PROBLEM 1:
WIDGET Company has the following adjusted trial balance at December 31, 2006. No dividends have been declared.
|
Account
|
Debit
|
Credit
|
|
Cash
|
$1,500
|
|
|
Accounts Receivable
|
2,000
|
|
|
Interest receivable
|
30
|
|
|
Prepaid Insurance
|
2,300
|
|
|
Notes Receivable
|
3,000
|
|
|
Equipment
|
12,000
|
|
|
Accumulated Depreciation
|
|
$300
|
|
Accounts payable
|
|
1,600
|
|
Accrued Expenses Payable
|
|
3,820
|
|
Income Taxes payable
|
|
2,900
|
|
Unearned rent revenue
|
|
600
|
|
Contributed capital
|
|
2,400
|
|
Retained earnings
|
|
1,000
|
|
Sales revenue
|
|
42,000
|
|
Interest Revenue
|
|
30
|
|
Rent revenue
|
|
300
|
|
Wages expense
|
21,600
|
|
|
Depreciation expense
|
300
|
|
|
Utilities expense
|
220
|
|
|
Insurance expense
|
100
|
|
|
Rent expense
|
9,000
|
|
|
Income Tax Expense
|
2,900
|
|
|
TOTAL
|
$54,950
|
$54,950
|
Q1. Prepare in proper form an income statement for 2006. Widget Company’s core operations related to computer technology. How much net income did Widget Company generate during 2006?
Q2. Prepare in proper form a statement of retained earnings for 2006.
Q3. Prepare in proper from a balance sheet on December 31, 2006. Are the company’s assets financed primarily by debt or equity?
Q4. Prepare the closing journal entries on December 31, 2006.
PROBLEM 2:
The comparative financial statements for Joe’s Company showed the following summarized data:
|
|
|
Increase (Decrease) 2004 over 2003
|
|
|
2004
|
2003 Amount Percentage
|
|
Income Statement
|
|
|
|
Sales revenue
|
110,000
|
99,000
|
|
Cost of Goods sold
|
52,000
|
48,000
|
|
Gross Profit
|
58,000
|
51,000
|
|
Operating Expenses
|
36,000
|
33,000
|
|
Interest Expense
|
4,000
|
4,000
|
|
Income before income taxes
|
18,000
|
14,000
|
|
Income tax expense (30%)
|
5,400
|
4,200
|
|
Net Income
|
12,600
|
9,800
|
|
Balance Sheet
|
|
|
|
Cash
|
49,500
|
18,000
|
|
Accounts receivable (net)
|
37,000
|
32,000
|
|
Inventory
|
25,000
|
38,000
|
|
Property and equipment (net)
|
95,000
|
105,000
|
|
Total assets
|
206,500
|
193,000
|
|
Accounts payable
|
42,000
|
35,000
|
|
Income taxes payable
|
1,000
|
500
|
|
Note payable, long term
|
40,000
|
40,000
|
|
Total liabilities
|
83,000
|
75,500
|
|
Capital stock (par $10)
|
90,000
|
90,000
|
|
Retained earnings
|
33,500
|
27,500
|
|
Total liabilities and equity
|
206,500
|
193,000
|
1. Complete the final two columns shown beside each item in the comparative financial statements above. Does anything jump out at you from the year over year analysis?
2. Given the data above, compute the following:
a. Compute the gross profit percentages in 2004 and 2003. Is the trend going in the right direction?
b. Compute the net profit margin ratios in 2004 and 2003. Is the trend going in the right direction?
c. Compute the earnings per share for 2004 and 2003. Does the trend look good or bad? Explain.
d. Stockholders’ equity totaled $100,000 at the end of 2002. Compute the return on equity ratios for 2004 and 2003. Is the trend going in the right direction?
e. Net property and equipment totaled $110,000 at the end of 2002. Compute the fixed asset turnover ratios for 2004 and 2003. Is the trend going in the right direction?
f. Compute the debt-to-assets ratios for 2004 and 2003. Is debt providing financing for a larger or smaller proportion of the company’s asset growth? Explain.
g. Compute the times interest earned ratios for 2004 and 2003. Do they look good or bad? Explain.
h. After Joe released its 2004 financial statements, the company’s stock was trading at $18. After the release of its 2003 financial statements, the company’s stock price was $15 per share. Compute the P/E ratios for both years. Does it appear that investors have become more (or less) optimistic about Joe’s future success?