Deck 13: Financial Statement Analysis

Question 1

Valley Mills Construction, Inc., had the following stockholders' equity on June 30, 2013:

In the past, Valley Mills has paid an annual cash dividend of $0.25 per share. Despite the large retained earnings balance, the board of directors wished to conserve cash for expansion. The board delayed the payment of cash dividends and in July distributed a 10% stock dividend. During August, the company's cash position improved. The board then declared and paid a cash dividend of $0.25 per share in September.
Suppose you owned 1,000 shares of Valley Mills common stock, acquired three years ago, prior to the 10% stock dividend. The market price of the stock was $22 per share before any of these dividends.
Requirements
1. What amount of cash dividends did you receive last year-before the stock dividend What amount of cash dividends will you receive after the stock dividend
2. How does the stock dividend affect your proportionate ownership in Valley Mills Construction Explain.
3. Immediately after the stock dividend was distributed, the market value of Valley Mills stock decreased from $22 per share to $20 per share. Does this decrease represent a loss to you Explain.

Answer 1

2.
Read the exercise.
Given the suppositions listed in the case facts determine how the stock dividend affected your proportionate ownership in Valley Mills Construction.
The dividend would not affect proportionate ownership due to the fact that all of the stockholders received new shares equal to 10% of the shares held prior to the dividend. Each stockholder is equally placed as they were before the dividend.
3.
Determine if the decrease in the given value of the stock represents a loss.
No loss of value occurred. The market value of the stock dividend which is given as $22,000 is the same as it was after the dividend.
Any increase in the number of shares owned at twenty dollars per share is offset by the decrease in the market price per share.

Question 2

Reporting a prior-period adjustment
Wells Research Service, Inc., (WRSI) ended 2011 with retained earnings of $73,000. During 2012, WRSI earned net income of $93,000 and declared dividends of $26,000. Also during 2012, WRSI got a $20,000 tax refund from the Internal Revenue Service. A tax audit revealed that WRSI paid too much income tax back in 2010.
Requirement
1. Prepare WRSI's statement of retained earnings for the year ended December 31, 2012, to report the prior-period adjustment.

Answer 2

This exercise requires knowledge and application of the concepts surrounding reporting a prior-period adjustment.
1.
Prepare WRSI'S statement of retained earnings for the year ended December 31, 2012, to report the prior-period adjustment.

Question 3

Preparing a detailed income statement
The following information was taken from the records of Clarkson Motorsports, Inc., at November 30, 2012:

Requirement
1. Prepare a multi-step income statement for Clarkson Motorsports for the fiscal year ended November 30, 2012. Include earnings per share.

Answer 3

__________
* Computation of preferred dividends: 6,000 shares x $4 = $24,000
** Computation of common shares outstanding: 21,000 shares issued - 1,000 treasury shares = 20,000 shares outstanding

Question 4

Bobby's Bagels just landed a contract to open 100 new stores in shopping malls across the country. The new business should triple the company's profits. Prior to disclosing the new contract to die public, top managers of the company quietly bought most of Bobby's Bagels stock for themselves. After the discovery was announced, Bobby's Bagels stock price shot up from $7 to $52.
Requirements
1. Did Bobby's Bagels managers behave ethically Explain your answer.
2. Who was helped and who was harmed by management's action

Question 5

Journalizing a stock dividend and reporting stockholders' equity
The stockholders' equity of Pondside Occupational Therapy, Inc., on December 31, 2011, follows:

On April 30, 2012, the market price of Pondside's common stock was $11 per share and the company distributed a 10% stock dividend.
Requirements
1. Journalize the distribution of the stock dividend.
2. Prepare the stockholders' equity section of the balance sheet after the stock dividend.

Question 6

Preparing a corrected combined statement of income and retained earnings
Jim Heller, accountant for Complete Home Finance, was injured in a boating accident. Another employee prepared the accompanying income statement for the year ended December 31, 2012.

The individual amounts listed on the income statement are correct. However, some accounts are reported incorrectly, and two items do not belong on the income statement at all. Also, income tax has not been applied to all appropriate figures. The income tax rate on discontinued operations was 40%. Complete Home Finance issued 55,000 shares of common stock in 2012 and held 5,000 shares as treasury stock during 2012. Retained earnings at December 31, 2011, was $167,000.
Requirement
1. Prepare a corrected combined statement of income and retained earnings for the fiscal year ended December 31, 2012, including earnings per share. Prepare the income statement in single-step format.

