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Financial Statement

Analysis
for
Graduate Students

At The
Ohio University

Summer, 2015
David P. Kirch, PhD, CPA
CSC 001A
Kirch@ohio.edu
740-707-1301
The Questions
Basic Accounting

1) A company’s chart of accounts is:

A) used for entries that offset other accounts.


B) the set of journal entries that makes up the components of owners’ equity.
C) a detailed list of the accounts that make up the five financial statement elements.

2) Accumulated depreciation and treasury stock are most likely to be shown as what types of accounts?
Accumulated depreciation Treasury stock
A) Contra-asset Equity
B) Contra-asset Contra-equity
C) Liability Equity

3) Allowance for bad debts and investment in affiliates are most likely to be shown as what types of
accounts?
Allowance for bad debts Investment in affiliates
A) Contra-asset Asset
B) Contra-asset Liabilities
C) Liabilities Asset

4) The following amounts were drawn from the records of JME Company: total assets = $1,200; total
liabilities = $750; contributed capital = $600. Based on this information alone, retained earnings must
be equal to:

A) $150.
B) $450.
C) −$150.

5) What is the fundamental balance sheet equation?

A) Assets = Liabilities + Stockholders' Equity (A = L + E).


B) Assets = Stockholders' Equity - Liabilities (A = E - L).
C) Liabilities = Assets + Stockholders' Equity (L = A + E).

6) Which of the following least accurately describes a correct use of double-entry accounting?

A) A decrease in a liability account may be balanced by a decrease in another liability account.


B) A transaction may be recorded in more than two accounts.
C) An increase in an asset account may be balanced by an increase in an owner’s equity account.
7) The purchase of equipment for $25,000 cash is most likely to be recorded as:

A) an increase in one asset account and a decrease in another asset account.


B) an increase in an asset account and an increase in a liability account.
C) an increase in two asset accounts.

8) Washburn Motors signs a contract to sell a $100,000 luxury sedan to be delivered next month, and
receives a $20,000 cash down payment from the buyer. How will the transaction most likely affect
Washburn’s assets and liabilities?
Assets Liabilities
A) Unchanged Unchanged
B) Increase Increase
C) Increase Unchanged

9) A furniture store acquires a set of chairs for $750 cash and sells them for $1000 cash. These
transactions are most likely to affect which accounts?
Purchase Sale
A) Assets only Assets, revenue, expenses, owners' equity
B) Assets only Assets and revenues only
C) Assets and expenses Assets, revenue, expenses, owners' equity

10) Which of the following is the least likely to be considered an accrual for accounting purposes?

A) Accumulated depreciation.
B) Wages payable.
C) Unearned revenue.

11) Accruals are best described as requiring an accounting entry:

A) when an expense has been incurred.


B) only when a good or service has been provided.
C) when the earliest event in a transaction occurs.

12) An accounting entry that updates the historical cost of an asset to current market levels is best
described as:

A) a contra account.
B) a valuation adjustment.
C) accumulated depreciation.
13) Alpha Company reported the following financial statement information:
December 31, 2014:
Assets $70,000
Liabilities 45,000
December 31, 2015:
Assets 82,000
Liabilities 55,000
During 2015:
Stockholder investments 3,000
Net income ?
Dividends 6,000

Calculate Alpha’s net income for the year ended December 31, 2015 and the change in stockholders’ equity for the
year ended December 31, 2015.
Net income Change in stockholders' equity
A) ($3,000) $2,000 increase
B) $5,000 $2,000 decrease
C) $5,000 $2,000 increase

14) Wichita Corporation reported the following balances as of December 31, 2015:
Cash $?
Accounts payable 16,000
Accounts receivable 58,000
Additional paid-in capital 42,000
Common stock 19,600
Inventory 12,000
Plant and equipment 26,800
Notes payable 20,000
Retained earnings 32,000

15) Calculate Wichita’s cash and total assets as of December 31, 2015 based only on these entries.
Cash Total assets
A) $16,000 $129,600
B) $32,800 $113,600
C) $32,800 $129,600
16) Beta Company reported the following financial statement information:
December 31, 2014:
Assets $58,000
Liabilities 28,000
December 31, 2015:
Assets ?
Liabilities 38,000
During 2015:
Stockholder investments 15,500
Net income 18,000
Dividends 7,750

Calculate Beta’s total assets and stockholders’ equity as of December 31, 2015.
Total assets Stockholders' equity
A) $93,750 $55,750
B) $93,750 $30,000
C) $79,250 $55,750

17) Prema Singh is the bookkeeper for Octabius Industries. Singh has been asked by
the CFO of Octabius to review all purchases that occurred between February 1 and
February 8 to investigate an error on the receiving dock. Singh will most likely look
at the:

A) general journal.
B) initial trial balance.
C) general ledger.

18) Which of the following is the best description of the flow of information in an
accounting system?

A) Journal entries, general ledger, trial balance, financial statements.


B) General ledger, trial balance, general journal, financial statements.
C) Trial balance, general ledger, general journal, financial statements.

19) A listing of all the firm’s journal entries by date is called the:

A) general ledger.
B) adjusted trial balance.
C) general journal.
20) The best description of the general ledger is that it:

A) sorts the entries in the general journal by account.


B) groups accounts into the categories that are presented in the financial statements.
C) is where journal entries are first recorded.

21) Jack Rivers is an investment analyst for the equity fund of a family office. The head of the family,
Charlotte Blackmon, is concerned that management may be manipulating the earnings of some of
the companies that the fund invests in. Rivers explains to Blackmon, “Even though we don’t have
access to the detailed transactions that underlie the financial statements, we can be sure that
management is not manipulating earnings because I read the footnotes to the financial statements of
every company we invest in. The footnotes would disclose any deviation from appropriate
accounting parameters.” Rivers is:

A) correct.

B) incorrect because even within appropriate accounting parameters, management can manipulate earnings
through the assumptions that rely on their discretion.

C) incorrect because deviation from appropriate accounting parameters is addressed in the auditor’s report,
so a qualified opinion in the auditor’s report ensures that management is not manipulating earnings.

22) Sergey Martinenko is an investment analyst with Profis, Martinenko and Verona. He is explaining to
his new assistant, John Stevenson, why it is crucial for an investment analyst to read the footnotes
to a firm’s financial statement and the Management Discussion and Analysis (MD&A) before making
an investment decision. Which rationale is Martinenko least likely to provide to Stevenson regarding
the importance of analyzing the footnotes and MD&A?

A) Accruals, adjustments and assumptions are often explained in the footnotes and MD&A.
B) Evaluating the footnotes helps the analyst assess whether management is manipulating earnings.
C) The footnotes disclose whether or not the company is adhering to GAAP.

23) Reading the footnotes to a company’s financial statements and the Management Discussion & Analysis is
least likely to help an analyst determine:

A) the detailed information that underlies the company’s accounting system.

B) the various accruals, adjustments and assumptions that went into the financial statements.

C) how well the financial statements reflect the company’s true performance.
24) Regarding the use of financial statements in security analysis and selection, it would be most
accurate to say that:

A) analysts can verify the accuracy of financial statements by using a firm’s detailed accounting system
information.

B) analysts can use footnotes and Management’s Discussion and Analysis to better understand
assumptions used in the financial statements.

C) further analysis of a firm’s financial statements is typically not necessary if the firm has conformed to
applicable accounting principles.

25) Which of the following statements about financial statements and reporting standards is least
accurate?
A) Financial statements could potentially take any form if reporting standards didn’t exist.

B) The objective of financial statements is to provide economic decision makers with useful information.

C) Reporting standards focus mostly on format and presentation and allow management wide latitude in
assumptions.

26) Which description of the objective of financial statements is most accurate? The objective of
financial statements is:

A) to provide economic decision makers with useful information about a firm’s financial performance and changes in
financial position.
B) to provide securities analysts with objective data about a firm’s financial prospects.
C) to provide a wide range of users with information about a firm’s financial prospects.

27) Which of the following statements about financial reporting standards is least accurate? Reporting
standards:

A) are disclosed on Form 8K by publicly traded firms in the United States.


B) narrow the range within which management estimates can be seen as reasonable.
C) ensure that the information is “useful to a wide range of users.”

28) Which of the following is least likely to be considered a stated goal of the International Accounting
Standards Board (IASB)?

A) Remain neutral in the debate on the use of global accounting standards to avoid appearance of a conflict of
interest.

B) Develop global accounting standards requiring transparency, comparability, and high quality in financial
statements.

C) Account for the needs of emerging markets and small firms when implementing global accounting standards.
29) Professional organizations of accountants and auditors that establish financial reporting standards are
called:

A) Regulatory authorities.
B) International organizations of securities commissions.
C) Standard setting bodies.

30) Would an increase in the cost of raw materials used in the production of inventory and would
an increase in marketing expenses result in lower gross profit?

Increase in raw materials cost Increase in marketing expense


A) Yes No
B) No Yes
C) Yes Yes

31) Do gains and losses, as well as expenses appear on the income statement?
A) Only expenses appear on the income statement.
B) Only gains and losses appear on the income statement.
C) Both appear on the income statement.

32) During 2015, Topeka Corporation entered into the following transactions:
Transaction #1 – Interest on a certificate of deposit owned by Topeka was credited
to Topeka’s investment account. Transaction #2 – Topeka sold 10,000 shares of
common stock at $30 that had been repurchased by Topeka last year for $20.

Should Topeka recognize the results of these transactions as income on the income
statement for the year ended December 31, 2007?

A) Only one should be recognized.


B) Neither should be recognized.
C) Both should be recognized.
33) In accounting for long-term construction contracts, the percentage-of-completion method
is preferable to the completed contract method when:

A) the contracts are of a relatively short duration (less than one year).

B) estimates of the costs to complete and the extent of progress toward completion are
reasonably dependable.

C) lack of dependable cost estimates cause forecasts to be doubtful.

34) An airplane manufacturing company routinely builds fighter jets for the U.S. armed forces.
It takes fourteen months to build one jet, and the government pays for them in installments
over the fourteen-month period. Which revenue recognition method should be used?

A) Percentage-of-completion method.
B) Installment sales method.
C) Completed contract method.

35) If a reliable estimate of total costs of the contract does not exist, which of the following
revenue recognition methods should be used?

A) Cost recovery method.


B) Percentage-of-completion method.
C) Completed contract method.

36) If Jackson Ski Company issues common stock, and uses the proceeds to purchase
fixed assets such as equipment:

A) both cash flow from operations and cash flow from financing would increase.
B) cash flow from financing would decrease and cash flow from investing would increase.
C) cash flow from financing would increase and cash flow from investing would decrease.

37) When a U.S. company pays dividends to its stockholders, which type of cash flow
does this represent?

A) Financing.
B) Operating.
C) Investing.
38) Which of the following items would least likely be included in cash flow from financing?

A) Dividends paid to shareholders.


B) Purchase of treasury stock.
C) Gain on sale of stock of a subsidiary.

39) Which of the following is NOT a category on the statement of cash flows? Cash
flow from:

A) sales.
B) financing.
C) operations.

40) Which of the following items would NOT be included in cash flow from investing?

A) Proceeds related to acquisitions.


B) Buying or selling a building.
C) Selling stock of the company.

41) Which of the following is least likely a cash flow in the calculation of cash flow from
operations under U.S. GAAP?

A) Interest income.
B) Dividends paid.
C) Dividends received.

42) Which of the following does NOT represent a cash flow relating to operating activity?

A) Cash received from customers.


B) Dividends paid to stockholders.
C) Interest paid to bondholders.
43) Holden Company’s fixed asset footnote included the following:
During 20X7, Holden sold machinery for a gain of $100,000. The machinery had an
original cost of $500,000 and its accumulated depreciation was $240,000.
At the end of 20X7, Holden purchased machinery at a cost of $1,000,000. Holden
paid $400,000 cash. The balance was financed by the seller at 8% interest.
Depreciation expense was $2,080,000 for the year ended 20X7.

Calculate Holden’s cash flow from investing activities for the year ended 20X7.

A) $360,000 inflow.
B) $40,000 outflow.
C) $300,000 outflow.

44) Which of the following should be classified as cash flows from investing (CFI) by Elegant,
Inc., which reports under U.S. GAAP?

A) Elegant's payment to purchase equipment to be used in its business.

B) Interest received by Elegant, Inc. on a bond Elegant, Inc. purchased from an outside
investor.

C) Dividends received by Elegant, Inc. from an investment in another firm.

45) Which of the following items is NOT found in the financing cash flow part of the statement of
cash flows?

A) Change in long-term debt.


B) Change in retained earnings.
C) Dividends paid.
46) Jodi Lein, small business consultant, is currently working with RJ Landscaping, a sole
proprietorship. She is trying to educate the owner on the importance of monitoring cash
flows. Operating information as of the end of the most recent month appears below:
Cash from sale of truck of $7,000.
Cash salaries paid of $17,000.
Cash from customers of $45,000.
Depreciation expense of $5,500.
Interest on bank line of credit of $1,000.
Cash paid to suppliers of $22,000.
Other cash expenses, including rent, of $6,300.
No taxes due.

Using this information, what is the cash flow from operations for the month?

A) $11,200.
B) -$1,300.
C) -$300.

47) An examination of the cash receipts and payments of Xavier Corporation reveals the
following:

Cash paid to suppliers for purchase of merchandise $5,000


Cash received from customers 14,000
Cash paid for purchase of equipment 22,000
Dividends paid 2,000
Cash received from issuance of preferred stock 10,000
Interest received on short-term investments 1,000
Wages paid 4,000
Repayment of loan to the bank 5,000
Cash from sale of land 12,000

Under U.S. GAAP, Xavier’s reported cash flow from operations will be:

A) -$5,000.
B) $5,000.
C) $6,000.
48) An examination of the cash receipts and payments of Xavier Corporation reveals the
following:

Cash paid to suppliers for purchase of merchandise $5,000


Cash received from customers 14,000
Cash paid for purchase of equipment 22,000
Dividends paid 2,000
Cash received from issuance of preferred stock 10,000
Interest received on short-term investments 1,000
Wages paid 4,000
Repayment of loan to the bank 5,000
Cash from sale of land 12,000

Under U.S. GAAP, Xavier's cash flow from financing (CFF) and cash flow from investing (CFI) will be:

CFF CFI
A) $3,000 -$10,000
B) $10,000 $12,000
C) $3,000 $12,000

49) The actual coupon payment on a bond is reported on the statement of cash flow as:

A) a financing cash outflow.


B) an investing cash outflow.
C) an operating cash outflow.

50) Which of the following transactions would least likely be reported in the cash flow statement
as investing cash flows?

A) Purchase of plant and equipment used in the manufacturing process with financing
provided by the seller.

B) Principal payments received from loans made to others.


C) Sale of held-to-maturity securities for cash.
51) What is the difference between the direct and the indirect method of calculating cash flow
from operations?

A) The indirect method starts with gross income and adjusts to cash flow from operations,
while the direct method starts with gross profit and flows through the income statement to
calculate cash flows from operations.

B) Balance sheet items are not included in the cash flow from operations for the direct
method, while they are included for the indirect method.

C) The direct method starts with sales and follows cash as it flows through the income
statement, while the indirect method starts with net income and adjusts for non-cash
charges and other items.

52) Consider the following:


Argument #1:
The indirect method presents a firm’s operating cash receipts and payments and is thus
more consistent with the objectives of the cash flow statement.

Argument #2:
The indirect method provides more information than the direct method and is more useful to
analysts in estimating future operating cash flows.

Which of these arguments support the use of the indirect method for presenting cash flow
from operating activities in the cash flow statement?

A) Argument #2 only.
B) Neither argument.
C) Argument #1 only.

53) The difference between cash flow from operations (CFO) under the direct method and CFO
under the indirect method is:

A) balanced by an opposite difference in cash flow from investing.


B) disclosed as a reserve in the footnotes to the cash flow statement.
C) always equal to zero.
54) Use the following information to calculate cash flows from operations using the ·indirect
method.
·Net Income: $12,000
·Depreciation Expense: $1,000
·Loss on sale of machinery: $500
·Increase in Accounts Receivable: $2,000
·Decrease in Accounts Payable: $1,500
·Increase in Income taxes payable: $500
·Repayment of Bonds: $3,000

A) Increase in cash of $7,500.


B) Increase in cash of $10,500.
C) Increase in cash of $9,500.

55) An analyst compiled the following information for Universe, Inc. for the year ended
December 31, 20X4:
Net income was $850,000.

Depreciation expense was $200,000.

Interest paid was $100,000.

Income taxes paid were $50,000.

Common stock was sold for $100,000.

Preferred stock (eight percent annual dividend) was sold at par value of $125,000.

Common stock dividends of $25,000 were paid.

Preferred stock dividends of $10,000 were paid.

Equipment with a book value of $50,000 was sold for $100,000.

Using the indirect method and assuming U.S. GAAP, what was Universe Inc.’s cash flow from operations (CFO) for the
year ended December 31, 20X4?
A) $1,050,000.
B) $1,015,000.
C) $1,000,000.

56) When using the indirect method for computing cash flow from operating activities, a change
in accounts payable will require which of the following?

A) A negative (positive) adjustment to net income when accounts payable increases


(decreases).
B) A positive (negative) adjustment to net income when accounts payable increases
(decreases).
C) A negative adjustment to net income regardless of whether accounts payable increases
or decreases.
57) What is the impact on accounts receivable if sales exceed cash collections and what is the
impact on accounts payable if cash paid to suppliers exceeds purchases?

A) Only accounts receivable will increase.


B) Both accounts payable and accounts receivable will increase.
C) Only accounts payable will increase.

58) Pacific, Inc.’s financial information includes the following, with “change” referring to the
difference from the prior year (in $ millions):
Net Income 27
Change in Accounts Receivable +4
Change in Accounts Payable +1
Change in Inventory +5
Loss on sale of equipment -8
Gain on sale of real estate +4
Change in Retained Earnings +21
Dividends declared and paid +4

Pacific, Inc.’s cash flow from operations (CFO) in millions was:


A) $23.
B) $27.
C) $15.

59) A company has the following changes in its balance sheet accounts:
Net Sales $500
An increase in accounts receivable 20
A decrease in accounts payable 40
An increase in inventory 30
Sale of common stock 100
Repayment of debt 10
Depreciation 2
Net Income 100
Interest expense on debt 5

The company’s cash flow from financing is:


A) $100.
B) $90.
C) -$10.
60) Which of the following characteristics are required for recognition of a balance sheet asset?
Characteristic #1: Future economic benefits to the firm are probable.
Characteristic #2: The asset is tangible and is obtained at a cost.

