Chapter 2

Review of Accounting
 Financial statements
Income Statement,

Balance Sheet

Statement of Retained earnings /

Changes in Equity and
Statement of Cash Flows
 Important Facts about the Income
Statement

• Shows transactions for a defined period of time -

can be one month, three month or a year.

• Records of a company's revenues and expenses

(NO ASSET AND LIABILTY ITEMs )

• The Income Statement can be either cash or

accrual. Example?
 Income
Statement_
Step
 Few Key Facts of Balance sheet
• Snapshot of a company's financial position at a given
point of time.
• Showing the company's Assets (A), Liabilities (L) and
shareholder's equity(OE). Remember the equation (A = L + OE)
• External liability (L) - Accounts payable, bond , bank loan;

Internal liability (OE) –Common & preferred share, retained earnings etc.

• Total amount of both sides of balance sheet will be same.

Note: If a company's external liabilities are greater than its

assets constantly but profit and growth of a firm is not
increasing significantly , indicates the poor performance.
The Balance-Sheet Model of the Firm
Total Value of Assets: Total Liab. And Equity

Current
Current Liabilities
Assets
Long-Term
Debt

Fixed
Assets
1 Tangible Shareholder
2 Intangible s’ Equity
 Stein Books Inc.
Income Statement
11 For the year ended December 31, 20X1

Content Total $
 
Sales ( 1900 * 250 ) 4,75,000
Less: Cost of goods sold ( 1900 * 210 ) (3,99,000)
Gross profit Earnings per
76,000
Less: Selling and Administrative Exp. Share EPS
(12,200)
Less : Depreciation
(15,200)
Operating profit / Revenue (EBIT)
48,600 = 25,284 /
Less
Less Interest
Interest exp.
exp. (1,04,000 * 12%) 10,000 if given
(12,480)
Earnings
Earnings before
before Tax
Tax // Net
Net income
income before
before tax
tax 36,120 EPS= $ 2.53
Less
Less Tax
Tax (( %
% )) ( 36,120 * 30% ) (10,836)
Earnings after Tax (EAT)
Earnings after Tax (EAT)
25,284
Preferred stock dividends
Preferred stock dividends (N/A)
Earnings available to common stockholders
/ (Net Profit / Income) 25,284
 Math's 1, Frantic Fast Food
•     𝑬 . 𝑨 .𝑻 .𝑪 . 𝑺𝑻
𝑪𝒐𝒎𝒎𝒐𝒏 𝑺𝒉𝒂𝒓𝒆𝒔
Earnings per Share EPS
 

= $ 1.36

= $1.65
 Lemon Auto Wholesale
Income Statement
12 - A For the year ended December 31, 2019

Content $ 12 /A $ 12 /B
Sales
Less: Cost of goods sold ( 10,00,000 * 78% )
Gross profit
Less: Selling and Admin. Exp. ( 10,00,000 * 12% )

Less : Depreciation
Operating profit/revenue (EBIT)
Less Interest exp.
Earnings before Tax
Less Tax ( % )
( 81,000 * 30% )
Earnings after Tax (EAT)
Preferred stock dividends
Earnings available to common stockholders
(Net Profit)
 Lemon Auto Wholesale
Income Statement
For the year ended December 31, 2019
12 - A

Content Total
Sales
10,00,000
Less: Cost of goods sold ( 10,00,000 * 78% ) (7,80,000)
Gross profit
2,20,000
Less: Selling and Admin. Exp. ( 10,00,000 * 12% ) (1,20,000)
Less : Depreciation
(11,000)
Operating profit/revenue (EBIT)
89,000
Less Interest exp.
(8,000)
Earnings before Tax 81,000
Less Tax ( % )
( 81,000 * 30% ) (24,300)
Earnings after Tax (EAT) Ans
56,700
Preferred stock dividends
(N/A)
Earnings available to common stockholders
(Net Profit) 56,700
 Lemon Auto Wholesale
12 - B Income Statement
For the year ended December 31, 2019

Content Total
Sales
10,50,900
Less: Cost of goods sold ( 10,50,900 * 74% ) (7,77,666)
Gross profit
2,73,234 Remember
Less: Selling and Admin. Exp. the tricks-
(10,50,900 * 14% ) (1,47,126)
Less : Depreciation - Increased to 10%
(11,000)
Operating profit/revenue (EBIT) Increased by 10%
1,15,108
Less Interest exp.
(15,800)
Earnings before Tax 99,308
Less Tax ( % ) - Reduced to
( 99,308 * 30% ) (29,792)
Earnings after Tax (EAT) Ans Reduce by
69,516
Preferred stock dividends
(N/A)
Earnings available to common stockholders
(Net Profit) 69,516
 Elite Trailer Parks
Income Statement
16-A For the year ended December 31, 20XX