Question 7

The following is a true case. General Electric (GE), like many other large corporations, is scrutinized by financial analysts who develop quarterly forecast EPS figures for the company. The companies are under intense pressure to meet or exceed these EPS forecasts. But when earnings fall short, some companies resort to accounting tricks. A few years ago, GE found itself facing this problem. In one case, it "sold" six locomotive engines to a financial institution at year-end with the idea that the financial institution would resell them to GE's regular railroad customers in the first quarter of the following year. GE booked the revenue at year-end, which helped it hit its forecast EPS numbers. Later, upon investigation by the SEC, the transaction was found to be a "sham," or phony transaction, because the financial institutions were not taking over full ownership of the engines. In early 2009, GE was fined $50,000,000 for misrepresenting its financial results.
Requirements
1. What are the criteria for recording a sale of goods
2. Why do company managers feel pressure to meet or exceed EPS forecasts of outside analysts

Question 8

Journalizing cash and stock dividends
Painting Schools, Inc., is authorized to issue 200,000 shares of $1 par common stock. The company issued 77,000 shares at $3 per share. When the market price of common stock was $5 per share, Painting distributed a 10% stock dividend. Later, Painting declared and paid a $0.25 per share cash dividend.
Requirements
1. Journalize the distribution of the stock dividend.
2. Journalize both the declaration and the payment of the cash dividend.

Question 9

Journalizing dividend and treasury stock transactions, and preparing stockholders' equity
The balance sheet of Franklin Foods, at December 31, 2011, reported 110,000 shares of no-par common stock authorized, with 30,000 shares issued and a Common stock balance of $180,000, Retained earnings had a balance of $120,000. During 2012, the company completed the following selected transactions:

Requirements
1. Record the transactions in the general journal. Explanations are not required.
2. Prepare the stockholders' equity section of Franklin Foods' balance sheet at December 31, 2012.

Question 10

Use the Amazon.com financial statements in Appendix A at the end of this book to answer the following questions.
Requirements
1. Show how Amazon computed basic earnings per share of $2.08 for 2009. (Ignore diluted earnings per share of $2.04.)
2. Prepare a T-account to show the beginning and ending balances and all activity in Retained earnings (Accumulated Deficit) for 2009.
3. How much in cash dividends did Amazon pay out during 2009, if any Explain your answer.
4. How much treasury stock did Amazon have at December 31, 2009 Explain.

Question 11

Effect of stock dividends, stock splits, and treasury stock transactions
Many types of transactions may affect stockholders' equity.
Requirement
1. Identify the effects of the following transactions on total stockholders' equity. Each transaction is independent.
a. A 10% stock dividend. Before the dividend, 520,000 shares of $1 par common stock were outstanding; market value was $3 at the time of the dividend.
b. A 2-for-l stock split. Prior to the split, 65,000 shares of $4 par common stock were outstanding.
c. Purchase of 1,000 shares of treasury stock (par value at $0.50) at $3 per share.
d. Sale of 900 shares of $0.50 par treasury stock for $5 per share. Cost of the treasury stock was $3 per share.

Question 12

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders' equity
The balance sheet of MacMillan Management Consulting, Inc., at December 31, 2011, reported the following stockholders' equity:

During 2012, MacMillan completed the following selected transactions:

Requirements
1. Record the transactions in the general journal.
2. Prepare the retained earnings statement for the year ended December 31, 2012.
3. Prepare the stockholders' equity section of the balance sheet at December 31,2012.

Question 13

Recording a small stock dividend
Supreme Water Sports has 12,000 shares of $2 par common stock outstanding. Supreme distributes a 5% stock dividend when the market value of its stock is $22 per share.
Requirements
1. Journalize Supreme's distribution of the stock dividend on August 31. An explanation is not required.
2. What is the overall effect of the stock dividend on Supreme's total assets
3. What is the overall effect on total stockholders' equity

Question 14

Reporting stockholders' equity after a stock split
Snake Golf Club, Corp., had the following stockholders' equity at December 31, 2011:

On June 30, 2012, Snake split its common stock 2 for 1.
Requirements
1. Make the memorandum entry to record the stock split.
2. Prepare the stockholders' equity section of the balance sheet immediately after the split.

