Question

The comparative financial statements of the Summer Company are as follows. The market price of the...

The comparative financial statements of the Summer Company are as follows.
The market price of the Summer Company common stock was $36 on
December 31, 2016 and $11.20 on December 31, 2017.
          Summer Company
Comparative Balance Sheet
December 31, 2017, 2016 and 2015
ASSETS
2017 2016 2015
Current Assets
Cash $176,200 $253,100 $26,500
Accounts Receivable 238,850 31,850 67,350
Merchandise Inventory 62,500 42,500 130,000
Prepaid Expenses 700 1,700 2,200
Total Current Assets $478,250 $329,150 $226,050
Plant Assets 696,100 726,100 786,100
Less: Accumulated Depreciation (70,000) (60,000) (80,000)
Plant Assets (net) 626,100 666,100 706,100
Total Assets $1,104,350 $995,250 $932,150
Liabilities and Stockholder's Equity
Current Liabilites
Accounts Payable $55,000 $30,000 $60,000
Accrued Liabilities 1,000 8,000 12,000
Dividends Payable 0 10,000 2,000
Total Current Liabilities $56,000 $48,000 $74,000
Long-Term Liabilities
Mortgage Note Payable $9,000 $29,000 $49,000
Bonds Payable 240,000 340,000 290,000
Less: Discount on Bonds Payable (4,500) (5,500) (4,500)
Total Long-Term Liabilities $244,500 $363,500 $334,500
Total Liabilities $300,500 $411,500 $408,500
Stockholders' Equity
Common Stock, $10 Par $411,900 $311,900 $311,900
Paid in Capital in Excess of Par 162,350 72,350 72,350
Retained Earnings 236,600 209,500 149,400
Less: Treasury Stock (7,000) (10,000) (10,000)
Total Stockholders' Equity $803,850 $583,750 $523,650
Total Liabilities and
Stockholders' Equity $1,104,350 $995,250 $932,150
The Summer Company
Retained Earnings Statement
                  For the years Ended December 31, 2011 and 2010
2017 2016
Retained Earnings. Jan. 1, $209,500 $149,400
Add: Net Income 27,100 70,100
Less: Dividends Declared (10,000)
Retained Earnings Dec. 31 $236,600 $209,500
The Summer Company
Income Statement
For the years ended December 31, 2011 and 2010
2017 2016
Sales $260,000 $521,000
less: Cost of Merchandise Sold 200,000 387,500
Gross Profit 60,000 133,500
less: Operating Expenses; excluding Depreciation 11,000 8,500
        Depreciation Expense 20,000 20,000
Income from Operations $29,000 $105,000
Add: Other Income: Gain on sale of equipment 10,000 0
Less: Other Expenses: Loss on sale of equipment 8,000
$39,000 $97,000
Less: Interest Expense 3,900 5,900
Income before Income Tax $35,100 $91,100
Less: Income Tax expense 8,000 21,000
$27,100 $70,100
The Summer Company
Statement of Cash Flows
       For the year ended December 31, 2016
Cash Flow From Operating Activities:
Net Income $70,100
Add: Net decrease in Accounts Receivable $35,500
Net decrease in Merchandise Inventory 87,500
Net decrease in Prepaid Expenses 500
Loss on Sale of Plant Assets (1) 8,000
Depreciation Expense (1) 20,000
Amortization of Bond Discount (2) 1,000 152,500
222,600
Deduct: Decrease in Accounts Payable $30,000
Decrease in Accrued Liabilities 4,000 34,000
Cash Flow From Operating Activities 188,600
Cash Flow from Investing Activities:
Sale of Plant Assets for cash (1) 12,000
Cash Flow from Investing Activities 12,000
Cash Flow from Financing Activities
Issued Bonds for cash (2) 48,000
Deduct: Cash Dividends Paid 2,000
Mortgage paid 20,000 22,000
Cash Flow from Financing Activities 26,000
Net Increase in Cash 226,600
1/1/2016 Cash Balance 26,500
12/31/2016 Cash Balance 253,100
(1) Sold Plant Assets with a book value of $20,000.
(2) Issued bonds for $48,000. Face Value $50,000.
The following transactions occurred during 2017 to assist you in preparing the Statement
of Cash Flows for 2017.
A. Dividends were declared in 2016 and paid 2017.
B. Purchased Treasury Stock for $10,000 on 1/1/2017.
C. Sold Treasury Stock receiving cash.
D. Sold Plant Assets, receiving cash. The net book value of the plant asset was $20,000.
E. Paid off a portion of the mortg age note.
F. Retired bonds at their maturity value.
G. Amortized the Discount on Bonds Payable.
H. Issued common stock, receiving cash.
Required: 1. Prepare the Statement of Cash Flows for the year ended December 31, 2017.
   (Show all required computations).
Assume that your manager, who has a marketing background ask you the
following questions 2-5, after reviewing the Statement of Cash Flows for 2017
and 2016.
As you can see from the premise of the questions, that your manager does not
have a basic understanding of the statement of cash flows. Take that into
consideration when answering questions 2-5.
2. "How can Depreciation be a cash flow"?
3. "How can a gain on the sale of non-current assets be a deduction from Net
    Income in determining the Cash Flow from Operating Activities?
4. "How can a Loss on the Sale of non current assets be be an
      addition to Net Income in determining Cash Flow from Operating Activities?
5. "Why does the bank need a Statement of Cash Flows anyway? They can
     compute the increase or decrease in cash flow from the Balance Sheet for the
     last two years"?
6. Prepare the following financial statement analysis for the 2017 and 2016.
     Define each measure and whether the Summer Company did better or worse
     and why?
    A. Current ratio.
    B. Quick ratio.
    C. Rate of Return on Total Assets.
    D. Rate of Return on Common Stockholders' Equity.
    E. Earnings Per Share on Common Sock. (When computing the earnings per
        share assume there is no Treasury Stock). Use the outstanding shares as of
        12/31/2017 for 2017 and the outstanding shares as of 12/31/ 2016 for 2016. Do
         not use the weighted average outstanding shares.
     F. Accounts Receivable Turnover. Assume all Sales are on account.
     G. Average collection period. Assume all Sales are on account.
     H. Inventory Turnover.
      I. Debt to equity ratio
      J. Times Interest Earned Ratio.
      K. Price Earnings Ratio.
      L. Operating Cash Flow to current liability ratio
      M. Vertical analysis for the Income Statement for 2017 and 2016.
    Below is an example of how you should present the information.
2011 2010
Working Capital:
Current Assets $478,250 $329,150
Current Liabilities 56,000 48,000
Net Working Capital 422,250 281,150
Strength or Weakness
Working Capital measures the ability of a company to meet it's short-term obligations with
current assets. In 2011 Summer is performing much better since they have more current
assets available to meet their short-term obligations.
7. From your analysis, summarize the major strenths and weaknesses comparing
    Summer's 2017 and 2016 performance. Summarize part 6 A through M.

Homework Answers

Answer #1

2. Depriciation is a cash flow becasuse journal entry for depreciation is

Depreciation a/c ...........Dr

To Assets a/c

Because there is neither cash debit nor credit. So it is non cash expense, which only decrese profit not cash.

3. Gain from asset must be deducted from operating assets. Because it is non operating income. Further the amount of gain is already included in amount of sale proceeds of assets.

4. Loss on assets is added back to profit. Because it is non operating item and not part of operating activities.

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