Characteristic #1 Characteristic #2
A) Yes No
B) Yes Yes
C) No No

61) Galaxy Corporation manufactures custom motorcycles. Galaxy finances the motorcycles over
36 months for customers who make a minimum down payment of 10%. Historically, Galaxy
has experienced bad debt losses equal to 1% of sales. Galaxy also provides a 24 month
unlimited warranty on all new motorcycles. In the past, warranty expense has averaged 3% of
sales. Ignoring taxes, how does the recognition of bad debt expense and warranty expense at
the time of sale affect Galaxy’s liabilities?
Bad debt expense Warranty expense
A) No effect No effect
B) Increase Increase
C) No effect Increase

62) Which of the following statements about a classified balance sheet is least likely accurate? A
classified balance sheet:

A) groups accounts by subcategories.


B) presents the net equity of each asset by subtracting its related liability.
C) distinguishes between current and noncurrent assets.

63) Do the following characteristics have to be met in order to classify a liability as current on the
balance sheet? Characteristic #1 – Settlement is expected within one year or operating cycle,
whichever is less.
Characteristic #2 – Settlement will require the use of cash within one year or operating cycle,
whichever is greater.
Characteristic #1 Characteristic #2
A) Yes No
B) No Yes
C) No No
64) Peterson Painting Company is a commercial painting contractor. At the beginning of 20X7,
Peterson’s net working capital was $350,000. The following transactions occurred during
20X7:
Performed services on credit $150,000
Purchased office equipment for cash 10,000
Recognized salaries expense 54,000
Purchased paint supplies on on credit 25,000
Consumed paint supplies 20,000
Paid salaries 50,000
Collected accounts receivable 157,000
Recognized straight-line depreciation expense 2,000
Paid accounts payable 15,000

Calculate Peterson’s working capital at the end of 20X7 and the change in cash for the year 20X7.
Working capital Change in cash
A) $414,000 $82,000
B) $416,000 $82,000
C) $416,000 $80,000

65) GTO Corporation purchased all of the common stock of Charger Company for $4 million. At
the time, Charger reported total assets of $3 million and total liabilities of $1 million. At the
acquisition date, the fair value of Charger’s assets was $3.5 million and the fair value of Charger’s
liabilities was $1.3 million. What amount of goodwill should GTO report as a result of the
acquisition and is it necessary for GTO to amortize the goodwill?
Goodwill Amortization required
A) $1.8 million No
B) $1.8 million Yes
C) $2.2 million No

Consider the following:Statement #1 – Copyrights and patents are tangible assets that can be separately identified.
Statement #2 – Purchased copyrights and patents are amortized on a straight line basis over 30 years.
With respect to the statements about copyrights and patents acquired from an independent third party:

A) only statement #2 is incorrect.


B) only statement #1 is incorrect.
C) both are incorrect.
66) According to the Financial Accounting Standards Board, what is the appropriate
measurement basis for equipment used in the manufacturing process and inventory that is held
for sale?
Equipment Inventory
A) Historical cost Lower of cost or market
B) Historical cost Historical cost
C) Fair value Lower of cost or market

Current assets that arise from the accrual process most likely include:

A) cash equivalents.
B) accounts receivable.
C) marketable securities.

67) On January 1, 20X7, Omega Corporation paid $45,000 to renew its property insurance for 3
years. What amount of insurance expense should Omega report for the year-ended December 31,
20X7 and what is the balance of Omega’s prepaid insurance account on December 31, 20X8?
Insurance expense Prepaid insurance
A) $15,000 $30,000
B) $15,000 $15,000
C) $45,000 $15,000

68) At the beginning of 20X7, Bryan’s Bakery Company purchased a secret cookie recipe for
$25,000. In addition, Bryan developed a new cake recipe at a cost of $5,000. Bryan expects to use
both recipes indefinitely; however, the useful (economic) life of similar recipes has been 10 years.
Assuming straight-line amortization, what amount of recipe expense should Bryan report for the
year ended 20X7 and what amount should Bryan report as assets related to these recipes on its
balance sheet at the end of 20X7?
Recipe expense Balance sheet
A) $5,000 $25,000
B) $7,500 $22,500
C) $3,000 $30,000

69) At the beginning of the year, Alpha Corporation purchased 10,000 shares of Beta Corporation
for $20 per share. During the year, Beta paid a $2,000 cash dividend to Alpha. At the end of
the year, Beta’s stock was selling for $22 per share. What amount should Alpha recognize in
its year-end income statement if the investment is treated as an available-for-sale security
and what amount should be recognized in the income statement if the investment is treated
as a trading security?
Available-for-sale Trading security
A) $2,000 $22,000
B) $2,000 $20,000
C) $0 $22,000
70) Consider the following statements.
Statement #1: Par value is a nominal dollar value assigned to shares of stock in a
corporation’s charter.

Statement #2: The par value of common stock represents the amount the corporation
received when the stock was issued.

With respect to these statements:

A) both statements are correct.


B) only statement #2 is correct.
C) only statement #1 is correct.

71) Ascot Corporation has 4 million shares of common stock authorized, 2.4 million shares of
common stock issued, and 1.8 million shares of common stock outstanding. How many
shares of treasury stock does Ascot own and is the treasury stock reported as an asset in
Ascot’s balance sheet?
Treasury shares Reported as an asset
A) 600,000 Yes
B) 600,000 No
C) 1.6 million No

72) Earlier this year, Slayton Corporation repurchased 5% of its total shares outstanding. At the
time, the book value of Slayton shares exceeded their market value. The shares are expected
to be reissued in the future when the market price of Slayton’s stock increases. Do Slayton’s
repurchased shares continue to have voting rights and to pay cash dividends?
Voting rights Cash dividends paid
A) Yes No
B) No No
C) No Yes
73) Coleman Corporation’s unadjusted trial balance at the end of 2007 reflected compensation
expense of $90 million. The trial balance did not include the following:
 Because of the holidays, no salary accrual was made for the last week of the year. Salaries for the last week totaled

$3.5 million and were paid on January 4, 2008.

 Employee bonuses for 2007 totaled $5 million. The bonuses were paid on January 31, 2008.

Ignoring payroll taxes, what is Coleman’s adjusted compensation expense for the year ended 2007 and what impact
will the adjustment have on Coleman’s 2007 current ratio?
Compensation expense Current ratio
A) $98.5 million Decrease
B) $94.5 million Decrease
C) $98.5 million No effect

74) The statement of changes in equity is least likely to provide information on the firm’s:

A) payment of dividends.
B) repayment of bond principal.
C) comprehensive income.

75) Bug-Be-Gone is a residential pest control company that offers a 12 month home-service
contract to eliminate insect infestation. Customers are required to prepay for the service at the
beginning of each year. If Bug-Be-Gone erroneously records these payments as revenue and
include the estimated cost of performing the service, what is the most likely effect on the
firm’s liabilities and equity compared to the correct treatment?
Liabilities Equity
A) Overstated Overstated
B) Overstated Understated
C) Understated Overstated

76) Common size balance sheets express all balance sheet items as a percentage of:

A) sales.
B) equity.
C) assets.
77) The following data is from Delta's common size financial statement:
Earnings after taxes 18%
Equity 40%
Current assets 60%
Current liabilities 30%
Sales $300
Total assets $1,400
What is Delta's total-liabilities-to-equity ratio?
A) 1.5.
B) 1.0.
C) 2.0.

78) Given the following income statement and balance sheet for a company:
Balance Sheet
Assets Year 2003 Year 2004
Cash 500 450
Accounts Receivable 600 660
Inventory 500 550
Total CA 1600 1660
Plant, prop. equip 1000 1250
Total Assets 2600 2910
Liabilities
Accounts Payable 500 550
Long term debt 700 1002
Total liabilities 1200 1552
Equity
Common Stock 400 538
Retained Earnings 1000 820
Total Liabilities & Equity 2600 2910
Income Statement
Sales 3000
Cost of Goods Sold (1000)
Gross Profit 2000
SG&A (500)
Interest Expense (151)
EBT 1349
Taxes (30%) (405)
Net Income 944

What is the current ratio for 2004?


A) 3.018.
B) 0.331.
C) 2.018.
79) An analyst has gathered the following information about a company:
Balance Sheet
Assets
Cash 100
Accounts Receivable 750
Marketable Securities 300
Inventory 850
Property, Plant & Equip 900
Accumulated Depreciation (150)
Total Assets 2750
Liabilities and Equity
Accounts Payable 300
Short-Term Debt 130
Long-Term Debt 700
Common Stock 1000
Retained Earnings 620
Total Liab. and Stockholder's equity 2750
Income Statement
Sales 1500
COGS 1100
Gross Profit 400
SG&A 150
Operating Profit 250
Interest Expense 25
Taxes 75
Net Income 150

What is the quick ratio?


A) 1.53.
B) 2.67.
C) 0.62.

S 9 R 29

80) Diabelli Inc. is a manufacturing company that is operating at normal capacity levels. Which
of the following inventory costs is most likely to be recognized as an expense on Diabelli’s financial
statements when the inventory is sold?

A) Administrative overhead.
B) Allocation of fixed production overhead.
C) Selling cost.

81) Goldberg Inc. produces and sells electronic equipment. Which of the following inventory
costs is most likely to be recognized as an expense on Goldberg’s financial statements in the
period incurred?

A) Conversion cost.
B) Selling cost.
C) Freight costs on inputs.
S9 R30

82) When comparing capitalizing versus expensing costs which of the following statements is
most accurate?

A) Expensing costs creates lower cash flows from operations and lower cash flows from
investing.

B) Capitalizing costs creates higher cash flows from operations and lower cash flows from
investing.

C) Capitalizing costs creates lower cash flows from operations and higher cash flows from
investing.

83) Which of the following statements regarding capitalizing versus expensing costs is least
accurate?

A) Capitalization results in higher profitability initially.


B) Total cash flow is higher with capitalization than expensing.
C) Cash flow from investing is higher with expensing than with capitalization.

84) Which of the following statements regarding the capitalization of an expense is least
accurate?

A) Capitalizing an expense creates an asset.


B) Capitalizing an expense lowers current period net income.
C) Capitalized expenses increases equity.

85) Capitalizing interest costs related to a company’s construction of assets for its own use is
required by:

A) IFRS only.
B) both IFRS and U.S. GAAP.
C) U.S. GAAP only.

86) Capitalized interest costs are typically reported in the cash flow statement as an outflow
from:

A) investing.
B) operating.
C) financing.
87) Dobkin Company decides to expense costs that it would have otherwise capitalized.
Compared to capitalizing, expensing these costs will result in:

A) lower asset levels and lower equity levels.


B) lower asset levels and higher equity levels.
C) lower asset levels and lower liability levels.

88) A firm that capitalizes rather than expensing costs will have:

A) lower cash flows from investing.


B) lower cash flows from operations.
C) lower profitability in the earlier years.

89 )Which of the following items is least likely an example of an intangible asset with an indefinite life?

A) Goodwill.
B) Acquired patents.
C) Trademarks that can be renewed at minimal cost.

90) During 2007, Big 4 Company’s warehouse was totally destroyed by a tornado. Tornados are
very rare in the region where Big 4 is located. The book value of the warehouse at the time of the
tornado was €10 million and Big 4 is self-insured. In addition, on June 30, 2007, Big 4 acquired
one of its major suppliers. The fair value of the net assets acquired by Big 4 was greater than the
purchase price. According to International Financial Reporting Standards, should Big 4 recognize
an extraordinary item for tornado damage and should Big 4 recognize negative goodwill on its
balance sheet due to the acquisition?
Extraordinary loss Negative goodwill
A) No No
B) Yes No
C) No Yes

91) Lakeside Co. recently determined that one of its processing machines has become obsolete
three years early and, unexpectedly, has no salvage value. Which of the following statements is
most consistent with this discovery?

A) Historically, economic depreciation was overstated.


B) Lakeside Co. will owe back taxes.
C) Historically, economic depreciation was understated.
92) This information pertains to equipment owned by Brigade Company.

·Cost of equipment: $10,000.


·Estimated residual value: $2,000.
·Estimated useful life: 5 years.
·Depreciation method: straight-line.
The accumulated depreciation at the end of year 3 is:

A) $1,600.
B) $4,800.
C) $5,200.

93) JME acquired an asset on January 1, 2004, for $60,000 cash. At that time JME estimated the
asset would last 10 years and have no salvage. During 2006 JME estimated the remaining life
of the asset to be only three more years with a salvage value of $3,000. If JME uses straight
line depreciation, what is the depreciation expense for 2006?

A) $6,000.
B) $15,000.
C) $12,000.

94) Allocating an intangible asset’s cost to the income statement over time is known as:

A) depreciation.
B) depletion.
C) amortization.

95) Intangible assets with finite useful lives are:

A) amortized over their actual lives.


B) not amortized, but are tested for impairment at least annually.
C) amortized over their expected useful lives.

96) Under normal circumstances, intangible assets with indefinite lives are:

A) not amortized but subject to impairment.


B) amortized over a reasonable period but not subject to impairment.
C) amortized over a reasonable period and subject to impairment.
97) Davis Inc. is a large manufacturing company operating in several European countries. Davis
has long-lived assets currently in use that are valued on the balance sheet at $600 million.
This includes previously recognized impairment losses of $80 million. The original cost of the
assets was $750 million. The fair value of the assets was determined by in independent
appraisal to be $690 million. Which of the following entries may Davis record under IFRS?

A) $90 million gain on income statement.


B) $80 million gain on income statement and a $10 million revaluation surplus.
C) $90 million revaluation surplus.

98) Under U.S. GAAP, an asset is impaired when:

A) the firm can no longer fully recover the carrying amount of the asset.
B) accumulated depreciation plus salvage value exceeds acquisition costs.
C) the present value of future cash flows exceeds the carrying amount of the asset.

99) An impairment write-down is least likely to decrease a company's:

A)debt-to-equity ratio.
B) assets.
C) future depreciation expense.

100) Spenser Inc. owns a piece of specialized machinery with a current fair value of $400,000.
The original cost of the machinery was $500,000 and to date has generated accumulated
depreciation of $140,000. Which of the following must Spenser record on the income
statement if it decides to abandon the asset?

A) Gain of $40,000.
B) Loss of $100,000.
C) Loss of $360,000.

101) Felker Inc. owns a piece of specialized machinery. The original cost of the machinery was
$500,000 and to date there is an accumulated depreciation balance of $140,000. Which of the
following will Felker recognize on its income statement if it sells the machinery for $400,000?

A) Gain of $40,000.
B) Loss of $100,000.
C) Loss of $360,000.
102) Which of the following statements is CORRECT? Income tax expense:

A) is the amount of taxes due to the government.


B) is the reported net of deferred tax assets and liabilities.
C) includes taxes payable and deferred income tax expense.

103) Which of the following statements about tax deferrals is NOT correct?

A) A deferred tax liability is expected to result in future cash outflow.


B) Income tax paid can include payments or refunds for other years.
C) Taxes payable are determined by pretax income and the tax rate.

104) The difference between income tax expense and taxes payable is a:

A) deferred income tax expense.


B) deferred tax liability.
C) timing difference.

105) A tax loss carryforward is best described as the:

A) net taxable loss that can be used to reduce taxable income in the future.
B) net taxable loss that can be used to refund paid taxes from the previous year.
C) difference of deferred tax liabilities and deferred tax assets.

106) If timing differences that give rise to a deferred tax liability are not expected to reverse then
the deferred tax:

A) should be considered an increase in equity.


B) must be reduced by a valuation allowance.
C) should be considered an asset or liability.

107) Which of the following statements regarding deferred taxes is NOT correct?

A) If deferred tax liabilities are not included in equity, debt-to-equity ratio will be reduced.
B) Only those components of deferred tax liabilities that are likely to reverse should be
considered a liability.
C) If deferred taxes are not expected to reverse in the future then they should be classified as
equity.
108) When analyzing a company's financial leverage, deferred tax liabilities are best classified
as:

A) a liability.
B) neither as a liability, nor as equity.
C) a liability or equity, depending on the company's particular situation.

109) Which of the following financial ratios is least likely to be affected by classification of
deferred taxes as a liability or equity?

A) Return on assets (ROA).


B) Return on equity (ROE).
C) Debt-to-total assets.

110) At the end of 20X8, Martin Inc. estimates that $26,000 of warranty repairs will be required in
the future on goods already sold. For tax purposes, warranty expense is not deductible until the
work is actually performed. The firm believes that the warranty work will be required over the next
two years. The tax base of the warranty liability at the end of 20X8 is:

A) zero.
B) $13,000.
C) $26,000.

111) In 20X8, Oliver Ltd. received $80,000 cash from a customer for goods that it could not
deliver until the next year and established a liability for unearned revenue. Oliver reports under
U.S. GAAP, faces a 40% tax rate, and is located in a tax jurisdiction where unearned revenue
is taxed as received. On their balance sheet for 20X8, what change in deferred tax should
Oliver record as a result of this transaction?

A) A deferred tax asset of $32,000.


B) A deferred tax liability of $32,000.
C) There is no effect on deferred tax items from this transaction.

112) Alter Inc. determines that it has $35,000 of accounts receivable outstanding at the end of
20X8. Based on past experience, it recognizes an allowance for bad debt equal to 10% of its
credit sales. The tax base of Alter’s accounts receivable at the end of 20X8 is closest to:

A) $31,500.
B) $3,500.
C) $35,000.
113) Nespa, Inc., has a deferred tax liability on its balance sheet in the amount of $25 million. A
change in tax laws has increased future tax rates for Nespa. The impact of this increase in tax rate
will be:

A)a decrease in deferred tax liability and a decrease in tax expense.


B) an increase in deferred tax liability and an increase in tax expense.
C) a decrease in deferred tax liability and an increase in tax expense.

114) On its financial statements for the year ended December 31, Jackson, Inc. listed
$2,000,000 in post retirement benefits expense. Jackson, Inc. contributed $200,000 of the
expense to its retirement plan during the year. Tax law recognizes cash contributions to a pension
account as tax deductible, but not expense accruals. Jackson’s tax rate is 40%.
For the year ended December 31, Jackson, Inc. should show, based on the above, an increase in
its deferred tax:

A) asset account of $720,000.