Question 15

Computing EPS and reporting a retained earnings restriction
The capital structure of Hillstride, Inc., at December 31, 2011, included 26,000 shares of $2 preferred stock and 42,000 shares of common stock. Common stock outstanding during 2012 totaled 42,000 shares. Income from continuing operations during 2012 was $118,000. The company discontinued a segment of the business at a gain of $28,000 and also had an extraordinary gain of $18,000. The Hillstride board of directors restricts $97,000 of retained earnings for contingencies. Retained earnings at December 31, 2011, was $97,000, and the company declared preferred dividends of $52,000 during 2012.
Requirements
1. Compute Hillstride's earnings per share for 2012. Start with income from continuing operations. Income and loss amounts are net of income tax.
2. Show two ways of reporting Hillstride's retained earnings restriction.

Question 16

Obtain the annual reports (or annual report data) of five well-known companies. You can get the reports either from the companies' Web sites, your college library, or by mailing a request directly to the company (allow two weeks for delivery). Or you can visit the Web and search the SEC EDGAR database, which includes the financial reports of most well-known companies.
Requirements
1. After selecting five companies, examine their income statements to search for the following items:
a. Income from continuing operations
b. Discontinued operations
c. Extraordinary gains and losses
d. Net income or net loss
e. Earnings per share data
2. Study the companies' balance sheets to see
a. what classes of stock each company has issued.
b. which item carries a larger balance-the Common stock account or Paid-in capital in excess of par (also labeled Additional paid-in capital).
c. the percentage of each company's total stockholders' equity made up of retained earnings.
d. whether the company has Treasury stock. If so, how many shares and how much is the cost
3. Examine each company's statement of stockholders' equity for evidence of
a. cash dividends.
b. stock dividends. (Some companies use the term stock split to refer to a large stock dividend.)
c. treasury stock purchases and sales.
4. As directed by your instructor, either write a report or present your findings to your class, You may not be able to understand everything you find, but neither can the Wall Street analysts! You will be amazed at how much you have learned.

Question 17

Journalizing treasury stock transactions
Stock transactions for Careful Driving School, Inc., follow:

Requirement
1. Journalize the transactions.

Question 18

Preparing a detailed income statement
The following information was taken from the records of Daughtry Motorsports, Inc., at November 30, 2012:

Requirement
1. Prepare a multi-step income statement for Daughtry Motorsports for the fiscal year ended November 30, 2012. Include earnings per share.

Question 19

The following accounting issues have arisen at T-Shirts Plus, Inc.:
Requirements
1. Corporations sometimes purchase their own stock. When asked why they do so, T-Shirts Plus management responds that the stock is undervalued. What advantage would T-Shirts Plus gain by buying and selling its own undervalued stock
2. T-Shirts Plus earned a significant profit in the year ended December 31, 2012, because land that it held was purchased by the State of Nebraska for a new highway. The company proposes to treat the sale of land as operating revenue. Why do you think the company is proposing this plan Is this disclosure appropriate
3. The treasurer of T-Shirts Plus wants to report a large loss as an extraordinary item because the company produced too much product and cannot sell it. (Under the rules of the lower of cost or market, this situation, in which the net realizable value of inventory is less than the book value, would trigger a write-down of inventory.) Why do you think the treasurer wants to report the loss as extraordinary Would that be acceptable

Question 20

Journalizing treasury stock transactions and reporting stockholders' equity
Southern Amusements Corporation had the following stockholders' equity on November 30:

On December 30, Southern purchased 275 shares of treasury stock at $14 per share.
Requirements
1. Journalize the purchase of the treasury stock.
2. Prepare the stockholders' equity section of the balance sheet at December 31.
3. How many shares of common stock are outstanding after the purchase of treasury stock

Question 21

Preparing a corrected combined statement of income and retained earnings
Jeff Halstrom, accountant for Home Bank Finance, was injured in a boating accident. Another employee prepared the following income statement for the year ended December 31, 2012:

The individual amounts listed on the income statement are correct. However, some accounts are reported incorrectly, and two items do not belong on the income statement at all. Also, income tax has not been applied to all appropriate figures. The income tax rate on discontinued operations is 30%. Home Bank Finance issued 54,000 shares of common stock in 2012 and held 4,000 shares as treasury stock dur-ing 2012. Retained earnings at December 31, 2011, was $164,000.
Requirement
1. Prepare a corrected combined statement of income and retained earnings for the fiscal year ended December 31, 2012. Prepare the income statement in single-step format.

