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P3–3 Income statement preparation On December 31, 2015

DescriptionPlease Follow these instructions for completing and submitting your assignment:Do all work in Excel. Do not submit Word files or *.pdf files.Submit a single spreadsheet file for this assignment. Do not submit multiple files.Place each problem on a separate spreadsheet tab.Label all inputs and outputs and highlight your final answer.Follow the directions in “Guidelines for Developing Spreadsheets.P3–3 Income statement preparation On December 31, 2015, Cathy Chen, a self-employedcertified public accountant (CPA), completed her first full year in business. Duringthe year, she billed $360,000 for her accounting services. She had two employees, abookkeeper 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 theclerical assistant, respectively. Employment taxes and benefit costs for Ms. Chen andher employees totaled $34,600 for the year. Expenses for office supplies, includingpostage, totaled $10,400 for the year. In addition, Ms. Chen spent $17,000 duringthe year on tax-deductible travel and entertainment associated with client visitsand new business development. Lease payments for the office space rented (a taxdeductibleexpense) were $2,700 per month. Depreciation expense on the officefurniture and fixtures was $15,600 for the year. During the year, Ms. Chen paidinterest of $15,000 on the $120,000 borrowed to start the business. She paid anaverage tax rate of 30% during 2015.a. Prepare an income statement for Cathy Chen, CPA, for the year ended December31, 2015.b.Evaluate her 2015 financial performance.P3–6Balance sheet preparation Use the appropriate items from the following list to preparein good form Mellark’s Baked Goods balance sheet at December 31, 2015. Value ($000) at Value ($000) at Item December 31, 2015 Item December 31, 2015Accounts payable $ 220 Inventories $ 375Accounts receivable 450 Land 100Accruals 55 Long-term debts 420Accumulated depreciation 265 Machinery 420Buildings 225 Marketable securities 75Cash 215 Notes payable 475Common stock (at par) 90 Paid-in capital in excessCost of goods sold 2,500 of par 360Depreciation expense 45 preferred stock 100 Equipment 140 Retaining ed earnings 210Furniture and fixtures 170 Sales revenue 3,600General expense 320 Vehicles 25P3–10 Statement of retained earnings Hayes Enterprises began 2015 with a retained earningsbalance of $928,000. During 2015, the firm earned $377,000 after taxes. Fromthis amount, preferred stockholders were paid $47,000 in dividends. At year-end2015, the firm’s retained earnings totaled $1,048,000. The firm had 140,000 sharesof 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 cashdividends 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 during2015?P3–16 Accounts receivable management An evaluation of the books of Blair Supply, whichfollows, gives the end-of-year accounts receivable balance, which is believed to consistof amounts originating in the months indicated. The company had annual salesof $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 $300,000a. 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 informationaffect the validity of your conclusion in part a? Explain.P3–18Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requesteda $4,000,000 loan, to assess the firm’s financial leverage and financial risk. On thebasis of the debt ratios for Creek, along with the industry averages (see the top ofthe next page) and Creek’s recent financial statements (following), evaluate andrecommend 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 1,000,000Net profits before taxes $ 2,000,000 Less: Taxes (rate 5 40%) 800,000Net profits after taxes $ 1,200,000Less: Preferred stock dividends 100,0000Earnings available for common stockholders $ 1,100,000P3–20 Common-size statement analysis A common-size income statement for Creek Enterprises’2014 operations follows. Using the firm’s 2015 income statement presented inProblem 3–18, develop the 2015 common-size income statement and compare it withthe 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 financialstatement values for each company follow. Use them in a ratio analysis thatcompares the firms’ financial leverage and profitability. Item Pelican Paper, Inc. Timberland Forest, Inc.Total assets $10,000,000 $10,000,000Total equity (all common) 9,000,000 5,000,000Total debt 1,000,000 5,000,000Annual interest 100,000 500,000Total sales 25,000,000 25,000,000EBIT 6,250,000 6,250,000Earnings available for 3,690,000 3,450,000common stockholdersa. Calculate the following debt and coverage ratios for the two companies. Discusstheir financial risk and ability to cover the costs in relation to each other.1. Debt ratio2. Times interest earned ratiob. Calculate the following profitability ratios for the two companies. Discuss theirprofitability relative to one another.1. Operating profit margin2. Net profit margin3. Return on total assets4. Return on common equityc. In what way has the larger debt of Timberland Forest made it more profitablethan Pelican Paper? What are the risks that Timberland’s investors undertakewhen they choose to purchase its stock instead of Pelican’s?

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