B) liability account of $720,000.
C) liability account of $80,000.

115) Kruger Associates uses an accrual basis for financial reporting purposes and cash basis for
tax purposes. Cash collections from customers are $476,000, and accrued revenue is only
$376,000. Assume expenses at 50% in both cases (i.e., $238,000 on cash basis and $188,000 on
accrual basis), and a tax rate of 34%. What is the deferred tax asset or liability? A deferred tax:

A) asset of $48,960.
B) liability of $17,000.
C) asset of $17,000.

116) Unit Technologies uses accrual basis for financial reporting purposes and cash
accounting for tax purposes. So far this year, Unit Technologies has recorded $195,000
in revenue for financial reporting purposes, but, on a cash basis, revenue was only
$131,000. Assume expenses at 50 percent in both cases (i.e., $ 97,500 on accrual basis
and $ 65,500 on cash basis), and a tax rate of 34%. What is the deferred tax liability or
asset? A deferred tax:

A) liability of $16,320.
B) liability of $10,880.
C) asset of $10,880.
117) This year, Blue Horizon has recorded $390,000 in revenue for financial reporting
purposes, but, on a cash basis, revenue was only $262,000. Assume expenses at 50% in
both cases (i.e., $195,000 on accrual basis and $131,000 on cash basis), and a tax rate
of 34%. What is the deferred tax liability or asset? A deferred tax:

A) liability of $21,760.
B)liability of $16,320.
C)asset of $21,760.

118) Camphor Associates uses accrual basis for financial reporting purposes and cash
basis for tax purposes. Cash collections from customers is $238,000, and accrued
revenue is only $188,000. Assume expenses at 50% in both cases (i.e., $119,000 on
cash basis and $94,000 on accrual basis), and a tax rate of 34%. What is the deferred
tax asset/liability in this case? A deferred tax:

A) asset of $48,960.
B) liability of $8,500.
C) asset of $8,500.

119) Laser Tech has net temporary differences between tax and book income resulting in a
deferred tax liability of $30.6 million. According to U.S. GAAP, an increase in the tax rate would
have what impact on deferred taxes and net income, respectively:

Deferred Taxes Net Income


A) Increase Decrease
B) Increase No effect
C) No effect Decrease

An analyst gathered the following data for Alice Company.

·Alice Company reported a pretax income of $400,000 in its income statement for the period ended
December 31, 2002.
·Included in its pretax income are: (1) interest received on tax-free municipal bonds $50,000 and
(2) rent expense of $20,000. (Only $10,000 was paid in cash for rent during 2002).
·Alice follows cash basis for tax reporting.
·Assume a tax rate of 40%.

What is the income tax expense that Alice should report on its income statement for the
year ended December 31, 2002?

A) $160,000.
B) $140,000.
C) $132,000.
120) All else equal, when a company issues bonds at a premium, the debt/equity ratio will
show:

A) an increasing trend over the life of the bond.


B) a decreasing trend over the life of the bond.
C) stable trend over the life of the bond.

121) Indata Company sold a specially manufactured item for $5,000,000 on December 31, 20X6.
The item was sold on an installment sale basis, with $1,000,000 paid on the date of the sale and
$4,000,000 to be paid in four annual installments of $1,000,000 plus interest at the market rate of
6%. Indata’s tax rate is 40% and its costs to construct the item were $2,500,000. Indata recognizes
the entire amount of the sale as income on the date the sale is made for accounting purposes, but
not until cash is received for tax purposes.On its balance sheet dated December 31, 20X6, Indata
will, as a result of the transaction described above, increase its deferred tax:

A) asset by $800,000.
B) liability by $800,000.
C) liability by $200,000.

122) Graphics, Inc. has a deferred tax asset of $4,000,000 on its books. As of December 31, it
became more likely than not that $2,000,000 of the asset’s value may never be realized because
of the uncertainty of future income. Graphics, Inc. should:

A) not make any adjustments until it is certain that the tax benefits will not be realized.
B) reduce the asset by establishing a valuation allowance of $2,000,000 against the asset.
C) reverse the asset account permanently by $2,000,000.

123) For the year ended 31 December 2004, Pick Co's pretax financial statement income was
$400,000 and its taxable income was $300,000. The difference is due to the following:
Interest on tax-exempt municipal bonds $140,000
Premium expense on key person life insurance $(40,000)
Total $100,000

Pick's statutory income tax rate is 30 percent. In its 2004 income statement, what amount should
Pick report as current provision for tax payable?

A) $102,000.
B) $90,000.
C) $120,000.
124) An analyst has gathered the following tax information:
Year 1 Year 2
Pretax Income $60,000 $60,000
Taxable Income $50,000 $65,000

The current tax rate is 40%. Assume the tax rate is reduced to 30% and the change is enacted at the beginning of
Year 2.In year 1, what are the taxes payable and what is the deferred tax liability?
Taxes Payable Deferred Tax Liability
A) $24,000 $3,000
B) $20,000 $1,500
C) $20,000 $3,000

Taxes Payable = Taxable Income × Current Tax Rate = $50,000 × 40% = $20,000. The taxes payable will be based on
the current tax rate of 40%.

Deferred Tax Liability = (Pretax Income − Taxable Income) × 30% = ($60,000 − 50,000) × 30% = $3,000.

SFAS 109 requires adjustments to deferred tax assets and liabilities to reflect the impact of a change in tax rates or tax
laws.

Total income tax expense for Year 1 is:


A) $23,000.
B) $17,000.
C) $24,000.

125) If a firm overestimates its warranty expenses, which of the following results is least likely?

A) Income tax expense will be greater than taxes payable.


B) A deferred tax asset will result.
C) A timing difference will result between tax and financial reporting.
126) Habel Inc. owns equipment with a tax base of $400,000 and a carrying value of
$600,000. Habel also has a tax loss carryforward of $200,000 that is expected to be
utilized in the foreseeable future. Deferred tax items on the balance sheet are valued
based on a tax rate of 30%. If the tax rate is expected to increase to 35%, the
adjustments to the value of deferred tax items will most likely cause Habel’s total
liabilities-to-equity ratio to:

A) increase.
B) decrease.
C) remain unchanged.

127) Firm 1 has a deferred tax liability and Firm 2 has a deferred tax asset. With respect to the
taxes payable for each firm when these deferred tax items reverse, a decrease in the firms’
tax rates will lead to:
Firm 1 Firm 2
A) Lower taxes payable Lower taxes payable
B) Higher taxes payable Lower taxes payable
C) Lower taxes payable Higher taxes payable
Which of the following statements about deferred taxes is least accurate? Deferred taxes:

A) arise primarily due to differences between GAAP and IRS code.


B) may never “reverse” in the case of companies that are growing.
C) can relate to either permanent or temporary differences.

128) Which of the following statements regarding differences in taxable and pretax income is
CORRECT? Differences in taxable and pretax income that:

A) result in deferred taxes are called temporary differences.


B) increase or reduce the effective tax rate are called temporary differences.
C) are not reversed for five or more years are called permanent differences.

128) Permanent differences in taxable and pretax income:

A) are considered as changes in the effective tax rate.


B) are reported on both tax returns and financial statements.
C) can be deferred in some cases.
129) Which of the following statements best justifies analyst scrutiny of valuation allowances?

A) If differences in taxable and pretax incomes are never expected to reverse, a company’s equity
may be understated.
B) Increases in valuation allowances may be a signal that management expects earnings to
improve in the future.

C) Changes in valuation allowances can be used to manage reported net income.


Information flows through an accounting system in four steps:
1. Journal entries record every transaction, showing which accounts are changed by what amounts. A listing of all the
journal entries in order by date is called the “general journal.”
2. The general ledger sorts the entries in the general journal by account.
3. At the end of the accounting period, an initial trial balance is prepared that shows the balances in each account. If
any adjusting entries are needed, they will be recorded and reflected in an adjusted trial balance.
4. The account balances from the adjusted trial balance are presented in the financial statements.
Accruals fall into four categories:
1. Unearned revenue.
2. Accrued revenue.
3. Prepaid expenses.
4. Accrued expenses. Wages payable are a common example of an accrued expense.
Accumulated depreciation is considered a contra-asset account to property, plant and equipment, not an accrual.
R

The Accounting Process

Learning debits and credits


The Learning Modules
Day 1

What this course is and isn’t

The Plan

The website
Where are you now?

From the following information for 2014 for CoJo, Inc. prepare an Income Statement and a Balance
Sheet. Assume a December 31 year end.

Accounts Payable $200,000


Accounts Receivable 80,000
Accumulated Depreciation (56,000)
Administrative Expenses 58,000
Advertising Expense 20,000
Building 300,000
Cash 106,000
Common Stock 300,000
Cost of Goods Sold 500,000
Equipment 140,000
Interest Expense 10,000
Inventory 120,000
Depreciation Expense 32,000
Notes Payable, Long-Term 10,000
Patent 50,000
Rent Expense 36,000
Retained Earnings 143,000
Sales 900,000
Salaries Payable 60,000
Salary Expense 120,000
Tax Expense 27,000
Taxes Payable 27,000
Utilities Expense 34,000

CoJo, Inc. issued 200 shares of common stock on June 30, 2014. There were 1,000 shares of
common stock outstanding at the end of 2013 (last year).
Investment Readings
juggernaut Module 1 If you always do
what you always did,
you’ll always get
what you always got.

“But I think that there’s no magic to evaluating any financial asset. A financial asset means, by
definition, that you lay out money now to get money back in the future. If every financial asset
were valued properly, they would all sell at a price that reflected all of the cash that would be
received from them forever until Judgment Day, discounted back to the present at the same
interest rate.”
Warren Buffett

So what we will be doing


The Pedagogy

What your brains wants above all else is to ________________!

Your Brain

Front Brain Back Brain


Decisions What we know
Consequences Long-term memory
Predicting Emotions related to experiences
Creating Language
Tomorrow! Yesterday!
Learning depends on experience, but it also requires reflection, developing abstractions, and
active testing of our abstractions. Often we will almost skip the reflective stage, and try a shortcut to
an idea or even an action. AoCtB

-Sensory input goes primarily to the back half of the brain.


It is where long-term memory is. It is about the past.

-The front integrative cortex is about the future. It is where we develop ideas and abstract hypotheses.
Things are weighted here. It is where we take charge. AoCtB

How do I learn?
I grope.
A. Einstein

Cognition requires:

Works or doesn’t
(Modify Knowledge)

Try it Matches
(Or Create
Structures)

What if?
(Hypothesis)

And we have such a challenge because what you know now, you _________________________. Only
you can _____________________________.

AoCtB refers to The Art of Changing the Brain, James Zull, Stylus Publishing 2002
Ohhhh -about asking questions---
Neils Bohr
We start……………………..

Accounting Equation:

Assets = Liabilities + Owners’ Equity

We are going to start a corporation to sell hot dogs in a cart on the corner of Court and
Union. We form a corporation, Hot Dogs, Inc. and you, and everyone in the class invests
$100 and we each get one share of stock for that $100. Assume there are 20 of us. We elect
a Board of Directors, a COO and start to do business. First we borrow $10,000 from the
bank and buy a new cart for that amount. Next we buy 1,000 dogs and 1,000 buns. Dogs
cost .15 and buns are .05 each. For our first month, we sell 900 dogs for $2 each. We pay
our worker $600 and our other expenses are $300. How did we do? Are we rich yet? Was it
a good investment?
We are going to start a corporation to sell hot dogs in a cart on the corner of Court and
Union. We form a corporation, Hot Dogs, Inc. and you, and everyone in the class invests
$100 and we each get one share of stock for that $100. Assume there are 20 of us. We elect
a Board of Directors, a COO and start to do business. First we borrow $10,000 from the
bank and buy a new cart for that amount. Next we buy 1,000 dogs and 1,000 buns. Dogs
cost .15 and buns are .05 each. For our first month, we sell 900 dogs for $2 each. We pay
our worker $600 and our other expenses are $300. How did we do? Are we rich yet? Was it
a good investment?

Owners'
Assets = Liabilities + Equity

CASH
+ -- -- + -- +
Earnings Per Share
The matching concept is:
Expenses must be _______________________________________________

_______________________________________________.

How would the Hot Dog Inc. financials have changed if we owed our worker $100 at the end
of January for work she did the last week of the month?

Seems appropriate------
The last thing Osama bin Laden saw on this earth was an American soldier with a gun.

Professional Tip: First Rule of the negotiator F_________ and S__________


Professional Tip: Be D_________. Both in speech and in action

Push through the discomfort


No elephants in the room here!!

epiphany Module #2 When mom’s on a diet,


redoubt everyone’s on a diet.

The concept of future value:

If you have $100 today and put it in a bank, how much will you have in the future?

|------------------------------------------------------------------------------------|

In order to put this concept to practical work, I need to know

1) when in the future are you talking


2) ____________________________
3) ____________________________

a) So you have $100 today, the bank pays annual interest of 10%, how much will you have in one
year?

b) Two years?

c) One year and the bank pays interest at 10% compounded semi-annually?
Interest is normally stated on an _________________ basis.
d) If you have $1,000 today, how much will you have in 2 years, 12% interest, compounded
quarterly?

The formula for FV is

The n is the number of ________________________________________________________.

If I put $100 in the bank today, the bank pays interest semi-annually at 8% how much will I have in
one year?

If I put $100 in the bank today, the bank pays interest quarterly at 12%, how much will I have in
one year?
From the following information for Mater, Inc., prepare the financial statements for the year
ending December 31, 2014.

Cash 58,000 Common Stock 50,000


Accounts Receivable 15,000 Retained Earnings 324,000
Inventory 80,000 Sales 410,000
Building 200,000 Cost of Goods Sold 200,000
Equipment 100,000 Salary Expense 50,000
Accumulated Depreciation 20,000 Rent Expense 36,000
Security Deposit 3,000 Depreciation Expense 10,000
Accounts Payable 12,000 Office Expense 10,000
Salaries Payable 4,000 Interest Revenue 1,000
Taxes Payable 6,000 Interest Expense 5,000
Note Payable, Long-Term 40,000 Income Tax Expense 30,000

Mater Inc. declared and paid a $5,000 dividend in 2014. The beginning Common Stock was
$40,000 and beginning Retained Earnings was $259,000.
From the following information for 2014 for CoJo, Inc. prepare Financial Statements. Assume a
December 31 year end.

Accounts Payable $200,000


Accounts Receivable 80,000
Accumulated Depreciation 46,000
Advertising Expense 19,000
Building 300,000
Cash 106,000
Common Stock 300,000
Cost of Goods Sold 500,000
Equipment 140,000
Interest Expense 5,000
Inventory 120,000
Depreciation Expense 28,000
Notes Payable, Long-Term 10,000
Patent 50,000
Rent Expense 75,000
Retained Earnings 171,000
Sales 825,000
Salaries Payable 60,000
Salary Expense 100,000
Tax Expense 18,000
Taxes Payable 9,000
Utilities Expense 40,000

Cojo, Inc. issued 200 shares of common stock on June 30, 2014. There were 800 shares of
common stock outstanding at the end of 2013. The company declared and paid a $10,000
dividend during 2014. The beginning Common Stock was $240,000 and the beginning Retained
Earnings was $141,000.
So…..

An Income Statement is _________________________________________________________________

Revenues are ________________________________________________________________

Expenses are _________________________________________________________________

Another name for the Income Statement is the ____ & _____ or ______________& ___________.

And the phrase ___________ _____ ___ ______ ___________ ________ comes from this.

A Balance Sheet is _____________________________________________________________________

We classify the Balance Sheet into sections or categories. Usually this segregation is done
according to L_____________________ on the Asset side
and when they ______________ b__ p________ on the liability side.
An Asset is ___________________________________________________________________________
On the Asset side we have C ____________ A_____________ and other categories such as
F_____________ A____________ and O___________ A___________
A Liability is _________________________________________________________________________
And on the Liability side of the Balance Sheet we have
C___________________ L___________________
L___________________ L___________________
and maybe O___________________ L___________________
Owners’ Equity is _________________________________

Two types of capital C_____________________________ and

E_____________________ which is termed R___________ E___________ in a corporation


A dividend is _______________________________________________________________.

Rule of the Professional:


Second Rule of the Successful executive
Be ________________________________
(It is ok to fake it!!----------------, but

-never, never, ever be w__________ W____________!!)

Module # 2 Homework

I was taught that the way of progress is neither swift nor easy.
Madame Marie Curie
Problem 1
From the following information for McStuffin Co. for the year ended 12/31/14, prepare the Financial
Statements. There were 100 shares of common stock issued on April 1, 2014 and a dividend of $5,000 was
paid on November 30, 2014. Beginning Common Stock was $9,000 and beginning Retained Earnings was
$57,500.

Advertising Expense $ 1,000 Rent Expense 12,000


Cash 47,000 Retained Earnings 63,000
Common Stock (1,000 shares) 10,000 Sales 85,000
Cost of Sales 40,000 Tax Expense 4,500
Inventory 25,000 Utilities Expense 2,000
Note Payable, Long-term 20,000 Wage Expense 10,000
Interest Expense 5,000 Land 20,000
Goodwill 10,000 Wages Payable 1,000
Accounts Payable 8,000

Problem 2
From the following information for John & Debbie’s Production Company for the year ended 12/31/14,
prepare Financial Statements. The company issued 1,000 new shares of common stock for $10,000 on
May 1, 2014 and declared and paid dividends of $2,000 in 2014. Beginning Common Stock was $90,000
and the beginning Retained Earnings was $90,600.

Accounts Payable 50,000 Interest Expense 8,000


Accounts Receivable 40,000 Note Payable, Long-Term 80,000
Advertising Expense 5,000 Rent Expense 36,000
Cash 50,000 Retained Earnings 134,000
Common Stock (10,000 Shares) 100,000 Sales 200,000
Cost of Sales 72,000 Tax Expense 18,600
Inventory 60,000 Utilities Expense 5,000
Land 200,000 Wage Expense 10,000
Patent 20,000 Wages Payable 6,000

ONLY THOSE WHO HAVE THE PATIENCE TO DO SIMPLE THINGS PERFECTLY


WILL ACQUIRE THE SKILLS TO DO DIFFICULT THINGS EASILY
Frederick Schiller

Problem 3
If I deposit $500 in the bank today and the bank pays interest of 6% compounded annually, how
much will I have 3 years from today?