Question 22

Comparing and contrasting cash and stock dividends
Compare and contrast the accounting for cash dividends and stock dividends.
Requirement
1. In the space provided, insert either "Cash dividends," "Stock dividends," or "Both cash dividends and stock dividends" to complete each of the following statements.
a. _______________decrease Retained earnings.
b. _______________has (have) no effect on a liability.
c. _______________ increase paid-in capital by the same amount that they decrease Retained earnings.
d. _______________decrease both total assets and total stockholders' equity, resulting in a decrease in the size of the company.

Question 23

Reporting a retained earnings restriction
The agreement under which Rapid Copy issued its long-term debt requires the restriction of $150,000 of the company's retained earnings balance. Total retained earnings is $550,000 and common stock, no-par, has a balance of $110,000.
Requirement
1. Report stockholders' equity on Rapid's balance sheet, assuming the following:
a. Rapid discloses the restriction in a note. Write the note.
b. Rapid appropriates retained earnings in the amount of the restriction and includes no note in its statements.

Question 24

Journalizing stock dividends
This exercise continues the Lawlor Lawn Service, Inc., situation from Exercise 12-44 of Chapter 12. On October 15, Lawlor Lawn Service declares and distributes a 10% stock dividend to all common shareholders of record on October 15 when the market price per common share is $5. Lawlor has 100 shares of common stock out-standing on the date of record.
Requirements
1. Is this a small or large stock dividend
2. Journalize the entries related to the dividend.

Question 25

Accounting for a stock dividend
Yummy, Inc., had 310,000 shares of $1 par common stock issued and outstanding as of December 1, 2012. The company is authorized to issue 1,400,000 common shares. On December 15, 2012, Yummy declared and distributed a 5% stock dividend when the market value for Yummy's common stock was $3.
Requirements
1. Journalize the stock dividend.
2. How many shares of common stock are outstanding after the dividend

Question 26

Preparing a multi-step income statement
Click Photographic Supplies, Inc.'s accounting "records include the following for 2012:

Requirement
1. Prepare Click's multi-step income statement for 2012. Omit earnings per share.

Question 27

Accounting for the purchase and sale of treasury stock
This problem continues the Draper Consulting, Inc., situation from Problem 12-45 of Chapter 12. In October, Draper has the following transactions related to its common shares:

Requirements
1. Journalize the entry related to the transactions.
2. Calculate the balance in the T-accounts affected by the transactions.

Question 28

Accounting for a stock dividend
Return to the Yummy, Inc., data in Short Exercise 13-3. Assume instead that the December 15, 2012 stock dividend was 45%.
Requirements
1. Journalize the stock dividend.
2. How many shares of common stock are outstanding after the dividend

Question 29

Computing EPS
Altar, Corp., earned net income of $118,000 for 2012. Altar's books include the following figures:

Requirement
1. Compute Altar's EPS for the year.

Question 30

Accounting for a stock split
Decorator Plus Imports recently reported the following stockholders' equity (adapted except par value per share):

Suppose Decorator Plus split its common stock 2 for 1 in order to decrease the market price per share of its stock. The company's stock was trading at $20 per share immediately before the split.
Requirements
1. Prepare the stockholders' equity section of Decorator Plus Imports' balance sheet after the stock split.
2. Were the account balances changed or unchanged after the stock split

Question 31

Computing EPS
Franco Academy Surplus had 10,000 shares of common stock and 7,000 shares of 5%, $10 par preferred stock outstanding through December 31, 2012. Income from continuing operations for 2012 was $125,000, and loss on discontinued operations (net of income tax saving) was $5,000. Franco also had an extraordinary gain (net of tax) of $25,000.
Requirement
1. Compute Franco's EPS amounts for 2012, starting with income from continuing operations.

Question 32

Accounting for the purchase and sale of treasury stock
Discount Center Furniture, Inc., completed the following treasury stock transactions:
a. Purchased 1,400 shares of the company's $1 par common stock as treasury stock, paying cash of $5 per share.
b. Sold 400 shares of the treasury stock for cash of $8 per share.
Requirements
1. Journalize these transactions. Explanations are not required.
2. Show how Discount Center will report treasury stock on its December 31, 2012 balance sheet after completing the two transactions. In reporting the treasury stock, report only on the Treasury stock account. You may ignore all other accounts.

