Earnings per share measures the net income earned

“Understanding Accounting And Financial Statements”.

“Understanding Accounting and Financial Statements”. Accounting can be an involved process, but none the less is essential for the manager to understand. The purpose of this module is four-fold:

To provide assistance in understanding some of the basic accounting principles and practices.
Provide hands on practice.
Provide real life examples
INSTRUCTIONS:

Watch three entertaining and informative video clips (3:30 minutes each) from The Center for Audit Quality (CAQ):

“Fight Fraud - Accounting Ethics” Provides an explanation why businesses sometimes commit fraudulent accounting acts and the importance of ethics and leadership.
“System of Investor Protection”: Understanding financial reporting and the team members in charge of ensuring reporting accuracy.
“Sarbanes Oxley - The Audit Committee”: Understanding the significance of the Sarbanes Oxley Act of 2002 and audit committee responsibilities. (Video credit: CAQorg.com)
Watch the video clip (1:07 minutes) entitled “Goodbye Training Wheels”. This is an example of a term called “Innovation Transfer” which means “ The transfer of a new idea or method for solving a problem from one group or individual to another, typically from a process improvement consulting group to a client business. Innovation transfer is an important part of Six Sigma and other best practice deployment approaches.” In this case, I am using this example of the young boy in the video learning to ride his bicycle as an analogy of you learning accounting principles: sometimes you just need a little practice and for someone to steady the bike and before long you are peddling on your own!!

(You can read more about innovation transfer at Business Dictionary.com. “Training Wheel Video credit: Andrea Dorfman. Music: Iron and Wine)

Complete the Excel workbook entitled Chpt 15 Critical Thinking Exercise – Accounting. This workbook consists of two problems (each worth up to 50 points each totaling the possible 100 points you can earn). The two problems are:

Wheatley International – Preparing a Financial Statement
Acme Incorporated – Calculating Financial Ratios
Both problems are in the same Excel workbook and are listed in six (6) tabs at the bottom of the spreadsheet when you open the file. Complete the work in the gray answer boxes for each assignment