Problem 4
If I deposited $2,000 in the bank today at 5%, how much would I have 8 years from today?

Problems 5
If Mary deposits $200 in an account that pays interest annually at 12%, how much will she have in
2 years?

Problem 6
If Mary deposits $200 in an account at12% that pays interest semi-annually, how much will she
have in 2 years?

Problem 7
Jane will save for three years. The bank pays interest at 10% compounded semi-annually. How
much will she have in three years if she deposits $1,000 today?

Problem 9
For Jane (6), what if the bank paid interest annually?

Problem 10
How much will you have in three years if you put $100 in the bank today and the bank pays
A) 8% compounded annually?
B) 16% compounded quarterly?
C) 12% compounded semi-annually?
D) 24% compounded quarterly?

Read & study pages 18 and 19


_________________________________________________________________________
EPS for Bella (Problem on next page)

100,000/ 2/12 X 6,000 + 3/12 X 8,000 + 1/12 X 12,000 + 6/12 X 16,000


= 100,000/12,000

= $8.33

Calculating Weighted Average Earnings Per Share

Earnings Per Share (EPS)


Types of EPS
Basic

Diluted

We will only be using Basic during this class

EPS = Net Income


Weighted Average Number of Shares Outstanding

Weighted Average EPS

Greges Corporation had net income for 2014 of $100,000. At the beginning of the year they had
10,000 shares of common stock outstanding. On April 1 they sold 4,000 shares to the public. On
October 1, they sold 3,000 more shares. At December 31 st, they had total assets of $1,000,000
and total Liabilities of $600,000. Calculate the EPS.

$100,000 1
(3/12 X 10,000)+ (6/12 X 14,000) + (3/12 X 17,000)

= 7.27

For 2014, Bella Company earned $100,000. The company had 6,000 shares outstanding on
January 1, sold 2,000 shares on March 1 and sold 4,000 shares on June 1 and another 4,000 on
July 1. Calculate the EPS for Bella. (Answer is on previous page.)
Depreciation
When a company buys a fixed asset (accountanteze for buildings, machines, furniture, trucks and so forth)
the cost of the asset, except land, must be allocated over the period the asset helps the company generate
revenues. The period over which the asset is useful to the company in generating revenues is called its
economic or useful life. Therefore, a definition of depreciation expense is the allocation of the cost of a
fixed asset over its estimated useful life. To figure the amount of the expense for each year under the
straight-line method of depreciation, we use the following formula:

Cost - Estimated Salvage Value


Depreciation Expense per year = Estimated Life of the Asset

Suppose we bought a truck to deliver our product. The truck cost us $30,000 and we estimate that we will
use it for 3 years before it becomes too expensive to keep it going. We further estimate that at the end of the
three years we will be able to sell it for $3,000. This $3,000 is the estimated salvage value (also termed the
residual value).

Accumulated Depreciation is an enigmatic account for many students. It is a valuation account. It is also a
contra account. Now let’s see what it really is. The truck account will remain the same, $30,000, until we
sell or trade in the truck. The amount of depreciation we take on the truck will accumulate over the years we
own it in the Accumulated Depreciation account. The cost minus the accumulated depreciation of any fixed
asset is known as its book value. Consider the P & L and the Balance Sheet for each of the following years:

P&L Year 1 Year 2 Year 3


Sales
Cost of Good Sold
Gross Margin
Operating Expenses:
Xxxxx Expense
Xxxxx Expense
Depreciation Expense 9,000 9,000 9,000

Balance Sheet
Current Assets
Xxxxxxx
Xxxxxxx
Xxxxxxx
Total Current Assets

Fixed Assets
Truck 30,000 30,000 30,000
Less: Accumulated
Depreciation < 9,000> <18,000> <27,000>
Net Fixed Assets 21,000 12,000 3,000

If we originally purchased the truck at a point in the year other than the beginning, we would adjust our
depreciation for the period we used it. Many companies have special rules for these situations. A common
one is that the company takes 1/2 of a year’s depreciation in the year they buy the asset, no matter when in
the year that occurs, and they take 1/2 of a year’s depreciation in the year they sell the asset, again, no matter
when in the year that occurs.
Hobson’s Choice Module #3 Friends come and go,
exacerbate but enemies accumulate.
(Thomas F. Jones, Jr.)
Earnings per Share

Primary and diluted

Convertible bonds, stock options and so forth

As if….

But never mind- we will only use basic…..

The Formula
Samsun Company earned $100,000 last year. The company had 5,000 shares of common stock
outstanding on January 1, sold 8,000 shares on April 1 and sold 4,000 shares on
October 1. Calculate the EPS for Samsun.

Ryan Corporation had 100,000 shares outstanding at the beginning of the year. On April 1, they
issued 12,000 shares, on June 30, they issued 16,000 shares and on October 1, they issued 8,000
shares. The Company earned $300,000 for the year. What was the EPS?
Depreciation
What it is, is

You bought a new truck to use to deliver the Whatevers that you sell. The truck cost $30,000, will
last for 4 years. At the end of 4 years, you figure you could sell it for $2,000.

Formula for Straight-Line Depreciation:

Goes on the Balance Sheet


Inventories
Specific Identification

Weighted Average

FIFO means ___________ ___, __________ _____.

The Inventory Turn is ----

And taking it one step further----------


Gives us a_________________ d_______ s__________ in i___________.

Before the homework--- Bubble Guppies---- current portion of long-term debt

And what about the dividend????


Time Value of Money

You have a choice- $100 today, $107 in one year or $115 in two years. You do not need money
today and the money is safe if you decide to take it later. How would you make this decision?

Present value
First, back to an easy future value problem, how much will you have in one year if you put $100 in
the bank today and the bank pays interest compounded annually at 10%?

How much do you need to put in the bank today to have $110 in one year if the bank pays interest
at 10%, compounded annually?
What if you wanted to have $100 in one year, bank pays interest at 10% compounded annually?

The formula for present value

How to use the calculator:

How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays
interest at 10% compounded annually?

2nd CLR TVM


1000 FV
3 N
10 I/Y
CPT PV

How much do I need to put in the bank today if I want to have $1,000 in 3 years, the banks pays
interest at 10% compounded semi-annually?

2nd CLR TVM


1000 FV
3 X 2= N
10÷2= I/Y
CPT PV

How about wanting $50,000 in 10 years bank pays interest 16% payable quarterly?
Or 2nd CLR TVM
50000 FV
10 X 4= N
16÷4= I/Y
CPT PV

The tutorials and instruction book for your calculator make some easy calculations very difficult. If you do
one or two additional steps, it all becomes easy.
First, some basics
The third line of the calculator is the one we will be using the most.
N is the number of compounding periods
I/Y is the interest rate per compounding period
PV is the present value
PMT is the payment per period
FV is the future value

To set your decimal points


2nd Format (bottom middle key)
Enter number of decimal points you want to use.
Enter (top line second key)

Future Value Problems

How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10%
compounded annually?
1) 2nd clr tvm
2) 100 PV
3) 1 N
4) 10 I/Y
5) CPT FV FV = -110.00
How much will I have in the bank in 1 year if I put $100 in today, bank pays interest at 10%
compounded semi-annually?

1) 2nd clr tvm


2) 100 PV
3) 2 N
4) 5 I/Y
5) CPT FV FV = -110.25

Present Value Problems


What is the present value of $1,000 to be paid to me in 2 years, bank pays interest annually at
10%.
2nd CLR TVM
1000 FV
2N
10 I/Y
Cpt PV -826.45

What is the present value of $1,000 to be paid to me in 2 years, bank pays interest of 10% semi-
annually?
2nd CLR TVM
1,000 FV
4N
5 I/Y
Cpt PV -822.70
Payments
You want to buy a new car. The cost is $50,000. You make 5 equal annual payments which
include interest at 10%. How much are the payments?

2nd CLR TVM


50,000 PV
5N
10 I/Y
Cpt PMT -13,189.87

What would the payments be if they were monthly?


2nd CLR TVM
50,000 PV
5X12 = N
10/12 = I/Y
Cpt PMT -1,062.35

Differential Interest
Bob will sell you a DooDad for $10,000 payable in 3 equal annual payments which include interest
at 2%. The bank would charge you 10% for the same loan. How much are you really paying for
the DooDad?
2nd CLR TVM
10,000 PV
3N
2 I/Y
Cpt PMT
10 I/Y
Cpt PV 8,623.28

How much would you pay for a 10 year, 100,000 bond, 10% interest payable annually, to earn 8%
interest?
2nd CLR TVM
100,000 FV
10 N
.10 X 100,000 = PMT
8 I/Y
Cpt PV 113,420.16

You are buying a 10 year, $100,000 Note issued 5 years ago. The Note is being paid in equal
annual payments which included interest at 10%. Current interest rates are 12%. The Note has
exactly 5 years of payments left and you will get the first in 1 year. How much do you pay to earn
12%?
2nd CLR TVM
100,000 PV
10 N
10 I/Y
Cpt PMT
5N
12 I/Y
Cpt PV 58,666.07

Problems
1) How much do you need to put in the bank if you want to have $1,000,000 in 5 years, bank
pays interest at 4% compounded annually?

2) Compounded semi-annually?

3) How much if you want to have $100,000 in 15 years, the bank pays interest at 8%
compounded annually?
4) What if you want $1,000,000 in 20 years at 12% compounded semi-annually?

5) Problem 4 compounded quarterly?

Annuities
1) How much do you need to put in the bank today so you can take out $100 per year
for each of the next two years? The bank pays interest at 12% compounded
annually. You will make your first withdrawal exactly one year from today.

2) How about $1,000 per year for next 4 years, bank pays interest at 10% compounded
annually?

3) How much do you need to put in the bank today so you can take out $10,000 per year for
the next five years? The bank pays interest at 8% compounded annually.
4) How about $100 for 10 years, same bank and interest?

5) How about $500 per year for the next 30 years, bank pays interest at 8%, compounded
annually?

Module 3 Homework

Bubble Guppies, Inc.

Listed below are the accounts for Bubble Guppies, Inc. at December 31, 2013 and
their balances.

Accounts Payable $ 40,000


Accounts Receivable 143,000
Accumulated Depreciation 85,000
Advertising Expense 8,000
Building 200,000
Cash 185,000
Common Stock 210,000
Cost of Goods Sold 440,000
Equipment 100,000
Interest Expense 8,000
Insurance Expense 3,000
Inventory 62,000
Depreciation Expense 46,000
Note Payable 100,000
Prepaid Rent 4,000
Rent Expense 36,000
Retained Earnings 272,000
Sales 880,000
Salaries Payable 8,000
Salary Expense 200,000
Security Deposit 40,000
Tax Expense 38,000
Taxes Payable 19,000
Utilities Expense 12,000

Bubble Guppies’s beginning balance (12/31/12) in Retained Earnings was $193,000 and the
beginning Common Stock balance was $60,000. The company had 6,000 shares of common
stock outstanding at the beginning of the year. The corporation issued 4,000 shares of common
stock on April 1, 2013. The Note Payable requires annual payments of $20,000 on principal plus
interest at 8% on December 31st. During the year the company paid a $10,000 dividend.

Prepare financials statements (3) for Bubble Guppies’s

There are more Problems on the next page


Problem 2
How much do I need to deposit in the bank today at 8% compounded quarterly so that I will have
$100,000 one year from today?

Problem 3
How much do I need to invest today at 4% compounded annually in order to have $1,000,000 five
years from today?

Problem 4
How much do I need to put in the bank today in order to have $10,000 two years from today if
interest is 8% compounded semi-annually?

Problem 5
The Arsen Co. earned $500,000 last year. The company had 100,000 shares outstanding on
January 1, sold 6,000 shares on July 1 and sold 6,000 shares on October 1. The Arsen Co. stock
sells for $50 per share. Calculate the EPS.
ONLY THOSE WHO HAVE THE PATIENCE TO DO SIMPLE THINGS PERFECTLY
WILL ACQUIRE THE SKILLS TO DO DIFFICULT THINGS EASILY
Frederick Schiller

Module 4

What built this country over time is tens of thousands of people who want to live better
tomorrow than they did today and go to work on it.
Warren Buffett

Payments and amortizations

You are buying a Mercedes for $65,000. You pay $5,000 down and will pay the rest in five annual
payments of $15,027.39 beginning one year from today. The payments include interest at 8%.
Prepare an amortization schedule.

How did I get the payment amount?


Now Amortize the loan
Ending or Unpaid
Applied to Principal
Periods Payments Interest 8% Principal Balance

Total Cost 65,000.00

Down Payment 5,000.00 5,000.00 60,000.00

1 15,027.39_______________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

Go back to the Mercedes- how would we do monthly payments?.......

Now Amortize the loan


Ending or Unpaid
Applied to Principal
Periods Payments Interest 12% Principal Balance

Total Cost 65,000.00


Down Payment 5,000.00 5,000.00 60,000.00

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________

6 ________________________________________________________

Sharon wants to buy a new red dress (which her dad and uncle think is way too short and too
tight). The cost is $600, 10% down and the rest in 3 equal annual payments which include interest
at 8%. How much are the payments? Prepare an amortization schedule.
You want to buy a cow. Price is $10,000 to be paid $1,000 down and the rest in three equal
annual installments which include interest at 10%. How much are the payments? Prepare an
amortization schedule.

You have just purchased a new car for $40,000. You pay no money down and will make 60 equal
monthly payments starting next month. The interest rate is 12% per year. Amortize the first
three months of your loan. (Did you get $889.78 as your payments?)
Professional tip # 1 Honor the ____________________________.

#2 Business lunches are not for e_________________!! Decide what you want

B___________ you g____ t______.

# 3 At the restaurant- show some ________________.

Don’t c___________ the _____________!!

If you can’t a_______________ t__ b__ t__________, DON’T G___!

And never, ever, take home ______________________________!!


Module 4 Homework

Problem 1

John wants to buy a new gas Barbeque. The cost is $659.98. He will have to pay for it
with10% down and 5 equal annual payments that include interest at 10%. Calculate the
payments. Amortize the payments.

Problem 2

You, on the other hand, want a new Jeep. The cost is $ 29,000. You pay 5% down and the rest
in five equal annual payments which include interest at 8%. Calculate the payments. Amortize
the payments.
Problem 3

Megan has just purchased a new goat. The cost was $ 1,000. She paid 10% down and will pay
the rest in 4 equal annual installments which include interest at 6%. Calculate her payments and
prepare an amortization schedule

Problem 4
You want to buy a bus. The cost is $769,000. You pay $69,000 down and the rest in five equal
annual payments which include interest at 8%. Calculate the payments. Amortize the payments.

Without data, you are just another person with an opinion.


Extra Calculator Problems

Eric wants to buy a new Mercedes. The cost is $80,000. Eric will put 10% down and pay the rest
in 5 equal annual payments which include interest at 8%. How much are the payments?

If Eric amortizes the above loan correctly, what would be the interest expense for the second year?

If Eric amortizes the loan correctly, what would be the principal balance after the third payment?
If Eric made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be
the amount of the each payment?

Still on monthly payments, what would be the interest expense for the second month?

Suzie wants to have $1,000,000 in the bank in thirty years. If the bank pays interest at 6%
compounded semi-annually, how much does she need to deposit today to reach her goal?

Cindy wants to withdraw $1,000 per month for the next 5 years. She will withdraw her first amount
in one month. The bank pays interest at 12% compounded monthly. How much does she need to
deposit today to do this?

Heather hit the lottery!! She has the option of taking 560,000 today or 100,000 per year for the
next 8 years, or $1,000,000 in ten years. If she can deposit her money at 8%, ignoring taxes,
which deal should she take?

Extra Extra Calculator Problems

Bob wants to buy a new Harley. The cost is $60,000. Bob will put 10% down and pay the rest in 3
equal annual payments which include interest at 8%. How much are the payments?

Amortize the loan

If Bob made 60 monthly payments (deal still the same, 10% down and 8% interest), what would be
the amount of the each payment?
Still on monthly payments, what would be the interest expense for the second month?

Suzie wants to have $10,000,000 in the bank in thirty years. If the bank pays interest at 8%
compounded semi-annually, how much does she need to deposit today to reach her goal?

vicarious Module #5 Happiness is different from pleasure.


Cash Flows Happiness has something to do with
struggling and enduring
and accomplishing.
George Sheehan
Two Types __________________ and __________________

Bobcat Bob, Inc. Bobcat Bob, Inc.


Income Statement Balance Sheet
For the Year Ended December 31, 2014 December 31,

Sales $ 48,000 2014 2013


Cost of Goods Sold 24,000 Assets
Gross Margin 24,000 Current Assets
Operating Expenses Cash $ 38,880 $ 26,800
Salary Expense $ 12,700 Accounts Receivable 5,000 8,000
Insurance Expense 1,200 Inventory 2,000 1,000
Depreciation Expense 2,400 Prepaid Insurance _ 100 ______
Total Operating Expenses 16,300 Total Current Assets 45,980 35,800
Operating Income 7,700 Property and Equipment
Other Revenues & <Expenses> Furniture & Fixtures 26,000 12,000
Interest Expense < 300> Less: Accumulated
Taxable Income 7,400 Depreciation (3,400) (1,000)
Tax Expense 2,960 Net Property & Equipment 22,600 11,000
Net Income $ 4,440 Other Assets
Patents 500 100
Earnings Per Share $ 4.04 Total Assets $69,080 $ 46,900

Liabilities
Current Liabilities
Accounts Payable $ 7,000 $ 5,000
Salaries Payable 1,000
Taxes Payable 2,960 3,120
Advertising Payable _____ 100
Total Current Liabilities 10,960 8,220
Long-Term Debt
Note Payable-Bank 15,000 4,000
Total Long-Term Debt 15,000 4,000
Total Liabilities 25,960 12,220
Owners’ Equity
Common Stock 34,000 30,000
Retained Earnings 9,120 4,680
Total Owners’ Equity 43,120 34,680
Total Liabilities
& Owners’ Equity $ 69,080 $ 46,900

The Note Payable-Bank is interest only at 6% with the principal balance due December 31, 2018.
During the year the company purchased a piece of office furniture worth $2,500 by issuing 500 shares
of common stock for it.
A word to the wise ain't necessary -- it's the stupid ones that need the advice. - Bill Cosby
When you’re on the phone
with the man, you’re all alone.
The Las Vegas Bookie
Now you do one -

The following balances are for Misty Company at December 31,

2013 2014
Cash 10,000 30,000
Accounts Receivable 40,000 50,000
Inventory 80,000 60,000
Prepaid Rent 6,000 3,000
Equipment 180,000 210,000
Accumulated Depreciation-Equipment 50,000 60,000
Security Deposit 8,000 9,000
Accounts Payable 40,000 50,000
Salaries Payable 10,000 -0-
Interest Payable -0- 5,000
Taxes Payable -0- ______?
Note Payable 100,000 70,000
Common Stock 10,000 50,000
Retained Earnings 114,000 124,000
Sales 200,000
Cost of Goods Sold 100,000
Salary Expense 40,000
Rent Expense 24,000
Interest Expense 6,000
Depreciation Expense 10,000
Tax Expense ______?

