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Chapter 2 Discussion Questions Rev 0

The document contains financial statements for Rachel Corporation for 2015 and 2016, including balance sheets, income statements, and discussions of dividends and cash flows. The balance sheet showed assets of $200k and $350k and liabilities of $50k and $150k in 2015 and 2016. The income statement showed net income increasing from $95k to $100k from 2015 to 2016. The document also discussed errors in the initial 2015 balance sheet and the calculation of a $50k dividend payment in 2016.

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Hayley S
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61 views

Chapter 2 Discussion Questions Rev 0

The document contains financial statements for Rachel Corporation for 2015 and 2016, including balance sheets, income statements, and discussions of dividends and cash flows. The balance sheet showed assets of $200k and $350k and liabilities of $50k and $150k in 2015 and 2016. The income statement showed net income increasing from $95k to $100k from 2015 to 2016. The document also discussed errors in the initial 2015 balance sheet and the calculation of a $50k dividend payment in 2016.

Uploaded by

Hayley S
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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FINA A718 - Chapter 2 Discussion Questions

Rachel Corporation Balance Sheet


2015 2016
Assets
Current assets - -
Cash & Equivalents 5 25
Accounts receivable 10 7
Inventory 85 118
Prepaid expenses 0 0
Total current assets 100 150
Long-term assets - -
Property, Plant & Equipment 100 200
Less: Accumulated depreciation 0 0 Error 1
NET Property, Plant & Equipment 100 200
Intangible Assets and Others 0 0
Total long-term assets 100 200
Total assets 200 350

Liabilities and Stockholders’ Equity


Liabilities - -
Current liabilities - -
Accounts payable 45 67
Notes payable 0 25
Income tax payable
Total current liabilities 45 92
Long-term liabilities - -
Mortgage payable/Long-term debt 0 50
Long-term deferred taxes 5 8
Total long-term liabilities 5 58
Total liabilities 50 150
Stockholders’ equity 20 20 Error 2
Stock
Retained earnings 130 180
Total stockholders’ equity 150 200
Total liabilities and stockholders’ equity 200 350

Initially, I had difficulty in getting my balance sheet to balance, due to my confusion regarding terminology. Here's why.
Error 1: I included the "depreciation expense" as part of the "Less: Accumulated depreciation" of long-term assets.
Error 2: I forgot to include the initial cash investment of $20K (terminology of "stock" versus stockholder's equity)
inology. Here's why.
ng-term assets.
older's equity)
FINA A718 - Chapter 2 Discussion Questions

Rachel Corporation Income Sheet


2015 2016
Net Sales (or Net Revenue) 350 400
Cost of Goods Sold (COGS) 125 140
Gross Profit 225 260
Operating Expenses (OPEX)* 35 40
Depreciation 45 50
Operating Income 145 170
Other Income 0 0
Earning before interest & taxes (EBIT) 145 170
Interest expense 0 15
Pretax income (EBT) 145 155
Total Taxes (Current & deferred) 50 55
Net Income 95 100

*Recall from Accounting that:


COGS are direct labor, direct/raw materials & overhead costs for
production.
OPEX are direct costs associated with daily operations/production which
are not included in COGS (e.g., rent, utilities)

Selling, General & Administrative (SG&A) expenses are company's


operating costs that are not included in the direct costs of production
(OPEX) or cost of goods sold (COGS); SG&A includes all non-production
costs (e.g.., corporate overhead, legal, marketing)
FINA A718 - Chapter 2 Discussion Questions

Rachel Corporation 2016 Dividend Calculation

Statement of Changes in Stockholder Equity for Year End 2016 ($K)


Beginning Common Stock (End of 2015) 20 20
Plus: Common Stock Issued 0 0
A Ending Common Stock 20 20

Beginning Retained Earnings (End of 2015) 130 130


Plus: Net Income 100 100
Less: Dividends ?? 50
B Ending Retained Earnings (End of 2016) 180 180

C Total Stockholders Equity 2016 (A+B=C) 200 200

Total dividend payment was $50


FINA A718 - Chapter 2 Discussion Questions

The cash flow identity states that cash flows from ASSETS should equal cash flows to creditors and equity investors.
(As I understand it, cash flow identity is not the same as the statement of cash flows.)

Rachel Corporation Statement of Cash Flows for Year Ending 2016


Cash Flows from Operating Activities
Cash Receipts from Revenue
Cash Payments for Expenses
Interest Paid to Creditors
Net Cash Flow from Operating Activities

Cash Flows from Investing Activities


Cash Payments to Purchase Land
Cash from Selling Land
Cash Payments to Purchase Building/Equip.

Cash from Selling Building/Equip.


Net Cash Flow from Investing Activities

Cash Flows from Financing Activities


Cash receipts from borrowing funds
Cash receipts from issuing common stock
Cash Payments for dividends
Cash Payments for debt
Net Cash Flow from Financing Activities

Net Increase/Decrease in Cash


Plus: Beginning Cash Balance
Ending Cash Balance
creditors and equity investors.

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