Share
Explore BrainMass

Accounting /Finance questions

I have a set of practice problems that I am in need of assistance from an OTA. Please provide details and step by step explanations that would help to assist me for an upcoming exam.

Thank you!

** See ATTACHED file(s) for complete details **

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.

Attachments

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

$2.19