The common stock outstanding was 10,000 shares on January 1, 2014. On April 1, 2014, Misty
issued 10,000 shares of common stock in exchange for $10,000 of equipment. On July 1, 2014,
Misty sold an additional 30,000 shares of common stock. During 2014, the company paid a
dividend of _____________. No equipment was sold during the year. The tax rate is 30% and 1/2
of 2014 taxes were paid in 2014, the rest will be paid in 2015.

On the next page, prepare a Statement of Cash flows in good form using the indirect
method.
93

"When it becomes more difficult to suffer than to change... you will change."-- Dr. Robert Anthony
The Direct Method
94

Cindy wants to withdraw $10,000 per month for the next 5 years. She will withdraw her first
amount in one month. The bank pays interest at 12% compounded monthly. How much does
she need to deposit today to do this?

Chris hit the lottery!! She has the option of taking $520,000 today or $90,000 per year for the next
8 years, or $85,000 per year for the next nine years or $1,000,000 in ten years. If she can deposit
her money at 6%, ignoring taxes, which deal should she take?

And a note to the ladies............


“Before you meet the handsome prince you really have to kiss a lot of toads.”

Professional tip Men communicate to __________, woman communicate to ______________.


Cite: “You Just Don’t Understand”, Deborah Tannen

#2 Hands to face, in men, is a sign of ___________.


Hand, fingers right under nose is a sign of i________________________.
95

An Extra Cash Flow Problem

CoJo’s Colts, Inc.


Balance Balance
12/31/13 12/31/14
Cash 88,900 97,600
Accounts Receivable 50,000 90,000
Allowance for Doubtful Accounts 2,000 3,600
Inventory 40,000 120,000
Prepaid Insurance 3,600 2,900
Prepaid Rent 3,000 -0-
Equipment 220,000 320,000
Accumulated Depreciation 20,000 50,000
Land 100,000
Security Deposits 10,000 8,000
Accounts Payable 30,000 35,000
Salaries Payable 10,000 6,000
Rent Payable -0- 3,000
Interest Payable 10,000 9,000
Taxes Payable 5,000 10,000
Note Payable 200,000 180,000
Common Stock ($1 each) 50,000 160,000
Retained Earnings 88,500 281,900
Sales 1,400,000
Cost of Goods Sold 700,000
Salary Expense 185,000
Rent Expense 36,000
Advertising Expense 85,000
Office Expenses 27,000
Depreciation Expense 30,000
Utilities Expense 12,000
Bad Debt Expense 6,500
Insurance Expense 6,000
Miscellaneous Expense 3,000
Interest Expense 9,500
Income Tax Expense 90,000

The land was acquired on June 30, 2014 by exchanging 80,000 shares of common stock worth $80,000 and
cash for the balance of the purchase price. The additional common stock (other than that issued for the
purchase of the land) was sold on September 30, 2014 for $1 per share. The company did not sell any
equipment during the year. All equipment purchased during the year was purchased for cash. The balance
in retained earnings for each year is after all closing entries have been made. The Note Payable requires
payments of $20,000 principal plus interest at 10% on June 30th of each year.
96

Some fun stuff


Comparative Balance Sheets for Darby’s Doodles, Inc. are listed below:

December 31,
2013 2014

Cash 400 650


Accounts Receivable 600 800
Inventory 1,000 1,300
Plant and Equipment 1,000 1,050
Accumulated Depreciation 325 600
Accounts Payable 600 640
Common Stock 1,000 1,000
Retained Earnings 900 1,560

The following data relate to 2014:


a) collections from credit customers, $30,000, cash sales $6,000
b) payments to suppliers of merchandise $ 40,000
c) purchases of equipment for cash, $50
d) dividends paid to shareholders $500
e) no plant and equipment was retired or sold during the year

1) For Darby, the Depreciation Expense for 2014 was

2) For Darby, the Sales Revenue for 2014 was


97

3) For Darby, the Net Income for 2014 was

4) The Cost of Goods Sold for 2014 was

More Professional Tips


Look them in _______ _________!

Guys, save that other stuff for ____ _________!

And people who will not look people in the eye are perceived as weak, wishy
washy!!

The greatest gift you can give is the purity of your a_______________!

So let the d______ phone _________!

Don’t answer with a b_________________ s__________.

As a common courtesy, introduce yourself- save embarrassment


98

Module 5 Homework
Problem 1 From the following information for Kevin’s Kennels, prepare a Statement of
Cash Flows for the year ended December 31, 2014 using both the indirect method.

Balance Balance
12/31/14 12/31/13

Cash 71,900 18,900


Accounts Receivable 78,000 45,000
Inventory 70,000 90,000
Prepaid Insurance 3,600 2,600
Equipment 340,000 290,000
Accumulated Depreciation 80,000 20,000
Land 120,000
Security Deposits 12,000 10,000
Accounts Payable 35,000 30,000
Wages Payable 6,000 10,000
Rent Payable 8,000 4,000
Interest Payable 6,500 7,500
Taxes Payable 10,000 5,000
Note Payable 130,000 150,000
Common Stock ($1 each) 300,000 160,000
Retained Earnings 120,000 70,000
Sales 1,200,000
Cost of Goods Sold 700,000
Wage Expense 220,000
Rent Expense 48,000
Office Expenses 46,000
Depreciation Expense 60,000
Utilities Expense 15,000
Insurance Expense 6,000
Interest Expense 15,000
Income Tax Expense 27,000

The land was acquired on March 31, 2014 by exchanging 60,000 shares of common stock worth
$60,000 and cash for the balance of the purchase price. The additional common stock (other than
that issued for the purchase of the land) was sold on September 30, 2014 for $1 per share. The
company did not sell any equipment during the year. All equipment purchased during the year
was purchased for cash. The retained earnings balance for both years is after all closing entries
have been made. The Note Payable requires payments of $20,000 principal plus interest at 10%
on June 30th of each year. Current stock price (12/31/14) is $4.00 per share.
99

Problem 2 From the following information for Molly’s Munchies, prepare a Statement of
Cash Flows for the year ended December 31, 2014 using the indirect method.

The following data is for Molly’s Munchies:


Balance Balance
12/31/14 12/31/13

Cash 80,000 20,000


Accounts Receivable 68,000 35,000
Inventory 70,000 90,000
Prepaid Insurance 500 3,000
Equipment 340,000 270,000
Accumulated Depreciation 80,000 20,000
Land 120,000
Security Deposits 12,000 10,000
Accounts Payable 35,000 30,000
Wages Payable 6,000 10,000
Rent Payable 7,500 6,000
Interest Payable 6,000 7,000
Taxes Payable 16,000 5,000
Note Payable 120,000 140,000
Common Stock ($1 each) 300,000 160,000
Retained Earnings 120,000 50,000
Sales 1,200,000
Cost of Goods Sold 575,000
Wage Expense 260,000
Rent Expense 24,000
Office Expenses 70,000
Depreciation Expense 60,000
Advertising Expense 15,000
Insurance Expense 9,000
Interest Expense 14,000
Income Tax Expense 52,000

Some of the equipment was acquired on March 31, 2014 by exchanging 60,000 shares of
common stock worth $60,000. The additional common stock (other than that issued for the
purchase of the equipment) was sold on June 30, 2014 for $1 per share. The company did not
sell any equipment during the year. All the rest of the equipment and the land purchased during
the year was purchased for cash. The retained earnings balance for both years is after all
closing entries have been made. The Note Payable requires payments of $20,000 principal plus
interest at 10% on June 30th of each year. Current market price is $5.00 per share

Format for the Indirect Cash Flow Statement


100

Company Name
Statement of Cash Flows
For the (Period) Ending (Date)
Operating Activities
Net Income $ xx,xxx
Add: Depreciation Expense x,xxx
Add: Amortization Expense x,xxx
Add: Loss on Sale of Fixed Asset(s) x,xxx
Less: Gain on Sale of Fixed Asset(s) <x,xxx>
Increase in (current asset account name) < x,xxx>
Decrease in (current asset account name) x,xxx
Decrease in (current asset account name) x,xxx
Increase in (current liability account name) x,xxx
Decrease in (current liability account name) < x,xxx>
Increase in (current liability account name) x,xxx
Cash Provided By Operating Activities -or-Cash Used For Operating Activities xx,xxx or <xx,xxx>

Investing Activities
Purchase(s) of (fixed asset account name) <$ xx,xxx>
Purchase(s) of (fixed asset account name) < xx,xxx>
Sale(s) of (fixed asset account name) x,xxx
Payment of Security Deposit < x,xxx>
Refund of Security Deposit x,xxx
Cash Provided By Investing Activities -or- Cash Used For Investing Activities xx,xxx or <x,xxx>

Financing Activities
New Borrowing(s) xx,xxx
Payment(s) on (description of debt) < x,xxx>
Issuance(s) of Common Stock x,xxx
Purchase(s) of Treasury Stock < x,xxx>
Payment of Dividends < x,xxx>
Issuance(s) of Bonds x,xxx
Redemption of Bonds < xx,xxx>
Cash Provided By Financing Activities -or- Cash Used for Investing Activities xx,xxx or <xx,xxx>
Increase in Cash -or- Decrease in Cash xx,xxx or <xx,xxx>
Beginning Cash, (Date) xx,xxx
Ending Cash, (Date) $ xx,xxx

Supplemental Cash Flow Information


Cash payments for income taxes $ x,xxx
Cash payments for interest x,xxx
Noncash investing and financing activities
(Description of transaction) x,xxx
(Description of transaction) x,xxx
101

gonzo Module 6 The race is not always to the swift,


bifurcate nor the battle to the strongest,
but that’s the best way to win.
Daniel Runyon
(as told to the Las Vegas Bookie)
Accounts Receivable
Controlling and subsidiary accounts

Slammin’ Sammy had $600,000 in Accounts Receivable at the beginning of the year. He also
had $12,000 in the Allowance for Doubtful Accounts. Allowance for Doubtful Accounts is

and the Balance Sheet looks like


102

2014 - Simms had total sales of $300,000. All of the company’s sales are on credit with terms
of 2/10, net 30. At the beginning of the year, the company had a balance in Accounts
Receivable of $26,000 and an Allowance for Doubtful Accounts of $1,000. At the end of the
year, Accounts Receivable had a balance of $37,000 and an Allowance for Doubtful Accounts of
$2,000.

First as to terms- 2/10 n/30 means

and costs

so why do?

now as to the receivable turn

Which tells us

and dividing the turn into 365

gives us A__________________ C___________________ P___________________.

Also known as D___________ S________________ O____________________.


103

What is an aging schedule?

Total
Current 30-60 60-90 over 90
Receivable

Able Co. 60,000.00 60,000.00

Acme Corp 40,000.00 38,000.00 2,000.00

Baker Co 20,000.00 12,000.00 4,000.00 4,000.00

Zollar Co 80,250.00 60,250.00 20,000.00

Totals 236,965,374.87 223,885,462.25 9,000,486.57 3,236,582.95 842,843.10

Professional tip
Groups are fine, but

A leader takes r_____________________________ and f____________ t____________!

“The difference between the right word and the almost right word
is the difference between lightning and a lightning bug.” Mark Twain
104

Once upon a time….


Once upon a time…..Suzie had just graduated from medical school and was set to begin a five
year ENT internship at a hospital in Pontiac Michigan. Interns earn comparatively little and
Suzie was a little apprehensive about her money situation. When she arrived in Michigan, the
housing market was such that she could buy a really nice condo for a really good price. The
payments on the condo would be less than rent payments. The problem was the down payment
and the furnishing. She decided that if she could borrow $100,000, she would be set. After her
internship, her first year pay would be about $400,000 per year and she figured she could pay
off the loan easily. Debbie, her sister was flush with cash and so Suzie approached her for a
possible loan. Debbie’s money was currently sitting in the bank earning 2%. Suzie asked the
bank what they would charge for a six year, interest only loan and they told her 10% per year.
Debbie offered to loan her the money at 8%. The terms were that Suzie would pay 8% on
December 31st of each year. Then with the sixth interest payment, Suzie would repay the
$100,000. The note was signed and Suzie got her money and bought her house.

Time has passed, three interest payments have been made by Suzie on time. (The note would
now be considered seasoned.) Debbie is about to have her fourth child, Colton, and wants to
move. A new house would deplete her savings and so she decided to sell the Suzie note. She
had just received the third payment of interest yesterday. Debbie called a loan broker, a
company that specializes in selling debt such as this. They told her that notes such as hers
currently earn 12%. So if Debbie sells the note so that it earns 12%, how much will she get?

Kirch’s Third Law of the Universe


You ______ ___________ ______ ________!
105

Amortize the deal

How about if you wanted to earn 8%? Amortize it.


106

What if the Suzie/ Debbie note was for 100,000 payable in six equal annual payments which
included interest at 8% and you purchased it to yield 8%. How much would you pay? Amortize
it.

Same problem, but now interest rates have changed and you purchase it to yield 12%. How
much would you pay? Amortize it.
107

Sally wants to sell you a note. It is a $100,000, 12% note she bought at par (for face value) last
year. The note was originally for seven years, is seasoned, and has four years to run, pays
interest only annually and the principal due with the last payment in four years. She received
last year’s interest on time yesterday. Current interest rate on this quality of note is 8%. If you
buy the note to yield 8%, how much will you pay Sally?

Amortize your purchase of the Sally note.

How much would you pay Sally if current interest rates are 14%? Amortize it.

You can’t do everything at once, but you can do one thing at once.”
Calvin Coolidge
108
109

visceral Module 7 Don’t tell me how rough


onomatopoeia the seas are son,
just bring the darn ship in.
Rules, Leases and Goodwill Lou Holtz

Rules of the Game


Rules from where?
GAAP

G______________ A_____________ A_______________P________________

Who sets GAAP?


FASB

F____________ A_______________ S________________ B________________

General Principals

Assets and Liabilities measured in H_________________ C_____________


Exceptions
Depreciation
ADA

Measureable in D_______________________

G_____ C_______________ (Unlimited Life)

Disclosure and Measurement Puzzlements

Contingent Liabilities

Gift Cards

GAAP vs Non-GAAP???

http://www.youtube.com/watch?v=7P2-vEtXSug
110

(IFRS????)

Internal control....... another illusion the shoe store, estimated inventory and perpetual?????

Parking (Channel Stuffing)


111

Leases - Two types


O___________________________ and C_________________.

Operating is the U-__________.

Capital is when you are really _____________________ ____ _____________.

For instance…….
You want to buy Copeland Hall. The cost is $30,000,000 to be paid in 360 monthly
payments that include interest at 4.6%.

As an alternative to the purchase, you have been offered the chase to lease the building for
$153,794 per month. At the end of the lease you can buy Copeland for $1.

What’s up with that??

What your momma told you…

How do we know which is which? Accountants have their ways!!!!

And IFRS is changing everything!!


112

Now some lease problems…

You are trying to decide whether to buy or lease a truck. The following information is available
to you:

The manufacturer’s suggested retail price is $26,459.00.


You can actually buy it for $22,880.00.
The current bank interest rate for truck loans is 9% and you will put 10% down and pay
the balance over 36 months starting one month from signing.
It is raining while you make the deal.
You can lease the truck for $700.00 per month for 36 months. The lease requires a
down payment of $1,200 due at signing. You can purchase the truck at the end
of the lease for $2,000.
You would rather have a Lexus.
113

You are trying to decide whether to buy or lease a new machine. The machine costs $700,000.

1) You can buy it, borrowing money from the bank. If you borrow from the bank, the
interest rate will be 10%.

You can also-


2) lease it for five years, $10,000 down and five annual payments of $179,000. At the end
of the 5th year you can buy the equipment for $5,000.

3) Lease it for seven years, $20,000 down and seven payments of $133,300 After making
the last payment, you may purchase the equipment for $50,000.

What should you do?


114

Goodwill is
_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

_______________________________________________________________

First – Rate of Return

Freeland Company wants to enter the Athens’ market. Freeland is one of the largest
distributors of greeting cards in Ohio. They have been looking at Garven Distributing, a smaller
greeting card company that services the Athens’ area. The following is a summary of Garven’s
balance sheet.

Accounts Receivables $ 50,000 Accounts Payable 60,000


Inventory 60,000 Note Payable 150,000
Fixed Assets $500,000 Owners’ Equity 200,000
Accum Deprec 200,000 300,000
$410,000 $410,000

Garven’s Net Income for the last twelve months was $100,000. If Freeland wants to earn 20%
on any investment, how much should Freeland offer for Garven’s?

Assume that Garvin’s accepts the offer. Freeland goes through the Balance Sheet carefully and
determines that the Accounts Receivable are worth about $40,000
because?_____________________), that the Inventory is worth $75,000 and the Fixed Assets
are worth $375,000. Everything else is worth its book value. How much would Freeland
charge to Goodwill?
115

When and how do you write off goodwill? Each year you must test for I_______________.

Another Case: JD’s Tractor Company

Accounts Receivable $400,000 Accounts Payable 50,000


Inventory 175,000 Note Payable 450,000
Fixed Assets $800,000 Common Stock 300,000
Accum Deprec 200,000 600,000 Retained Earnings 375,000

Your company will buy this company for $3,000,000. You estimate that the receivables are
worth about $375,000, the inventory is worth $150,000 (how could that be?) and the fixed
assets are worth $500,000. Everything else is worth its book value. How much of the purchase
price is Goodwill?

Go back to the previous problem (JD’s Tractor Company). Assume the Note Payable is interest
only at 8% with exactly five years left before the principal is due. Current interest rates are 12%.
Redo the goodwill calculation using this information.
116

Other Assets
Intangible Assets

Other Intangibles:

Organization Costs

Patents, Trademarks and Copyrights

Franchises

Research and Development (R&D)???

and a consolidated statement is _________________________________________________.


