stockholder's Equity
    Current liabilities:
    Short term notes
    Accounts payables
    Salaries and wages payable
    Income taxes payable
    Total current liabilities
    Long term bonds payable
    Stockholders' equity:
    Common stock, no par
    Retained earnings
    Total stockholders' equity
    Total liabilities and stockholders' equity
    $ 8,750
    20,090
    1,975
    3,130
    $ 33,945
    $ 80,000

    $100,000
    65,580
    $165,580
    $278,525
    $ 12,750
    14,380
    2,430
    2,050
    $ 31,610
    $ 80,000

    $100,000
    58,485
    $158,485
    $270,095

    Required:
    1. Prepare a columnar report for the controller of Heartland Inc. comparing the industry averages for the ratios published by the trade association with the comparable ratios for Heartland. For Heartland, compute the ratios as of December 31, 2008, or for the year ending December 31, 2008, whichever is appropriate.
    2. Briefly evaluate Heartland's ratios relative to the industry averages.
    3. Do you think that the bank will approve the loan? Explain your answer.

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    https://brainmass.com/business/dividends-stock-repurchase-and-policy/accounting-finance-questions-367084

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    Solution Summary

    The solution explains various questions in accounting/finance - Problem 12-15 Income Statement, Statement of Cash Flows (Direct Method) and Balance Sheet, Problem 12-1 Comparing Two Companies in the Same Industry: Kellogg's and General, Problem 10-3 Amortization of Premium, Problem 11-5 Dividends and Stock Splits and Problem 13-7 Comparison with Industry Averages

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