Introduction to

Finance
Course Code: FIN201
Lecturer: Tahmina Ahmed
Section: 7
Chapter: 2
Email: tahmina98ahmedsbe@iub.edu.bd
KRAMER CORPORATION
Income Statement
For the Year Ended December 31, 2018
Retained Earnings
Retained Earnings (RE) is the amount of net income left over for the business
after it has paid out dividends to its shareholders plus any retained earnings
given from previous year or at the starting of the year.
The $100,000 of profit ($1 earnings per share) may be paid out to the
common stockholders in the form of dividends or retained in the
company for subsequent reinvestment. The reinvested funds
theoretically belong to the common stockholders, who hope they will
provide future earnings and dividends. In the case of the Kramer
Corporation, we assume $50,000 in dividends will be paid out to the
common stockholders, with the balance retained in the corporation for
their benefit. A short supplement to the income statement, a statement of
retained earnings (Table 2-2), usually indicates the disposition of
earnings.
Retained Earnings

We see that a net value of $50,000 has been added to previously accumulated earnings of
$250,000 to arrive at $300,000.

This value in the statement of retained earnings (Table 2-2), represents the firm’s
cumulative earnings since inception minus dividends and any other adjustments.
Retained Earnings Formula
 Problem Solving: Income Statement
10. Precision Systems had sales of $820,000, cost of goods of $510,000,
selling and administrative expense of $60,000, and operating profit of
$103,000. What was the value of depreciation expense? Set up this
problem as a partial income statement and determine depreciation
expense as the “plug” figure required to obtain the operating profit.

A partial income statement gathers information for only part of a normal accounting
period.

A plug figure in accounting is meant for balancing an account. if any of the account
balances do not tally, a plug figure is used to tally the accounts.
 Problem Solving: Income Statement
11. Stein Books Inc. sold 1,900 finance textbooks for $250 each to High
Tuition University in 20X1. These books cost $210 to produce. Stein
Books spent $12,200 (selling expense) to convince the university to buy
its books.
Depreciation expense for the year was $15,200. In addition, Stein
Books borrowed $104,000 on January 1, 20X1, on which the company
paid 12 percent interest. Both the interest and principal of the loan were
paid on December 31, 20X1.The publishing firm’s tax rate is 30 percent.

Did Stein Books make a profit in 20X1? Please verify with an income
statement.
 Problem Solving: Income Statement
12. Lemon Auto Wholesalers had sales of $1,000,000 last year, and cost of goods sold represented
78 percent of sales. Selling and administrative expenses were 12 percent of sales. Depreciation
expense was $11,000 and interest expense for the year was $8,000. The firm’s tax rate is 30
percent.

a. Compute earnings after taxes.

b. Assume the firm hires Ms. Carr, an efficiency expert, as a consultant. She suggests that by
increasing selling and administrative expenses to 14 percent of sales, sales can be increased to
$1,050,900. The extra sales effort will also reduce cost of goods sold to 74 percent of sales. (There
will be a larger mark-up in prices as a result of more aggressive selling.) Depreciation expense
will remain at $11,000. However, more automobiles will have to be carried in inventory to satisfy
customers, and interest expense will go up to $15,800. The firm’s tax rate will remain at 30
percent. Compute revised earnings after taxes based on Ms. Carr’s suggestions for Lemon Auto
Wholesalers. Will her ideas increase or decrease profitability?
 Problem Solving: Earnings Per Share And
Retained Earnings
16. Elite Trailer Parks has an operating profit of $200,000. Interest expense
for the year was $10,000; preferred dividends paid were $18,750; and
common dividends paid were $30,000. The tax was $61,250. The firm
has 20,000 shares of common stock outstanding.

a. Calculate the earnings per share and the common dividends per
share for Elite Trailer Parks.
b. What was the increase in retained earnings for the year?
 Problem Solving: Earnings Per Share And
Retained Earnings

17. Quantum Technology had $669,000 of retained earnings on

December 31, 20X2. The company paid common dividends
of$35,500 in 20X2 and had retained earnings of $576,000 on
December 31, 20X1. How much did Quantum Technology
earn during 20X2, and what would earnings per share be if
47,400 shares of common stock were outstanding?
Statement of Financial Position (Balance Sheet)
Statement of Financial Position (Balance Sheet)
The balance sheet indicates what the firm owns and how these assets are
financed. It is like a photo of the financial position of the firm at a point in
time, with the stockholders’ equity section represent ownership interest.
It is a cumulative chronicle of all transactions that have affected the
corporation since its inception.
Since, the balance sheet is presented on a historical cost basis, it may not
always reflect the true value of the firm. Balance sheet items are stated on
an original cost basis rather than at current market value.
Terms Of Financial Position (Balance Sheet)
Current assets are any assets that can be converted into cash within a period of one year.