117

Professional tips Dress for the _____________ _____ ____________,

not the ________________ ____ ________.


(It is always better to be _______ ____________)

Guys remember the __________. Ladies remember the ______________.

One ___________ per ______ and one _________ per _______.

(Earrings should be ______________________________________).

How you dress and carry yourself accounts for ____% of others assessment of you!
118
Module 7 Homework

Problem 1
Consider Dezie’s Company

Accounts Receivables $300,000 Accounts Payable 150,000


Inventory 200,000 Note Payable 400,000
Fixed Assets $900,000 Owners’ Equity
Accum Deprec 100,000 800,000 Common Stock 200,000
Retained Earnings 350,000

Hayley’s Company will buy this company (Dezie’s) for $1,000,000. Hayley estimates that the Accounts
Receivables are worth $290,000, the Inventory is worth $220,000 and the Fixed Assets are worth
$750,000. The Note Payable is interest only at 10% with exactly ten years left before the principle is
due. Current interest rates are 8%. Everything else is worth its book value. How much is the charge
to goodwill on Hayley’s books?

Problem 2
Consider the case:
Below is financial information from John’s Company
Accounts Receivables $100,000 Accounts Payable 50,000
Inventory 200,000 Note Payable 500,000
Fixed Assets $900,000 Owners’ Equity
Accum Deprec 100,000 800,000 Common Stock 200,000
Retained Earnings 350,000

Debbie’s Company will buy John’s Company for $1,500,000. You estimate that the Inventory is worth
$175,000 and the Fixed Assets are worth $700,000. The Note Payable is interest only at 8% with
exactly ten years left before the principal is due. Current interest rates are 10%. Everything else is
worth its book value. How much does Debbie charge to Goodwill when she records the purchase
of John’s?

Problem 3
On January 1, Joey, Inc. buys equipment for $10,000. Terms are 10% down the rest in 3 equal annual
payments which include interest at 12%. The payments start December 31. Prepare an amortization
schedule.
119
Problem 4
Baker Company needs to decide whether to buy or lease office equipment. Baker can buy the office
equipment for $250,000 today, which would require that they borrow the funds from the bank. The
bank will charge them 8% and require equal monthly payments over 4 years. They also have the
option of leasing the office equipment for either 3 years or 5 years. If they choose to lease for 3 years,
they will have to put $10,000 down today and make monthly lease payments of $7,500 and they can
purchase the office equipment after the last payment for $5,000. If they opt for the 5-year lease, they
need to put $6,000 down today and make monthly payments of $5,000 and they can purchase the
office equipment after the last payment for $3,000. Which option is best? Explain with numerical
analysis.

Problem 5
Sally sold $300,000 worth of stuff last year. Her beginning balance in Accounts Receivable was
$200,000 and her beginning credit balance in Allowance for Doubtful Accounts was $6,000. During the
year she collected $280,000 on her receivables, and wrote off $9,000. She estimates that 3% of her
receivables at any one time will not be collectable.
How much is her charge to Bad Debt Expense?

Problem 6
What is Sally’s average collection period?

Problem 7
At December 31, 2013 Makenna’s balance in Accounts Receivable was $200,000 and the balance in
Allowance for Doubtful Accounts was $4,000. During 2014 she had credit sales of $1,000,000. She
collected $850,000 on her accounts receivable during 2014. She wrote off $3,000 of accounts
receivable during 2014. Makenna estimates that 2% of her receivables will never be collected. How
much would the charge to Bad Debt Expense be for 2014. Show how this information will
appear on the financial statements and calculate the accounts receivable turn and the average
collection period.
120
121

Module 8
Differential Interest
Sam will sell you a Bopper for $8,000. No money down and 5% per year for five years. At the end of
the fifth year, you send him both that year’s interest and the $8,000. You send him the 5% each year.
How much are you really paying for the Bopper? (The bank would charge you 10% interest for a loan of
this type).

Kirch’s 2nd Law of the Universe:

T___________________________________________________

and it___________________________________________________!

Amortize it.
Ending or Unpaid
Applied to Principal
Periods Payments Interest 10% Principal Balance

BB

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________
122
What if the Sam deal had been for five equal payments that included interest at 5%? Current rate for
similar loans is 10%

Amortize it.
Ending or Unpaid
Applied to Principal
Periods Payments Interest 10% Principal Balance

BB

1 _______________________________________________________

2 ________________________________________________________

3 ________________________________________________________

4 ________________________________________________________

5 ________________________________________________________
123
What a deal!! Buddy will sell you an airplane for $250,000. $50,000 down and the rest in five equal
easy payments which include interest at 5%. A realistic interest rate would be 10%. How much are
you really paying? Record the purchase and prepare the amortization schedule.
(How do you handle the down payment ____________________________________)
124
Buddy wants to sell you a car. $20,000, no money down and you pay interest of only 4% for one year.
At the end of the year along with your 4% interest, you pay Buddy $20,000 for the car. You think this is
a heck of a deal because if you borrowed the money from a bank it would cost you 12%. What a deal?
Or,.. how much are you really paying for the car? And Sam has offered you the same car for $18,000
cash - what to do, what to do............
125
Nick also wants to sell you a thing-a-ma-jig for $100,000! He tells you that you can pay in three
equal annual payments which start in one year and include interest at 5%. You have seen the same
item on sale for $85,000. If you bought the item for $85,000, you would have to borrow the money from
the bank at 12%. Which is the better deal?

Buddy will sell you some carpet. $20,000. No money down and only 1% interest per year for two years.
(You send him the 1% at the end of each year). At the end of the 2nd year, you send him the $20,000
along with the interest. If you borrowed from the bank you would have to pay 12%- a heck of a deal...
or is it? (How much are you really paying for the carpet?)
126
You want to buy a motorcycle from JD. The cost is $20,000, $2,000 down and the rest in three equal
annual payment beginning one year from today. Interest is included in the payments at 10%. How
much are the payments? Amortize the loan.

Professional Tips

#1 The Effective Leader is D________________


without being D____________________.
(The latter is a sign of weakness)

#2 The Effective leaders makes s__________________,


does not generally ask q____________.
And seldom ap_______________ as this is perceived as weakness.
127
Module 8 Homework
Problem 1
Colton wants to sell you a Bubble Guppie $89,000! He tells you that you can pay in three equal annual
payments which start in one year and include interest at 5%. You have seen the same item on sale for
$79,000. If you bought the item for $79,000, you would have to borrow the money from the bank at
8%. Which is the better deal?

Problem 2
Ryan will sell you a Thing for $30,000. No money down and only 1% interest per year for two years.
(You send him the 1% at the end of each year). At the end of the 2nd year, you send him the $30,000
along with the interest. If you borrowed from the bank you would have to pay 6%- a heck of a deal... or
is it? (How much are you really paying for the Thing?)

Problem 3
What if the original Sally note (around page 59) had called for seven equal payments including interest
at 12% and now has four more years left to run. How much would you be willing to pay Sally if you
wanted to earn

A) 8%? Amortize it.


B) 14%? Amortize it.

Problem 4
Doozer wants to sell you a note with a face value of $1,000,000. The face rate on the note is 10% and
is payable in 4 equal payments which include interest at 10%. The note has four years left to run and is
seasoned.

A. How much would you pay for the note to earn 12%? Amortize it.

B. How much would you pay for the note to earn 8%? Amortize it.

Problem 5
You want to buy a motorcycle from JD. The cost is $20,000, $2,000 down and the rest in three equal
annual payment beginning one year from today. Interest is included in the payments at 10%. How
much are the payments? Amortize the loan.
128
129
Surfeit Module 9 Our most important thoughts are
Hubris those that contradict our emotions.
cornucopia Valarie

Bonds
What is a bond?

The bond agreement is full of c________________.

The coupon is

Bonds can have S______________.


(Convertibility, security, extra covenants)

On January 1, 2014, Lucky Company of Las Vegas, Nevada, issues $100,000 of 8% bonds for par.
The bonds pay interest annually and mature in three years. Interest is to be paid on December 31 of
each year. (First interest is to be paid 12/31/14)

How much does Lucky receive?


130
On January 1, 2014, Lucky Company of Las Vegas, Nevada, issues $100,000 of 8% bonds. At the
time of the issue, interest rates had risen to 10%. The bonds pay interest annually and mature in three
years. Interest is to be paid on December 31 of each year. (First interest is to be paid 12/31/14)

How much does Lucky receive?

Bonds issued for less than the face are said to be issued at d__________.

Amortize the bond

Show how the Bond Accounts appear on the Balance Sheet for each year.
131
What if the current interest rate was 6%?
(Calculate issuance amount and amortize the bond)

Bonds sold for an amount higher than the face are said to sell at a p________________.

Show how the Bond Accounts will appear on the Balance Sheet for each year.
132

What if the original Lucky note called for equal payments- everything else is the same.

How much would you pay to earn 8%

Amortize it

How much would you pay to earn 6%?

Amortize it
133
Still lucky equal payments,
How much would you pay to earn 6%

Amortize it
134
135
A Zero Coupon bond is

Also called a D________ D_____________ B________

Why issue/buy?

Clarence Co. issues a $100,000 zero on 12/31/14, interest rate 10% per annum, bond is due in three
years. How much do they get? Amortize it

How will the bonds appear on the Balance Sheet each year?
136

Professional Tips:

#1 In negotiating, go B_______ then S_________.

#2 When you are late, just say ___ s_______, lets get t___ w____.
137
138
Module 9 Homework Problems
Problem 1
Darby Company issues a $100,000 on 12/31/14, 15%, bond that matures in 5 years. Interest is paid on
December 31st of each year. What would be the amount they receive given the following interest rates:

10%
15%
20%

Problem 2

Still Darby Company - How about an 8% zero issued on 12/31/14 due in 3 years, face amount of
$100,000. How much would you pay? Amortize it.

Problem 3

Ryan Company issues a $100,000 zero coupon bond on 12/31/14. The face interest rate is 10% and
the bond that matures in 4 years. How much would you pay to yield*:

8%
10%
14%

Amortize all three bonds

*is the face interest rate relevant?


139

Obdurate The Purpose of the Course


Everyone has a strategy until they get punched in the mouth.
Mike Tyson

Your education is for ………………………………

Back to what makes a leader

What is your real style????

A Leader

Takes r________________

And f________U__

Is D___________________

Always s______________ even when you are not

Makes st___________________

Limited q_________________

Talks straight forward, not generally

Now….. signaling

When you are talking, sitting working………………………..

Not something you can turn off and on

October, Seattle and Dan Wilson

So always be
the h______________ w__________ P_________ I__ the R_______

Can you change??? The past is o________________ but you can.

Do you judge others on their actions and judge yourself on your intentions?
140

Tuesday, October 17, 1995 5:08


, Kingdome
Attendance: 58,489, Time of Game: 2:54

Indians Mariners W: Dennis Martinez (1-1)


at
4 0 L: Randy Johnson (2-1)

1 2 3 4 5 6 7 8 9 R H E

- - - - - - - - - - - -

Indians 0 0 0 0 1 0 0 3 0 4 8 0

Mariners 0 0 0 0 0 0 0 0 0 0 4 1

Top of the 8th, Indians Batting, Ahead 1-0, Mariners' Randy Johnson facing 9-1-2
Felix Fermin replaces Luis Sojo playing SS batting 8th
t8 1-0 0 --- 1,(0-0) CLE T. Pena R. Johnson 7% 80% Double to RF (Line Drive to Deep CF-RF)
Ruben Amaro pinch runs for Tony Pena (C) batting 9th
t8 1-0 0 -2- 2,(0-1) CLE K. Lofton R. Johnson 6% 86% Single to P (Bunt to P's Right); Amaro to 3B
t8 1-0 0 1-3 1,(0-0) CLE O. Vizquel R. Johnson 1% 87% Lofton Steals 2B
t8 1-0 0 -23 3,(2-0) RR CLE O. Vizquel R. Johnson 5% 92% Passed Ball; Amaro Scores; Lofton Scores
t8 3-0 0 --- 6,(3-2) O CLE O. Vizquel R. Johnson -1% 91% Lineout: LF (Deep LF)
t8 3-0 1 --- 4,(2-1) R CLE C. Baerga R. Johnson 4% 95% Home Run (Fly Ball)
Norm Charlton replaces Randy Johnson pitching
t8 4-0 1 --- 6,(2-2) O CLE A. Belle N. Charlton -0% 95% Popfly: 2B (Deep SS-2B)
t8 4-0 2 --- 7,(3-2) O CLE E. Murray N. Charlton -0% 95% Popfly: 2B (Deep 2B-1B)
3 runs, 3 hits, 0 errors, 0 LOB. Indians 4, Mariners 0.
141
Module 10 Courage is not the absence of fear,
taciturn Owners’ Equity but rather the judgment that
something is more important the fear.
From the Princess Diaries

Types of Business Organizations

Advantages of the _____________________________________

Your own corporation

Don’t ever give ___________________ ___________________

Always have a __________/ ______________ before you __________________!!!

How about disputes?

Partnership always have a _______________ _______________ before you start!!

Corporation always _____________________ itself back.

Common stock

Par is
142
Issuance of Common Stock

A Company issue 10,000 shares of $1 par value stock for $10 per share.

On January 1, Annabella Co. issued 50,000 shares of $5 par value stock for $20 per share.

Good luck comes to the saucy


and the bold. (Welsh Proverb)
143
Dividends

Cash

Annabella Co., declares a $.10 per share dividend on September 1, payable on October 1 to
shareholders of record September 15

|---------------------------------------------------------|-------------------------------------------------------|

date of _____________

date of _____________

date of _____________

Stock Dividends are

So why issue?

The purpose of management is…………………………………………


144

Horse puckey!!!
The real purpose of managers is more likely to be

Signaling and information theories

Finishing the Owners’ Equity Section

Treasury stock is

Treasury Stock goes __________________________________


145
Module 11

Refreshing on Present Value, Payments and Amortization

You have found a camel you really just must have! Which is the best deal? Why?
Amortize all the deals.

Deal #1. Cost is $20,000, four equal payments which include interest at 4%. Payments begin
one year from today. (Realistic rate is 12% for all the deals)

Deal #2 The camel costs $25,000, BUT you pay interest only at 4% for six years. With the
last interest payment, you also pay the $25,000.

Deal #3 The camel is $30,000, NO INTEREST for five years and then you pay the 30,000.

Deal #4 $17,000 cash.

Certainties are arrived at only on foot.


146
147
You have seen an ad for a used Mercedes in the Athens Messenger. The car is for sale for
$40,000. You believe you could make a buck by renting the car out. You figure you could rent the car
to the semi-rich on a daily basis for three years. You think you could rent the car for $100 per day for
the first year and $80 per day the second year and $60 per day for the third year. You expect that the
car will be rented out about 70% of the time for each year. At the end of the third year, you figure you
can sell the car for $20,000. You estimate that the repairs and maintenance on the car will be about
$1,000 for the first year, $2,000 the second year and $3,000 the third year. Licenses and fees will run
$2,000 per year for all three years. You will pay a rental company 10% of the gross rents you receive
each year to take care of all the paper work and the renting of the car to the students. How much can
you pay for the car today and make 20% on your investment?
148
149

Mercedes

Year 1 Year 2 Year 3

Rents 25,550

Cash Expenditures:

Repairs & Maintenance

Licenses & Fees

Rental Company Fees

Total Cash Expenditures

Net Cash Flow

The IRR What rate of return are you earning?

Use excel for instance =IRR(c15:f15)

The critical assumption

Professional Tip #1 In negotiating, use s__________ a__________________.

Professional Tip #2 Beware of S__________________ people-you cannot change them!!!

And speaking of this….


Never try to I________________ someone. There are enough other people in the world!

It never works and trying injures your s__________.

And the leaders does not seek a_____________________


150
151
struthious Module 12 Lazy people are
sycophant Financial Statement Analysis always anxious
pugnacious to be doing something.
Marquis De Vauvenargues

Hermi’s Bumbles, Inc.

Hermi’s Bumbles is a company that has been in business for three years. The company is a
wholesaler of Bumbles. Bumbles are bulbs which grow into beautiful, sweet smelling plant-trees. They
are a cross between a hyacinth and a buckeye. They are refrigerated and must be planted within one
year of when they are harvested. Hermi buys the bumbles from a grower when they are one month
old. Hermi has one location in Columbus, Ohio. It has three refrigerated trucks which deliver the
Bumbles throughout Ohio. The financial statements on the previous page summarize Hermi’s
operations for its first three years.

Hermi began operations with individuals investing $120,000 for 12,000 shares of common stock and a
small business loan of $200,000 from the bank. The loan carries interest at 12%. Hermi must pay the
interest plus $10,000 on the principal on January 1 of each year. Hermi sells using terms of 2/10
n/30. The latest sale of stock between individuals was yesterday at $85.00 per share. There are more
shares available from the other investors for this amount. The tax rate is 30%.
152
153
Analyzing Hermi’s
Current Ratio

Which tells us?

Calculate the Current Ratio for 2012 and 2013

The Quick or “Acid Test” Ratio

“Occam’s Razor”
154

Calculate the Accounts Receivable Turn for 2012 and 2013

And the average collection period for the two years

Calculate the Inventory Turn

Calculate the Average Days Sales In Inventory

Calculate Book Value Per Share


155
Return on Assets ROA

Which tells us?

Return on Equity ROE

Which tells us?


156

Leverage
What causes the difference between the ROA and the ROE??

Debt Ratio

Debt to Equity

Which tells us?


157
Use of Leverage

You have decided to open a hot dog stand at the corner of Court and Union. The following is your
opening balance sheet. You own the only 50,000 shares of stock outstanding for your company. You
sell the dogs for $2.00 each. You pay your worker a fixed salary of $20,000 plus $.10 for each dog she
sells.

Assets
Cash 5,000
Inventory 10,000
Cart 35,000
Total 50,000

Liabilities
-0-
Owners’ Equity
Common Stock 50,000
Retained Earnings -0-
Total 50,000

Expand using Expand using


Stock Loan
For the First Year
Sales 60,000
Cost of Sales 12,000
Gross Margin 48,000
Operating Expenses
Wages 23,000
Other 10,000
Total Operating Expenses 33,000

Operating Income 15,000

Net Income Before Taxes ______


Tax Expense
Net Income .

EPS .

