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A common size income statement for creek enterprises

28/12/2020 Client: saad24vbs Deadline: 10 Days

Details: Complete the following problems from the textbook: (All 7 problems are printed on here)


· P3-3:


· P3-6


· P3-10


· P3-16


· P3-18


· P3-20


· P3-21


Follow these instructions for completing and submitting your assignment:


1. Do all work in Excel. Do not submit Word files or *.pdf files.


2. Submit a single spreadsheet file for this assignment. Do not submit multiple files.


3. Place each problem on a separate spreadsheet tab.


4. Label all inputs and outputs and highlight your final answer.


5. Follow the directions in “Guidelines for Developing Spreadsheets.”


P-3: Income statement preparation On December 31, 2015, Cathy Chen, a self-employed


certified public accountant (CPA), completed her first full year in business. During


the year, she billed $360,000 for her accounting services. She had two employees, a


bookkeeper and a clerical assistant. In addition to her monthly salary of $8,000,


Ms. Chen paid annual salaries of $48,000 and $36,000 to the bookkeeper and the


clerical assistant, respectively. Employment taxes and benefit costs for Ms. Chen and


her employees totaled $34,600 for the year. Expenses for office supplies, including


postage, totaled $10,400 for the year. In addition, Ms. Chen spent $17,000 during


the year on tax-deductible travel and entertainment associated with client visits


and new business development. Lease payments for the office space rented (a taxdeductible


expense) were $2,700 per month. Depreciation expense on the office


furniture and fixtures was $15,600 for the year. During the year, Ms. Chen paid


interest of $15,000 on the $120,000 borrowed to start the business. She paid an


average tax rate of 30% during 2015.


a. Prepare an income statement for Cathy Chen, CPA, for the year ended December


31, 2015.


b. Evaluate her 2015 financial performance.


P3–6: Balance sheet preparation Use the appropriate items from the following list to prepare


in good form Mellark’s Baked Goods balance sheet at December 31, 2015.


Item Value ($000 Item Value ($000) at


Item December 31, 2015 December 31, 2015 December 31, 2015



Accounts payable


$ 220


Inventories


$375


Accounts receivable


450


Land


100


Accruals


55


Long-term debts


420


Accumulated depreciation


265


Machinery


420


Buildings


225


Marketable securities


75


Cash


215


Notes payable


475


Common stock (at par)


90


Paid in capital in excess


Cost of goods sold


2,500


of par


360


Depreciation expense


45


Preferred Stock


100


Equipment


140


Retained Earnings


210


Furniture and fixtures


170


Sales Revenue


3,600


General expense


320


Vehicles


25


P3–10: Statement of retained earnings Hayes Enterprises began 2015 with a retained earnings


balance of $928,000. During 2015, the firm earned $377,000 after taxes. From


this amount, preferred stockholders were paid $47,000 in dividends. At year-end


2015, the firm’s retained earnings totaled $1,048,000. The firm had 140,000 shares


of common stock outstanding during 2015.


a. Prepare a statement of retained earnings for the year ended December 31, 2015,


for Hayes Enterprises. (Note: Be sure to calculate and include the amount of cash


dividends paid in 2015.)


b. Calculate the firm’s 2015 earnings per share (EPS).


c. How large a per-share cash dividend did the firm pay on common stock during


2015?


P3–16: Accounts receivable management An evaluation of the books of Blair Supply, which


follows, gives the end-of-year accounts receivable balance, which is believed to consist


of amounts originating in the months indicated. The company had annual sales


of $2.4 million. The firm extends 30-day credit terms.


Month of origin Accounts receivable


July $ 3,875


August 2,000


September 34,025


October 15,100


November 52,000


December 193,000


Year-end accounts receivable $300,000


a. Use the year-end total to evaluate the firm’s collection system.


b. If 70% of the firm’s sales occur between July and December, would this information


affect the validity of your conclusion in part a? Explain.


P3–18: Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requested


a $4,000,000 loan, to assess the firm’s financial leverage and financial risk. On the


basis of the debt ratios for Creek, along with the industry averages (see the top of


the next page) and Creek’s recent financial statements (following), evaluate and


recommend appropriate action on the loan request


Creek Enterprises Income Statement for the Year Ended December 31, 2015


Sales revenue $30,000,000


Less: Cost of goods sold 21,000,000


Gross profits $ 9,000,000


Less: Operating expenses


Selling expense $ 3,000,000


General and administrative expenses 1,800,000


Lease expense 200,000


Depreciation expense 1,000,000


Total operating expense $ 6,000,000


Operating profits $ 3,000,000


Less: Interest expense 1,000,000


Net profits before taxes $ 2,000,000


Less: Taxes (rate 5 40%) 800,000


Net profits after taxes $ 1,200,000


Less: Preferred stock dividends 100,000


Earnings available for common stockholders $ 1,100,000


P3–20: Common-size statement analysis A common-size income statement for Creek Enterprises’


2014 operations follows. Using the firm’s 2015 income statement presented in


Problem 3–18, develop the 2015 common-size income statement and compare it with


the 2014 statement. Which areas require further analysis and investigation?


Creek Enterprises Common-Size Income Statement


for the Year Ended December 31, 2014


Sales revenue ($35,000,000) 100.0%


Less: Cost of goods sold 65.9


Gross profits 34.1%


Less: Operating expenses


Selling expense 12.7%


General and administrative expenses 6.3


Lease expense 0.6


Depreciation expense 3.6


Total operating expense 23.2


Operating profits 10.9%


Less: Interest expense 1.5


Net profits before taxes 9.4%


Less: Taxes (rate 5 40%) 3.8


Net profits after taxes 5.6%


Less: Preferred stock dividends 0.1


Earnings available for common stockholders 5.5%


P3–21: The relationship between financial leverage and profitability Pelican Paper, Inc.,


and Timberland Forest, Inc., are rivals in the manufacture of craft papers. Some financial


statement values for each company follow. Use them in a ratio analysis that


compares the firms’ financial leverage and profitability.


Item Pelican Paper, Inc. Timberland Forest, Inc.


Total assets $10,000,000 $10,000,000


Total equity (all common) 9,000,000 5,000,000


Total debt 1,000,000 5,000,000


Annual interest 100,000 500,000


Total sales 25,000,000 25,000,000


EBIT 6,250,000 6,250,000


Earnings available for


common stockholders 3,690,000 3,450,000


a. Calculate the following debt and coverage ratios for the two companies. Discuss


their financial risk and ability to cover the costs in relation to each other.


1. Debt ratio


2. Times interest earned ratio


b. Calculate the following profitability ratios for the two companies. Discuss their


profitability relative to one another.


1. Operating profit margin


2. Net profit margin


3. Return on total assets


4. Return on common equity


c. In what way has the larger debt of Timberland Forest made it more profitable


than Pelican Paper? What are the risks that Timberland’s investors undertake


when they choose to purchase its stock instead of Pelican’s?


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