Wheatley List of Accounts
PREPARING FINANCIAL STATEMENTS
As the accountant for Wheatley International, it is your job to prepare the company’s income statement and balance sheet. Use the accounts listed below to construct the statements. Assume that the tax rate is 25%.
List of Accounts for
WHEATLEY INTERNATIONAL
Accounts Receivable $120,600
Land $1,500,000
Notes Receivable $61,200
Insurance Expenses $54,000
Accounts Payable $45,000
Interest Expenses $24,600
Common Stock $1,896,000
Depreciation $400,000
Net Sales $1,053,000
Ending Inventory $126,600
Notes Payable (Long‑Term) $210,000
Beginning Inventory $154,800
Retained Earnings $1,459,800
Advertising Expense $90,000
Cash $72,000
Salaries $180,000
Short-Term Notes Payable $15,600
Merchandise Purchased (for Inventory) $316,800
Buildings $1,050,000
Rent $13,800
Utilities $8,400
Equipment & Vehicles $1,066,000
Goodwill $90,000
Bonds Payable $60,000
Wheatley Income Statement
The formula for the balance sheet is assets equal liabilities plus stockholders’ equity. To prepare a balance sheet, add the assets and liabilities. The difference between the two is stockholders’ equity. For the income statement, you subtract cost of goods sold from net sales (revenue). Then you subtract expenses to get gross income. From that, you subtract the income tax of 25% to get net income. (Note: The format of these statements may be slightly different from the format taught in an accounting course. The exact format is less important than understanding the overall concepts.)
WHEATLEY INTERNATIONAL
INCOME STATEMENT
FY 201X
REVENUES
Net Sales $1,053,000
COST OF GOODS SOLD
Beginning Inventory
Merchandise Purchased +
Cost of Goods Available for Sale $471,600
Less: Ending Inventory -
Cost of Goods Sold $345,000
GROSS PROFIT (GROSS MARGIN)
OPERATING EXPENSES
Selling Expenses
Salaries
Advertising
Total Selling Expenses $270,000
General Expenses
Insurance
Interest Expense
Rent
Utilities
Total General Expenses
Total Operating Expenses
NET PROFIT (INCOME) BEFORE TAXES
Less: Income Tax Expenses (25%)
NET INCOME (PROFIT) AFTER TAXES $252,900
Wheatley Balance Sheet
Complete the balance sheet. (Fill in the gray highlighted areas)
WHEATLEY INTERNATIONAL
Balance Sheet
December 31, 201X
ASSETS
Current Assets
Cash $72,000
Accounts Receivable
Notes Receivable
Inventory
Total Current Assets
Fixed Assets
Land
Buildings
Equipment & Vehicles
Depreciation - $400,000
Total Fixed Assets
Other Assets
Goodwill $90,000
Total Other Assets
TOTAL ASSETS $3,686,400
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts Payable $45,000
Short-Term Notes Payable
Total Current Liabilities $60,600
Long‑Term Liabilities
Notes Payable (Long-Term)
Bonds
Total Long‑Term Liabilities $270,000
Total Liabilities
Owner’s Equity
Common Stock
Retained Earnings $1,459,800
Total Owners’ Equity
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY $3,686,400
Acme Inc. Questions
You are considering investing in Acme Incorporated. The company has provided you with the balance sheet and income statement for the previous year. The current price of one share of stock is $46.25. Earning per share last year was $1.86.
Questions
1 Calculate the requested financial ratios
(IMPORTANT EXPLAIN WHAT THESE NUMBERS MEAN IN RELATION TO ACME)
a. Current ratio
b. Debt-to-equity ratio
c. Return on sales (use net income AFTER taxes)
d. Return on equity (use net income AFTER taxes)
e. Earnings per share (use net income AFTER taxes)
2 Would you invest in Acme Incorporated? Why or why not?
Acme Income Statement
ACME INCORPORATED
STATEMENT OF INCOME
FY 201X
REVENUES
Net Sales $4,090,970
Other Income + $104,227
Total Revenue $4,195,197
COST OF GOODS SOLD $2,673,129
GROSS PROFIT (GROSS MARGIN) $1,522,068
OPERATING EXPENSES
Total Selling Expenses $333,300
Total General Expenses + $306,036
Total Operating Expenses $639,336
NET INCOME BEFORE TAXES $882,732
Less: Income Tax Expenses (25%) $220,683
NET INCOME (PROFIT) AFTER TAXES $662,049
Acme Inc Balance Sheet
ACME INCORPORATED
Balance Sheet
December 31, 201X
ASSETS
Current Assets
Cash $280,928
Marketable Securities $514,800
Accounts Receivable $108,694
Notes Receivable $855,771
Inventories $218,156
Prepain Expenses and Other $88,237
Total Current Assets $2,066,586
Fixed Assets
Land $510,000
Plant and Building $304,096
Equipment & Vehicles $218,500
Total Fixed Assets $1,744,701
Other Assets
Goodwill, Net $49,930
Total Other Assets $49,930
TOTAL ASSETS $3,861,217
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts Payable $226,977
Accrued Expenses and Other $380,496
Current Portion of Finance Debt $382,579
Total Current Liabilities $990,052
Long‑Term Liabilities
Notes Payable (Long-Term) $228,772
Bonds $380,000
Other Long‑Term Liabilities $29,478
Total Long-Term Liabilities $638,250
Total Liabilities $1,628,303
Owner’s Equity
Common Stock $389,538
(342,196 Shares Outstanding)
Retained Earnings $1,843,377
Total Owners’ Equity $2,232,915
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY $3,861,217
Acme Inc Question Worksheet
Calculate the requested financial ratios. (Fill in the gray highlighted areas)
a. Current ratio. The current ratio is the ratio of the firm’s current assets to its current liabilities,
calculated as follows:
Current ratio =
Current assets or
Current liabilities
:1 Show the ratio
b. Debt-to-equity ratio. The debt-to-equity ratio measures the degree to which the company
is financed by borrowed funds that must be repaid. It is calculated as follows:
Debt-to-equity ratio =
$1,628,300 Show percentage or decimal format (e.g. .346 or 35%)
or $2,232,815
or %
c. Return on sales. Return on sales is calculated by comparing a company’s net income
with its total sales, calculated as follows:
Return on sales =
or
%
d. Return on equity. Return on equity measures how much was earned for each dollar invested
by owners. It is calculated by comparing a company’s net income with its total owner’s equity:
Return on equity =
Net income or
Owners’ equity $2,232,915
%
e. Earnings per share. Earnings per share measures the amount of profit earned by a company
for each share of common stock it has outstanding:
Earnings per share =
Net income or
Number of shares outstanding $342,196
$1.935 per share
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