You paid all your income out as a dividend. You want to expand to Oxford. You will need to invest a
total of $60,000. You expect your sales and cogs to double with the new operation. Your wage
expense for Oxford will be based the same as it is in Athens. Your other expenses will increase to
$12,000. Your tax rate is 30%. You can either sell 60,000 shares of stock for $1 each or you can
borrow the money from the bank. The bank will charge you 8% interest on the loan. Prepare the
income statement for next year if you do the deal under each of the alternatives. Assume the deal is
done on January 1st.
158

Window Dressing

Cash $300,000 Accounts Payable $200,000


Accounts Rec 100,000 Other payables 200,000
Inventory 100,000
Total Current Assets 500,000 Total Current Liabilities 400,000

Current Ratio is

Now pay off the Accounts Payable

The Current Ratio is

The probability of someone


watching you is proportional
to the stupidity of your action.

Professional tip # 1 In negotiations use time ____ a t____________.

# 2 Create an issue……
Then you can t_______ it a_________.
(no winners or losers here!!!)
159
Module 12 Homework
Problem 1
Calculate all the ratios you have learned for both Kevin’s Kennels and Molly’s Muchies (Cash Flow
Homework). Compare and contrast the two companies using the ratios you have learned. Use a
market price per share of $5 for Kevin’s and $4 per share for Molly’s.
160
161

Explanations and Calculations of the Ratios


Susanne Freeland

Current Ratio = Working Capital Ratio


Current Assets
Current Liabilities

Measure of liquidity – a company has sufficient liquid assets to cover its current obligations.

The higher the ratio the better able a company can meet its current obligations.

Return on Assets = Net Income


Ave. Total Assets

Measure of how well a company uses its assets to create profits.

The company wants to create a return that satisfies its shareholders (owners).

Investors use this ratio to evaluate company leadership.

Return on Equity = Net Income


Ave. Equity

Measures the success of company’s financing, investing and operating activities.

A company that generates a high return relative to its shareholders equity is considered a sound
investment. The original investors will be repaid with the proceeds from business operations.

Debt Ratio = Total Liabilities


Total Liabilities + Total Owners’ Equity

= Total Liabilities
Total Assets

Debt to Equity Ratio = Total Liabilities


Total Owners’ Equity

The more outstanding debt a company has, the more its earnings must go to making the payments on
this debt load. This limits the amount of capital available to grow the business or pay dividends to the
shareholders.
162

The more debt a company carries, the more risk is being taken by the creditors as opposed to the
shareholders.

Inventory Cost of Goods Sold


Turnover Average Inventory

Average Inventory = Inventory @ BOY + Inventory @ EOY/2

Measures the success a company has in converting (turning) its investment in inventory into sales.
The number of times a company sells and replaces its inventory during a given period.

Average Days = __ 365_____


Sales in Inventory Inventory Turn

The number of days sales, on average, that a firm carries in inventory.

Acid Test Ratio = Quick Ratio


Current Assets - Inventory
Current Liabilities

A stringent test that indicates whether a company has enough current assets to cover immediate
liabilities without selling inventory.

Accounts Receivable Turnover

Sales / Average Net Accounts Receivable

The number of times the accounts receivable are turned over or are collected
during the period.

Average Collection Period

365 days per year / Accounts Receivable Turn

The number of days it takes on average to collect an account receivable.


163

Earnings Per Share

Net Income
Weighted Average number of shares of common stock

The dollar amount of earnings that is associated with each share of stock.

Book Value per Share

Assets – Liabilities
Number of shares of common stock at the end of the year

The dollar amount of equity that is associated with each share of stock.

Price Earnings Ratio

Market Price per share


Earnings per share
This tells you how expensive a share of stock is in relation to its earnings.
164

A Look At Whether Ford Is Firing On All Cylinders


October 10, 2011 | 13 comments | about: F, includes: GM, TM
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Shares of US Automaker Ford (F) have fallen nearly 43% from its 52-week high reached at the
beginning of this year. With it's new dealsigned with the UAW, the company has essentially started a
new era with its workers, but it's too early to tell how it will all work out. With those labor negotiations
now in the rear view mirror, I wonder if the company is doing all that it currently can. Let's take a look at
some products first, and then we'll take a look at the financials.
The problem I see with Ford right now in terms of products is that they are lesser quality for a higher
price. I'll use the example of the Ford Fusion (manual) versus the Hyundai (HYMLF.PK)Sonata
(manual). If you'd like to do the same comparison, click here. Both manuals are the base models. The
MSRP and "comparably equipped pricing" have the Fusion about $200 more with no incentives. The
Sonata has an extra 23 horsepower, a lower turning radius, and more interior space and room for
occupants. And the gas mileage: Sonata gets 24/35 while the Fusion gets 22/32. And the Sonata's gas
tank is a gallon bigger so you can go even further.
According to Consumer Reports, the Sonata also has better crash test ratings, better acceleration,
better braking, and a better warranty. So I'll sum everything up. The Sonata is a much better car, will
cost you less in fuel and maintenance, and is safer. And you can get it for the same price. That's a no
brainer to me. For those of you who may question this example, I also observed both of these cars at
the New York International Auto Show earlier this year. I was more impressed with the Sonata.
That's just one example based on similar cars. I provided that comparison just to show you the one
main thing Ford needs to do: build a better quality car at a better price. That may be easier said than
done. However, if you look at the competitors page on Yahoo Finance, you will notice that Ford has
higher margins than both Toyota (TM) and General Motors (GM). Good for them. They need to keep it
going though, and right now, there is a ton of competition. So my main point is that Ford will be a
winner if they can control their costs and increase quality. We'll see how this deal with the UAW works
out. But for now, why not focus on how Ford has done recently. Here's some selected financial data
over the past eight quarters.
Selected
Financial 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010 1Q 2011 2Q 2011
Data ($B)
Revenues $30,892 $35,449 $31,566 $35,067 $29,893 $32,428 $33,114 $35,527
Gross
$5,716 $5,717 $6,427 $7,239 $5,660 $5,177 $6,338 $6,274
Profit
Net
$997 $868 $2,085 $2,599 $1,687 $190 $2,551 $2,398
Income
Current
$62,222 $55,865 $59,456 $53,787 $59,371 $48,875 $51,279 $50,030
Assets
Total
$203,106 $194,850 $191,968 $179,750 $177,078 $164,687 $167,391 $168,086
Assets
Current
$70,360 $61,193 $60,056 $59,674 $61,100 $60,206 $62,076 $62,686
Liabilities
Total
$210,376 $201,365 $197,405 $183,291 $178,818 $165,329 $164,926 $162,736
Liabilities
165
As you can see, the company has done fairly well, and has reduced the size of its balance sheet
quite a bit over the past 2 years. So let's look at some financial metrics, and we'll focus on profitability
first.
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Profitability
2009 2009 2010 2010 2010 2010 2011 2011
Gross
18.50% 16.13% 20.36% 20.64% 18.93% 15.96% 19.14% 17.66%
Margin
Operating
2.89% 2.14% 5.32% 7.41% 5.26% 2.50% 7.50% 6.25%
Margin
Profit
3.23% 2.45% 6.61% 7.41% 5.64% 0.59% 7.70% 6.75%
Margin
Return on
0.49% 0.44% 1.08% 1.40% 0.95% 0.11% 1.54% 1.43%
Assets
Gross margins have come down in the year over year numbers, but operating margins have been quite
decent despite those declines. Profit margins have also faired fairly well, as well as the return on assets
ratio. I excluded the return on equity ratio from this analysis because the company has had a negative
shareholder's equity book balance for seven of the past nine quarters, so the numbers look a bit
distorted. We'll look at liquidity and coverage next.
1Q 2Q
Liquidity 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010
2011 2011
Current
0.88 0.91 0.99 0.90 0.97 0.81 0.83 0.80
Ratio
Quick
0.79 0.82 0.89 0.80 0.86 0.71 0.71 0.69
Ratio
Working
Capital ($8.14) ($5.33) ($0.60) ($5.89) ($1.73) ($11.33) ($10.80) ($12.66)
($B)
1Q 2Q
Coverage 3Q 2009 4Q 2009 1Q 2010 2Q 2010 3Q 2010 4Q 2010
2011 2011
Debt
103.58% 103.34% 102.83% 101.97% 100.98% 100.39% 98.53% 96.82%
Ratio
Cash
Debt 7.44% 7.79% 1.35% 3.39% 5.65% 0.72% 1.51% 3.80%
Coverage
Both the current and quick ratio have come down from last year's levels, but have stayed fairly even
over the past couple of quarters. I don't like how the working capital number has gotten worse, but as I
said before, the company has reduced the size of its balance sheet. Also, I'm not as concerned with the
short term numbers getting worse, because the long term numbers have gotten better.
The debt ratio, or liabilities to asset ratio, has improved every quarter. Ford has essentially reduced its
long term liabilties, shifting some of them to short term liabilities in the process. I like what it is doing
here, and I hope it can keep it going. The final check will be some activity ratios.
3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q
Activity
2009 2009 2010 2010 2010 2010 2011 2011
Receivables
4.43 4.76 4.35 4.70 3.66 4.12 4.04 3.85
Turnover
Inventory 3.83 4.95 4.28 4.50 3.75 4.27 4.02 4.05
166
Turnover
Asset
0.15 0.18 0.16 0.19 0.17 0.19 0.20 0.21
Turnover
The receivables turnover has declined a little, meaning that Ford's accounts receivable are growing
faster than its revenues. It's not a problem yet, but if the number starts moving closer to 3 it might bring
up a little concern. The inventory turnover has remained fairly strong, which is a good sign that it is
getting its products out there and sold. Their asset turnover has definitely improved, meaning they are
doing more with less. I'd like to see this improvement continue.
So, where is Ford going from here? Well, it is projected for 14% revenue growth in 2011 and 7%
revenue growth in 2012. Unfortunately, it doesn't look like it will be translating that growth to the bottom
line. EPS estimates call for only 1% growth this year, and about an 8% decline next year. Like I've said
before, it needs to control its costs. At a forward P/E of 6, it is trading at a premium to GM's forward P/E
of 5. Ford has a slight advantage in revenue growth expectations, while GM has the advantage in EPS
growth. And right now, the analysts like GM a little better, but say Ford has more upside.
So what's my overall opinion now? I would rate Ford a short term hold with a medium to long term buy.
Ford just reached an agreement with the UAW, and it remains to be seen how that will work out. Also,
despite gas prices being down about 25 cents in the past month, they are still up 60 cents year over
year. Ford has been pushing its more fuel efficient cars lately, but it still trails some of its international
counterparts in fuel economy.
I like the balance sheet work it has done, and I like the profitability, but it needs to continue. But right
now, I'm not sold on the US economy and the unemployment picture. In my opinion, that will probably
pressure the shares for the next couple of months. However, I think this is a great stock for a period of
economic improvement. Remember, it did go from under $2 to $19 after we climbed out of the
recession. For now, it needs to get those long term liabilities under control, keep costs in check, and
improve quality.
167

Module 13
Valuing
Part I
The P/E Ratio

The inverse of the P/E actually tells us……………………….

And our formula for the return on an investment is:

So differences in P/E ratios implies……………………………


168

Operations for profit should be based not on optimism but on arithmetic.


Benjamin Graham

Kirch’s First Law of the Universe

The financial worth ______________________________________

________________________________________________________

Now we go back to the apartment building

Once upon a time the following add appeared in the Athens newspaper-

For Sale: Apartment Building


30 Units
Average Rent for 2014 is expected to be $600 per month per unit
2 years old
Price __________

Upon investigation you found that it would require little or no work on your part. There was a rental
agency which would keep the books, rent apartments, do evictions and other administrative tasks for
10% of the rent. Your investigation showed that the apartments stayed about 95% occupied and that
occupancy rate is likely to continue. Additionally, the rental agency told you that you can expect rents
to increase about 5% per year after 2014 year for the following three years (2015, 2016, and 2017)
because the building is new. The repairs and maintenance costs are about $800 per month for 2014,
2015, 2016, and 2017. You want to earn at least 20% on your investment. You figure you will hold on
to the apartment for four years and then sell it for $600,000 (on Dec 31, 2017). All other cash
expenses run $1,000 per month and will rise at 5% per year after 2014. Assume it is Jan 1, 2014-
what is the price you would pay for the apartment? Ignore taxes.
169

Apartment
2014 2015 2016 2017
Rents

Cash Expenditures:
Rental Company Fees
Repairs & Maintenance
Other Cash Expenses
Total Cash Expenditures

Net Cash Flow


170
171
Module 14
Risk and Terminal Value

The concept of terminal value


And if we expected the investment to last forever, how would we value it?
172
173

Apartment
2014 2015 2016 2017
Rents 30(95%)(600)(12) 205,200
194,400 + 194,400(5%) 215,460
204,120 + 204,120(5%) 226,233
214,326 + 214,326(5%) 237,545

Cash Expenditures:
Rental Company Fees 20,520 21,546 22,623 23,754
Repairs & Maintenance 9,600 9,600 9,600 9,600
Other Cash Expenses 12,000 12,600 13,230 13,892
Total Cash Expenditures 42,120 43,746 45,453 47,246

Net Cash Flow 163,080 171,714 180,780 190,299

PV of Net Cash Flows @ 20% 135,900 119,246 104,618 91,772 = 451,536


174
175

Can you actually beat the markets?


First
As to Market Efficiency (Shiller vs. Fama)

George Soros 29% for 37 years


Eddie Lampert 29% for 18 years
Peter lynch 29% for 18 Years
David Tepper 27% for 15 years
Warren Buffett 21% for 40 years
176
Risk and Return
I would like to take time to describe another aspect of investing-

risk versus return.

Say you have the option of putting your money in a federally insured bank earning less than 1%. This
is our starting point and carries no risk. From this ultra-safe extreme we move up the investment
spectrum. At the other end of the spectrum,
Higher
Return
Lower

Lower Level of Risk Higher

Federally US
Insured Bank wins World Cup

Systemic risk unsystematic (idiosyncratic) risk


(market) (individual stock or investment risk)
177

Variability

Sharpe Ratio

CapM
the Capital Asset Pricing Model (CAPM).

where:

 is the expected return on the capital asset


 is the risk-free rate of interest such as interest arising from government bonds
 (the beta) is the sensitivity of the expected excess asset returns to the expected excess market returns, or

also ,
 is the expected return of the market
 is sometimes known as the market premium (the difference between the expected market
rate of return and the risk-free rate of return).
 is also known as the risk premium
Restated, in terms of risk premium, we find that:

which states that the individual risk premium equals the market premium times β.
178
179

Timing
It is far from certain that the typical investor should regularly hold off buying until low market levels
appear, because this may involve a long wait, very likely the loss of income, and the possible missing
of investment opportunities. On the whole it may be better for the investor to do his stock buying
whenever he has money to put in stocks, except when the general market level is much higher than
can be justified by well-established standards of value. If he wants to be shrewd he can look for the
ever-present bargain opportunities in individual securities. (Benjamin Graham)

If you are shopping for common stocks, choose them the way you would buy groceries,
not the way you would buy perfume. (Benjamin Graham)

Professional Tip
180
Find the one with power by w______________ the e________!
181
182
183
184
185

Module 15
Valuation- Part II
You and Your Money

Stocks or Mutual Funds??

Remember 5% do!!!

Mutual Funds

Load vs. No-Load

Do expense ratios matter?

Manager tenure
186

Finding a Mutual Fund using a screener

Professional Tip

When You apologize, do not t_________________ the ______________________!


The best way to get in the last word is to say “I’m sorry”!!
187

Module 16
Managerial Part I
temerity Concentration comes out of
a combination of confidence
and hunger.
(Arnold Palmer)

We have been studying Financial Accounting

Which deals with ___________________________________________

Managerial accounting is __________________________________________________

Cost Behavior
We sell Tasteys. They cost $90 to make and sell for $ 300 each. Our only other expenses are the rent
of $400 per month and a $10 per unit sales commission we pay to the salespeople.

Fixed Costs are

Variable Costs are


188

The relevant range

Calculating Break-even

Target Profit

Break-even using Contribution Margin %


189
Now go back to the Hot Dog Stand

You have decided to open a hot dog stand at the corner of Court and Union. The following is your
opening balance sheet. You own the only 50,000 shares of stock outstanding for your company. You
sell the dogs for $2.00 each. You pay your worker a fixed salary of $20,000 plus $.10 for each dog she
sells. (Dogs cost $.40 each- how do I know that?)

Assets
Cash 5,000
Inventory 10,000
Cart 35,000
Total 50,000

Liabilities
-0-

Owners’ Equity
Common Stock 50,000
Retained Earnings -0-
Total 50,000

Income Statement Using


For the First Year Contribution Margin Format
Sales 60,000 Sales
Cost of Sales 12,000
Gross Margin 48,000
Operating Expenses
Wages 23,000
Other 10,000
Total Operating Expenses 33,000

Operating Income 15,000

How many hot dogs do you need to sell to break-even


Per Year

Per Month Per Week Per Day Per Hour


190
Gracie Company sells Dodds. The following is an income statement for a recent month.

Sales $250,000
Cost of goods sold 150,000
Gross Margin 100,000
Operating Expenses
Salaries and commissions $42,000
Rent 18,000
Utilities 7,000
Other 3,000 70,000

Net Income $30,000

Gracie sells one product, Dodds at $20 each. Cost of goods sold is variable. A 10% sales
commission, included in salaries and commissions, is the only other variable cost. Gracie tells you that
the income statement is not helpful, for she cannot determine such things as the break-even point.

Redo the statement using the contribution margin format.

What is the breakeven in units and dollars


191
Acme Company sells anvils and the following is per anvil

Unit Selling Price $20


Variable Costs 12

Total fixed costs $ 400,000

Total volume 100,000 units

Prepare an income statement using the contribution margin format

What is Acme’s Break Even point in units

In $

Using the contribution margin % to calculate Break-even in dollars


192
Now assume that Acme wants to make $1,000,000 per year. How many anvils does the company
need to sell to accomplish this (in units and dollars).

The CFO of Laurel Company provides the following per-unit analysis, based on a volume of 100,000
units

Selling Price $30


Variable Costs $12
Fixed Costs 9
Total Costs 21
Profit per unit $ 9

Answer each of the following questions independent of your answers to the other questions

1) What total profit does Laurel expect to earn?

2) What would be the total profit at 110,000 units?


193
3) What is the break-even point in units?

