9

CHAPTER

2
NINT H
EDITI ON

th

Foundations of Financial Management

TWO

Review of Accounting

Block Hirt

Irwin/McGraw-Hill Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc.

NINT H

th EDITI
ON

Foundations of Financial Management

T 2-1

Table 2-1
Income Statement For the Year Ended December 31, 1999
KRAMER CORPORATION

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

Sales . . . . . . . . . . . . . . . . . Cost of goods sold . . . . . . . . . . . Gross Profits . . . . . . . . . Selling and administrative expense . . . . Depreciation expense . . . . . . . . . . Operating profit (EBIT)* . . . . Interest expense . . . . . . . . . . . . Earnings before taxes (EBT) . . Taxes . . . . . . . . . . . . . . . . . Earnings after taxes (EAT) . . . Preferred stock dividends . . . . . . . . Earnings available to common stockholders. Shares outstanding . . . . . . . . . . . Earnings per share . . . . . . . . . . .

$2,000,000 1,500,000 500,000 270,000 50,000 180,000 20,000 160,000 49,500 110,500 10,500 $ 100,000 100,000 $1.00
The McGraw-Hill Companies, Inc.

Block Hirt

*Earnings before interest and taxes.

Irwin/McGraw-Hill

NINT H

th EDITI
ON

Foundations of Financial Management

T 2-7

Table 2-6a
KRAMER CORPORATION Comparative Balance Sheets Year-End 1998 Assets Current assets: Cash . . . . . . Marketable securities . Accounts receivable (net) Inventory . . . . Prepaid expenses . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000 10,000 170,000 160,000 30,000 400,000 $ 40,000 10,000 200,000 180,000 20,000 450,000 Year-End 1999

Block Hirt

Investments (long term) . . . Plant and equipment . . . . Less: Accumulated depreciation Net plant and equipment . . . Total assets . . . . . . .

20,000 1,000,000 550,000 450,000 $ 870,000

50,000 1,100,000 600,000 500,000 $ 1 ,000,000

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc.

NINT H

th EDITI
ON

Foundations of Financial Management

T 2-7

Table 2-6b

KRAMER CORPORATION Comparative Balance Sheets Liabilities and Stockholders Equity

Year-End 1998 Year-End 1999

Current liabilities: Accounts payable . . . . . . Notes payable . . . . . . . Accrued expenses . . . . . . Total current liabilities . Long-term liabilities: Bonds payable, 1998 . . . . . . Total liabilities . . . Stockholders equity: Preferred stock, $100 par value . . Common stock, $1 par value . . . Captial paid in excess of par . . . Retained earnings . . . . . . Total stockholders equity
Irwin/McGraw-Hill

. . . . . . . . . . .

. . . . . . . . . . . .

$ 45,000 100,000 35,000 180,000 40,000 220,000 50,000 100,000 250,000 250,000 650,000

80,000 100,000 30,000 210,000 90,000 300,000 50,000 100,000 250,000 300,000 700,000

Block Hirt

Total liabilities and stockholders equity .

$870,000 $ 1,000,000
The McGraw-Hill Companies, Inc.

NINT H

th EDITI
ON

Foundations of Financial Management

T 2-9

Table 2-10a

KRAMER CORPORATION Statement of Cash Flows For the Year Ending December 31, 1999

Cash flows from operating activities: Net income (earnings after taxes) . Adjustments to determine cash flow from operating activities: Add back depreciation . . . Increase in accounts receivable . Increase in inventory . . . . Decrease in prepaid expenses . Increase in accounts payable . . Decrease in accrued expenses. . Total adjustments . . .

. . . . . . . . $ 110,500

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . . . .

. . . . .

. . 50,000 (30,000) . (20,000) 10,000 35,000 (5,000) . . 40,000

Block Hirt

Net cash flows from operating activities . . . . . . . $ 150,500

The McGraw-Hill Companies, Inc.

Irwin/McGraw-Hill

NINT H

th EDITI
ON

Foundations of Financial Management

T 2-9

Table 2-10b
Cash flows from investing activities: Increase in investments (long-term securities) . . . (30,000) Increase in plant and equipment . . . . . . . . . (100,000) Net cash flows from investing activities . . . . . . ($130,000) Cash flows from financing activities: Increase in bonds payable . . . . . . Preferred stock dividends paid . . . . Common stock dividends paid . . . . Net cash flows from financing activities

. . . .

. . . .

. . . 50,000 . . . (10,500) . . . (50,000) . ($10,500)

Net increase (decrease) in cash flows . . . . . . . . $10,000

Block Hirt

Irwin/McGraw-Hill

The McGraw-Hill Companies, Inc.