Question 33

Preparing a statement of retained earnings
Annie May Bakery, Inc., reported a prior-period adjustment in 2012. An accounting error caused net income of prior years to be overstated by $10,000. Retained earnings at December 31, 2011, as previously reported, stood at $47,000. Net income for 201.2 was $71,000, and dividends were $29,000.
Requirement
1. Prepare the company's statement of retained earnings for the year ended December 31, 2012.

Question 34

Interpreting a restriction on retained earnings
JP Corporation reported the following stockholders' equity:

Requirements
1. JP Corporation's agreement with its bank lender restricts JP's dividend payments for the cost of treasury stock the company holds. How much is the maximum amount of dividends TP can declare
2. Why would a bank lender restrict a corporation's dividend payments and treasury stock purchases

Question 35

Preparing a combined statement of income and retained earnings
During 2012, St. Bernard, Corp., earned income from continuing operations of $139,000. The company also sold a segment of the business (discontinued operations) at a loss of $37,000 and had an extraordinary gain of $11,000. At year-end, St. Bernard had an unrealized loss on investments of $5,000.
Requirements
1. Compute St. Bernard's net income and comprehensive income for 2012. All amounts are net of income taxes.
2. What final EPS figure should St. Bernard report for 2012 What is the correct title of this calculation What is the amount of this calculation St. Bernard had 30,000 shares of common stock (and no preferred stock) outstanding.

Question 36

Preparing a corporate income statement
RAR Corporation's accounting records include the following items, listed in no particular order, at December 31, 2012:

Income tax of 30% applies to all items.
Requirement
1. Prepare RAR's income statement for the year ended December 31, 2012. Omit earnings per share.

Question 37

Journalizing dividend and treasury stock transactions, and preparing stockholders' equity
The balance sheet of Lennox Health Foods, at December 31, 2011, reported 120,000 shares of no-par common stock authorized, with 25,000 shares issued and a Common stock balance of $190,000. Retained earnings had a balance of $115,000. During 2012, the company completed the following selected transactions:

Requirements
1. Record the transactions in the general journal. Explanations are not required.
2. Prepare the stockholders' equity section of Lennox Health Foods' balance sheet at December 31, 2012.

Question 38

Reporting earnings per share
Return to the RAR data in Short Exercise 13-8. RAR had 13,500 shares of common stock outstanding during 2012. RAR declared and paid preferred dividends of $3,000 during 2012.
Requirement
1. Show how RAR reported EPS data on its 2012 income statement.

Question 39

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders' equity
The balance sheet of Goldstein Management Consulting, Inc., at December 31, 2011, reported the following stockholders' equity:

During 2012, Goldstein completed the following selected transactions:

Requirements
1. Record the transactions in the general journal.
2. Prepare a retained earnings statement for the year ended December 31, 2012.
3. Prepare the stockholders' equity section of the balance sheet at December 31, 2012.

Question 40

In 100 words or fewer, explain the difference between stock dividends and stock splits. Include the effect on stock values.

Question 41

Reporting comprehensive income
Use the RAR data in Short Exercise 13-8. In addition, RAR had unrealized gains of $4,500 on investments during 2012.
Requirements
1. Start with RAR's net income from Short Exercise 13-8 and show how the company could report other comprehensive income on its 2012 income statement.
2. Should RAR report earnings per share for other comprehensive income

Question 42

Computing EPS and reporting a retained earnings restriction
The capital structure of Blacksmith, Inc., at December 31, 2011, included 18,000 shares of $1 preferred stock and 38,000 shares of common stock. Common stock outstanding during 2012 totaled 38,000 shares. Income from continuing operations during 2012 was $108,000. The company discontinued a segment of the business at a gain of $26,000 and also had an extraordinary gain of $12,000. The Blacksmith board of directors restricts $99,000 of retained earnings for contingencies. Retained earnings at December 31, 2011, was $99,000, and the company declared preferred dividends of $18,000 during 2012.
Requirements
1. Compute Blacksmith's earnings per share for 2012. Start with income from continuing operations. All income and loss amounts are net of income tax.
2. Show two ways of reporting Blacksmith's retained earnings restriction.