4) Laurel’s managers think they can increase volume to 120,000 units by spending an additional $
60,000 on salespeople. What total profit would they earn if they make this move?

Ryan, Inc. manufactures lamps and expects to sell 350,000 units in 2015 at $21 per unit. Planned per-
unit manufacturing costs at that level of production are as follows:

Variable manufacturing costs $9


Fixed manufacturing costs $5

Early in 2015, a new customer approaches Ryan offering to buy 15,000 lamps at $11 each. Ryan can
produce the additional units with no change in fixed manufacturing costs or per-unit variable costs. The
only additional fixed cost for this order is for packing and shipping, estimate at $3,800, Accept?

Professional tip In negotiating, go ___________ then ________________.


194
` Module 16 Homework
Problem 1. Salmon Company makes Things. Things sell for $30 each and cost $10 each to make.
Fixed costs are estimated to be $1,500,000 next year.

What is the breakeven point for Salmon based on the above information

How many Things must Salmon sell to make $1,200,000 next year?

Problem 2 Billy Bob’s has given you the following income statement for June 2013.

Sales $ 500,000
Cost of goods sold 300,000
Gross margin 200,000

Operating expenses:
Salaries and commissions $ 80,000
Utilities 20,000
Rent 22,000
Other 18,000
Total operating expenses 140,000
Income 60,000

Billy Bob sells one product, a running shoe for $100 per pair. A 10% sales commission, included in
Salaries and commissions is the only other variable cost. The manager tells you that this financial
statement is not very helpful to her.

Redo the income statement using the contribution margin format.

For Billy Bob’s determine the break-even in sales dollars and units
195
Module 17
struthious Managerial Lazy people are always anxious
sycophant Part 2 to be doing something.
pugnacious Marquis De Vauvenargues

Susie is the new manager of Acme Clothing. The controller has given her the following information
based on expected operations for the coming year.

Shirts Pants Pullovers


Selling Price $ 20 $ 30 $ 60
Variable Costs 10 12 15
Contribution Margin 10 18 45

Sales mix percentage, in dollar sales 50% 30% 20%

Total fixed costs are $1,189,000

What is the weighted average contribution margin?

What is the break-even in sales?

At the break-even point, how many of each item will be sold?


196

The CEO wants a profit of $800,000. Determine the sales needed to achieve this goal?

The sales manager believes she can increase the sales of any of the three products by 20% by
spending $25,000 in advertising on that product. Which product should she choose for the promotion?
197
Cleveland Cliffs produces three models of gel pens, regular, silver and gold. Price and costs of the
three are as follows
Regular Silver Gold
Selling Price $ 20 $ 30 $60
Variable Costs 12 15 21

Monthly fixed costs are $600,000

Suppose the sales mix is Regular 50%, Silver 30% and Gold 20%
What is the breakeven in sales dollars?

How much must the sales volume be to make $300,000 per month?
198
Freeland Company makes three products, Alpha, Beta, and Gamma

Below are the income statement for a recent month:

May
Sales $160,000
Costs 120,000
Net Income 40,000

Selling price and cost data by product are as follows.


Alpha Beta Gamma

Selling Price $40 $20 $10


Variable costs 16 6 6
Contribution margin 24 14 4

Sales mix (in dollars) 40% 40% 20%

1) Determine the break-even point in dollars*

2) Which product is most profitable per unit sold?

3) Which product is most profitable per dollar of sales?


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4) What sales dollars are needed to earn $70,000 per month, and how many units of each product
will be sold at that sales level if the usual mix is maintained?

5) The sales manager believes that he could increase sales of Gamma by 10,000 units per month if
more attention were devoted to is and less to Beta. Sales of Beta would fall by 2,000 units per
month. What change in income would occur if this action were taken?

6) June sales were $200,000 with a mix of 40% Alpha, 30% Beta and 30% Gamma. What was the
income?
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7) Suppose the company is currently selling 12,000 units of Gamma. Because this is the least
profitable product, management believes it should be dropped from the mix. If Gamma is
dropped, it is expected that sales of Beta would remain the same and those of Alpha would rise.
By how much would sales of Alpha have to rise to maintain the same total income?

(Did you figure out that the fixed costs were $56,000? If yes, you are really good. If no, use the
$56,000 as fixed costs anyway).

Professional Tip #1 The urge to talk is the urge to r______________ c_____________.

#2 The second rule of the negotiator:


Never get down to _______ _________. If necessary, ____________ __________!!
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Module 17 Homework
Problem 1. Jenkins company sells three different laundry baskets. The controller has prepared the
following estimates for next year
A B C
Selling Price $12 $20 $30
Variable Costs 4 5 8

Estimated sales mix 60% 30% 10%

Estimated Fixed Costs $1,590,000

What is the weighted average contribution margin?

How many of each of the laundry baskets does Jenkins have to sell for the company to make
$1,590,000?

Problem 2

Aisha Exterminating Company performs a wide variety of pest control services. Aisha, the owner, has
been examining the following forecasts for 2013.

Type of Service Expected $ volume Contribution Margin %

Termites $480,000 60%


Lawn Pests 360,000 50
Interior Pests 360,000 70

1) What is the weighted average contribution margin?

2) If Fixed Costs are $560,000, what profit does Aisha expect?

3) The actual sales mix turned out to be 20% termites, 30% lawn pests and 50% interior pests.
Total actual sales were $1,200,000 and total fixed costs were $560,000. Determine the actual
weighted-average contribution margin and the net income.
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Module 18
Managerial Part 3

Cost Allocation

Kreutzer’s Klutz Company sells backpacks, tote-bags and book-bags. The cost structure is as follows:

Backpacks Tote-bags Book-bags


Selling Price $40 $32 $40
Variable Costs 24 8 20

Sales Mix 60% 10% 30%

Additionally, the company spends $4,000 per year advertising Backpacks, $1,000 per year advertising
Tote-bags, and $3,000 to advertise book-bags. All other administrative costs equal $112,000. Sales
are $400,000.

Prepare the contribution margin format income statement

Backpacks Tote-bags Book-bags Total

Sales

Variable Costs

Contribution Margin

Fixed Costs
Direct
Common
Total

Net Income

Direct Fixed Costs are

Common Costs are

What is the breakeven?


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Module 19 That was talking, this is doing.
Doing is different than talking.
Curly Sue
Capital Budgeting
Kreutzer Industries is introducing a new product expected to sell for $14 and to have variable costs
of $7. The managers expect to sell 20,000 per year for 10 years. Making the product requires
machinery that costs $400,000. Will last for 10 years, and will increase annual fixed operating costs by
$30,000.
The machinery will be depreciated using the straight-line method. The tax rate is 30% and the
required return is 12%
Evaluate the feasibility of the project.

What is the expected increase in after-tax cash flows for the project?
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The Net Present Value

Payback

IRR

Using Excel
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Colton Company makes high-quality workshoes. Its managers believe the company can increase
productivity by acquiring some new machinery but are unsure whether it would be profitable.
The machinery costs $ 1,000,000, has a five-year life with no salvage value, and should save about
$ 400,000 in operating costs annually. The company uses straight-line depreciation and has a 40%
income tax rate and a 12% cost of capital.

What is the expected increase in after-tax cash flows for the project?

Calculate the NPV of the project


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What is the Payback?

What is the IRR?


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JD Company has the opportunity to introduce a new radio with the following expected results.
Annual unit sales volume 300,000 Selling price per unit $60
Annual cash fixed costs $ 4,200,000 Variable cost per unit $35

The product requires equipment costing $8,000,000 and having a four-year life with no salvage value.
The company has a 12% hurdle rate. The tax rate is 40% and the company uses straight line
depreciation.

What is the expected increase in after-tax cash flows for the project?

What is the NPV of the project?


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What is the Payback?

What is the IRR of the project?


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Stowe Company has the following three investment opportunities.

A B C
Cost $70,000 $70,000 $70,000

Cash inflow by
year
Year 1 $35,000 $35,000 $4,000
Year 2 35,000 10,000 8,000
Year 3 - 45,000 10,000
Year 4 5,000 20,000 98,000
Total 75,000 110,000 120,000

Rank the investment opportunities in order of desirability using (a) payback, (b) NPV and, (c) irr.
For the NPV, use a hurdle rate of 16%.
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Gabriel company currently makes 200,000 large strawberry jars per year at a variable cost of $9.75.
Equipment is available for $500,000 that will reduce the variable cost to $7.50 while increase cash fixed
costs by $200,000. The equipment will have not salvage value at the end of its four-year life and will be
depreciated using the straight-line method. Gabriel has a 30% tax rate and a 12% hurdle rate.
Do it????
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Debbie Stickle owns a driving range. She present pays several high school students $.8 a bucket to
pick up the golf balls that his customers hit. A salesperson has shown her a machine that will pick up
balls at an a cash cost of $6,600 plus $.05 per bucket. The machine costs $10,000 and has a five year
life. Debbie would us straight line depreciation. Volume for the driving range is 21,000 buckets per
year. Debbie’s combined state and federal tax rate is 30%. She believes the appropriate discount rate
is 16%.

Do it? Other factors??


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Module 20
Budgeting Part 1

Use the following data for Doozer Company, prepare a budgeted income statement and a purchases
budget in units and dollars for January 2015.

Budgeted sales for January 5,000 units at $20 $100,000


Budgeted sales for February 6,000 units at $20 $120,000

Cost Data:
Purchase price of product $5 per unit
Commission to salespeople 10% of sales
Depreciation $2,000 per month
Other operating expenses $40,000 per month plus 5% of sales

Doozer’s policy is to maintain inventory at 150% of the coming month’s sales requirements, Inventory
at December 31, 2014, is $30,000 (6,000 units at $5), which is less than budgeted.
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214

The following data relate to the operations of Jarrett Company, a retail store.

January $200,000
February 240,000
March 150,000
April 160,000

Cost of sales is 40% of sales. Other variable costs are 30% of sales
Inventory is maintained at twice the budgeted sales requirements for the following month.
The beginning inventory is $160,000.
Fixed costs are $50,000 per month.

a) Prepare a budgeted income statement of the first three months of 2015.


b) Prepare a purchase budget, by month for the first quarter.
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Banana City is a wholesaler of bananas and nuts. Mr. George Jones, the company’s president, has
asked for your assistance in preparing budgets for fiscal year 2015, which begins on September 1,
2015. He has gathered the following information for your use.

a) Sales are expected to be $8,800,000 for the year, of which bananas are expected to be 50%,
nuts, 50%.
b) Sales are somewhat seasonal, Banana sales are expected to be 770,000 in November, with the
rest spread evenly over the remaining eleven months. Sales of nuts are expected to be
$400,000 per month except in October and May, when they are expected to be $350,000 per
month.
c) Cost of sales, the only variable cost, is 40% of both products.
d) Inventory of bananas is generally kept equal to a one-month supply. Inventory of nuts is usually
held at a two-month supply.
e) Income taxes are 30% of income before taxes
f) Annual fixed costs, all incurred evenly throughout the year, are expected to be as follows:

Rent $240,000 Depreciation $ 360,000


Insurance $120,000 Interest $ 60,000
Wages and salaries $1,200,000 Other fixed costs $1,560,000

g) Inventories expected at August 31, 2015, are bananas. $143,000 and nuts, $275,000.
h) The company expects to sell some land that it purchased several years ago for $80,000. The
sale is expected to occur in October at a price of $60,000.

Required
1) Prepare a budgeted income statement for the fiscal year ending August 31, 2016.
2) Prepare a budgeted income statement for each month of the first quarter of the fiscal year and for
the quarter as a whole.
3) Prepare a purchases budget by product for each month of the first quarter of the fiscal year and
for the quarter as a whole.
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Module 21
Budgeting Part 2
Still working on Doozer Co. (budgeting Part 1)
Using the following additional data, prepare a cash budget for January 2015 and a pro forma balance
sheet for January 31, 2015. Prepare a supporting budgets for cash receipts and cash disbursements.

Doozer Co.
Balance Sheet
Assets Liabilities
Cash $20,000 Accounts Payable $12,000
Acct Rec 30,000 Owners’ Equity
Inventory (6,000 units) 30,000 Common Stock 200,000
Building and Equip- net 200,000 Retained Earnings 68,000
Total Assets $280,000 Total Liabilities and
Owners’ Equity $280,000
A) Sales are collected 40% in the month of sale, 60% in the following month.
B) Purchase are paid 40% in the month of purchase, 60% in the following month.
C) All other expenses requiring cash are paid in the month incurred.
D) The board of directors plans to declare a $3,000 dividend on January 10, payable January 31.
E) The following is from Budget Day 1 for Doozer.
January February
Sales $ 100,000 $ 120,000

Inventory
Cogs 25,000
Target Inventory 45,000
Inventory Needed 70,000
Less Beg
Inventory (35,000)
Required Purchases 35,000
Income
Statement
Sales $ 100,000
Variable Costs
Cost of Sales 25,000
Commission 10,000
Other 5,000
Total Variable
Costs 40,000
Contribution
Margin 60,000
Fixed Costs
Depreciation 2,000
Other 40,000
Total Fixed 42,000
Net Income $ 18,000
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220
Continuation of Jarrett Company from Budget Part 1
Jarrett pays for its purchases 40% in the month of purchase and 60% in the following month.
Accounts Payable at December 31, 2014, were $18,000. The company collects 60% of its sales in the
month of sale and 40% in the following month. Receivables at December 31, 2014 to be collected in
January, were $30,000. All of its fixed costs require cash disbursements and are paid as incurred. Its
cash balance at December 31, 2014, was $20,000.

Required
1) Prepare a cash budget for the first three months of 2015.
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Continuation of Banana City.
The following additional information about Banana City is available

A) Sales of bananas are for cash only. Sales of nuts are on credit and are collected two months
after sale.

B) Banana City’s suppliers give terms of 30 days for payments of accounts payable. Banana City
takes full advantage of the 30-day payments. (Assume all months have 30 days).

C) The Company mys make quarterly payments on its income taxes. The payment for the first
quarter of fiscal year 2015 is due on January 15, 2015. The liability shown on the balance sheet
below is to be paid on October 15.

D) Fixed expenses that require cash disbursement are paid as incurred with the follow exceptions:
a) Insurance premiums are all paid on November 1 in advance for the next 12 months
and
b) b) interest payments are all made on January 1. The $156,000 “other fixed
expenses” in the income statement require cash disbursements evenly on the year.

E) Sales expected in the last part of fiscal year 2015 are as follows:

June July August


Bananas $31,000 $34,000 $32,500
Nuts 37,000 41,000 34,000

F) The company to pay a dividend of $12,000 in October.


G) The Balance Sheet at August 31, 2015 is as follows:

Cash $15,000 Accounts Payable (merchandise) $26,000


Accounts Rec 75,000 Taxes Payable 31,000
Inventories 41,800 Accrued Interest 4,000
Prepaid Insurance 2,000 Long-term Debt, 6% 100,000
Land 8,000 Common Stock 150,000
Equipment (net) 210,000 Retained Earnings 40,800
Total $ 351,800 Total $ 351,800

Required:
A) Prepare a cash budget for the first three months of fiscal year 2016 and for the quarter
as a whole.

B) Prepare a pro forma balance sheet for November 30, 2015.


223

The following page is a copy of a purchase agreement for a Dr. Kirch’s car. The second page
has data for leasing the same car. Dr. Kirch financed the car at 2.9% over 60 months. Under
these terms, was it better for him to purchase the car or should he have leased it? Support your
answer with figures.
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225
226
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Dear Dave:

Here is a lease based on an in stock car that is within $175 of the price of the car you
have on order. We did this because it is considerably simpler with the particular
software that we employ to quote an in stock car. I have also attached your partial
payment receipt. Thanks again for your business.

MSRP: $48,980.00

Sale price: $46,702.00

Use tax financed in lease: $1,513.89

Acquisition fee in lease: $1,095.00

36 months/15,000 miles $665.00

Due at signing $0

Purchase option at lease end $28,898.00 plus applicable sales tax

.25 (cents) per mile penalty for each mile over 45,000 (assuming vehicle is returned)

Turn in (disposition fee) : $595.00

Mit freundlichen Grüßen / with kind regards,

Stephen F.H. Revard

Master Certified Mercedes-Benz Representative


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ipse dixit Learning Module #19 You get more cooperation
(Being the last module) with a smile and a gun than
Internal Control and Fraud you do with a smile alone.
(Al Capone)

Let’s do the car first

As to change….. create ________________________________________________.


230
Internal control

the three requirements of the thief


1)

2)

3)

so where should the bank statement go?

The illusion of Internal Control

the sign “all returns must be accompanied by a receipt”

The z total

oh and what should you do with a returned check?

The rule of 78s, Simple Interest and other nefarious interest scams

A Ponzi Scheme is
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The Cookies
A woman was waiting at an airport one night, With several long hours before her flight.
She hunted for a book in the airport shops. Bought a bag of cookies and
found a place to drop.

She was engrossed in her book but happened to see, That the man sitting
beside her, as bold as could be. Grabbed a cookie or two from the bag
in between, Which she tried to ignore to avoid a scene.

So she munched the cookies and watched the clock. As the gutsy cookie
thief diminished her stock. She was getting more irritated as the
minutes ticked by, Thinking, "If I wasn't so nice, I would blacken his eye."

With each cookie she took, he took one too, When only one was left, she
wondered what he would do. With a smile on his face, and a nervous
laugh, He took the last cookie and broke it in half.

He offered her half, as he ate the other, She snatched it from him and
thought... oooh, brother. This guy has some nerve and he's also rude,
Why he didn't even show any gratitude!

She had never known when she had been so galled, And sighed with relief
when her flight was called. She gathered her belongings and headed to
the gate, Refusing to look back at the thieving ingrate.

#1 P____________ is an active NOUN !!!! Be slow to A______ and to A_______

The other 90% rule


90% of the time your ____________________________________________!!!

#2 When you are ___________, you are __________!!!


Or, get your free floor mats here.

#3 Ethics are not hard, just D___ the r________ t_________. (has a period like the first law!

And the most important professional tip


#4 -- True evil is _____________________ until _____ ____________!!!
(Andrew Vachss)

You've got to promise me if . . . you ever get to the point in your life where you are so puzzled,
confused and frightened that you feel the only way out is to abuse or molest a little kid, well then,
you have got to kill yourself. You have got to lean into the strike zone and take one for the team."
(Dennis Miller).
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