• A company cash would state how much cash is there at the point of time when the balance sheet is being
generated.

• Marketable securities are temporary investments of excess cash. The value shown in the account is the fair
market value.

• When both the buyer and the seller have reasonable understanding of the asset and are willing to make a
deal, this price of the asset is called fair market value.

• Accounts receivable includes the amount that you will receive from your customers, which your customers
didn’t pay yet because they have bought goods in credit.

• Sometimes you might not receive all the money from your debtors so that money is estimated to be
uncollectible and is called bad debts which you need to deduct from the accounts receivable. Bad debt is
always counted by the firm because there is always a risk that payment will not be received.
Terms Of Financial Position (Balance Sheet)
• Inventory is the stock that your company holds. It may be in the form of raw material,
goods in process, or finished goods.

• Prepaid expenses, you might be thinking why prepaid expenses are in current assets
or why expense is an asset. Prepaid expenses represent future expense items that the
company has already paid as an advance, such as insurance premiums or rent. It is
carried on the balance sheet as a current asset until it is consumed. For example you
have paid your office rent of November, in one month advance in October, so this will
be noted down as prepaid expense under current assets. Once they begin using the
office space from November 1st, the payment would then be reported as an expense.
Terms Of Financial Position (Balance Sheet)
• Other assets in the balance sheet will include any investment, these are often known
as short-term investments. Short-term investments are temporary investments that
will provide a cash return within a year. Therefore short-term investments are
considered current assets for accounting purposes.

• Fixed assets are your long-term assets including any property machinery and plant
and equipment. These are based on their original cost, since when you bought them.

• You will deduct the accumulated depreciation of plant and equipment to get the net
plant and equipment. Accumulated depreciation is the total amount of
the depreciation expense of that specific asset since the asset is being used till the
creation of balance sheet.
Terms Of Financial Position (Balance Sheet)
Total assets are financed through either liabilities or stockholders’ equity. Liabilities
represent financial obligations of the firm and move from current liabilities (due within
one year) to longer-term obligations, such as bonds payable in 2025.

Current liabilities

• Accounts Payables is also known as creditor. The sum of all outstanding amounts
owed to your supplier or vendors comes under accounts payables. Which means that
you bought something in credit from your supplier. Since you need to pay one day or
the other it will be considered as liability.
Terms Of Financial Position (Balance Sheet)
• Notes payable is kind of a promissory note in which the company records the
amounts that remains to be paid. Purchasing a company vehicle, a building, or
obtaining a loan from a bank for your business are all considered notes payable. Notes
payable are generally short-term signed obligations to the banker or other creditors.

• Accrued expenses are the expenses of the company which you haven’t paid yet and is
due. For example wages of employees incurred but payments have yet to be made.

Long-term liabilities

• Bonds Payable Typically a bond covers many years, that’s why it is considered as long
term liability.
Terms Of Financial Position (Balance Sheet)
Stockholders’ Equity

The shareholders’ equity is the remaining amount of assets available to shareholders

after the debts and other liabilities have been paid.
The stockholders’ equity, also known as shareholders’ equity, represents the residual
amount that the business owners would receive after all the assets are liquidated and all
the debts are paid.

• In preferred stock, if your stock per value is £100 and 500 shares then the company’s
total preferred stock will be $50,000.

• The difference between the stock fair market value and the actual stocks value is
referred to as paid in capital in excess of par.
Terms Of Financial Position (Balance Sheet)
The preferred stock investment position is $50,000, based on 500 shares at $100 par. In
the case of common stock, 100,000 shares have been issued at a total par value of
$100,000, plus an extra $250,000 in capital paid in excess of par for a sum of$350,000.
We can assume that the 100,000 shares were originally sold at $3.50 each, as shown
below.
Homework
Question number: 15 from the book, Chapter 2
Thank You!!!
Course Code: FIN201
Lecturer: Tahmina Ahmed
Section: 7
Chapter: 2
Email: tahmina98ahmedsbe@iub.edu.bd