Content Total $
Sales
Less: Cost of goods sold
Gross profit
Less: Selling and Admin. Exp.
Less : Depreciation
Operating profit/revenue (EBIT)
2,00,000
Less Interest exp. (10,000)
Earnings before Tax / N.I before tax 1,90,000
Less Tax ( % ) ( Given)
(61,250)
Earnings after Tax (EAT)
1,28,750
Preferred stock dividends
(18,750)
Earnings available to common stockholders
(Net Profit / Income) 1,10,000
  
16-A Earnings per Share , EPS

EPS = 1,10,000 / 20,000

= $ 5.50 Ans

Common Dividend per share =

(1) Com.
Dividend paid or Cash Dividend /
(2)Number of common stock outstanding

= 30,000 / 20,000
= $ 1.50 Ans
 Elite Trailer Parks
16-B Statement of Retained Earnings
For the year ended December 31, 20XX

Content $
Retained earnings , Beginning balance (date) Not given

Add: Earnings available to common

stockholders (Net Profit) 1,10,000
Less: Common dividend or Cash Dividend
30,000
Retained earnings , Ending balance (date)
? 80,000

17 H.W
  
EPS =
18-A
EPS = 3,70,000 / 2,00,000
= $ 1.85 Ans

P /E ratio = ( 31.5 / 1.85 )

= 17.02 times Ans
P / E ratio

18 – B
EPS = $ 2.18 ;
P/E = (42 / 2.18)=19. 27 times
 Asset (A) = Liabilities (L) + Owner Equity (OE)

Assume, (A) 1000 = (L) 400 + OE ?

(Com. Stock + Preferred stock) OE = 600
- 100 (preferred stock cap.)
Net worth available for common stockholders = 500

Book Value per Share =

(1) Net worth available for common stockholders / (2) Number of
common Shares

Book Value per Share = 500 / 10 (if given) = $ 50 Ans

 24 -A
Assets $ 4,00,000
Less: Current Liabilities $ 50,000
Less: Long term Liabilities
$ 1,00,000
Owner Equity
Less: Preferred Stock obligation / pref. share $ 2,50,000
contribution / Pref. share capital
$ 40,000
Net worth available for common
stockholders
$ 2,10,000

Book Value per Share = (1) Net worth available for common
stockholders / (2) Number of common Shares

2,10,000 / 20,000 = $ 10.50 Ans

 24 - B
Step 2 –
P/ E ratio 18 times (given)
18 = Mkt. price / 1.10 (EPS)
Market price= ($ 18 * 1.10 )
P / E ratio $ 19.8 Ans

Step 1 - EPS = 22,000 / 20,000

= $ 1.10 Ans

24 – C
Market value to Book Value per Share =
Market Value per share / Book value per share
= ($ 19.8 / 10.50 )
= 1.89 times Ans
 Baxter Corporation
Income Statement
27-A For the year ended December 31, 20x2

Content Total $
Sales
2,45,000
Less: Cost of goods sold ( 245,000 * 60% ) (1,47,000)
Gross profit
98,000
Less: Selling and Administrative Exp.
(24,500)
Less : Depreciation (2,55,000 * 8% ) (20,400)
Operating profit/revenue (EBIT)
53,100
Less Interest exp. (25,000 * 10% + 55,000 *12%) (9,100)
Earnings before Tax 44,000 * EPS =
Less Tax ( % )
( 44,000 * 20% ) (8,800) [ 32,700 /
Earnings after Tax (EAT)
35,200
Preferred stock dividends 10,000 ]
(2,500)
Earnings available to common stockholders
= $ 3.27
(Net Profit / Income) 32,700
 27- B Baxter Corporation
Statement of Retained Earnings
For the year ended December 31, 20x2

Content $
Retained earnings , Beg. balance, January 1 69,500

Add: Earnings available to common

stockholders (Net Profit) 32,700
Less: Cash Dividend
5,500
Retained earnings , Ending balance, December 31
96,700
 Balance Sheet , For Dec 31, 20x2
27- C
Asset $ Liabilities & $
owner equity
 Current Asset  Current Liability:

Cash 15,000 Accounts payable 20,400

Account Receivable 22,000 Notes payable
31,500

Inventory 33,000 Total Cur. Lib. 51,900

Prepaid Expense 12,500 Bonds payable 42,500
Total Current Asset 82,500  Owners Equity
 Fixed Asset Pref. Stock 25,000
Plant and Equipment * 2,95,000 Common Stock 60,000
Less: Accumtd. Dep. Paid in capital
* (71,400) 30,000
Net plant and Retained earnings
equipment. 2,23,600 96,700
2,11,700
 Total Asset  Total Liabilities
& owner equity
3,06,100 3,06,100
 Workings

New Total Plant and Equipment in 20x2 = [ 2,55,000 (old) + 40,000 (new) ]
= 2,95,000
Depreciation of Plant and Equipment in 20x2 = [2,55,000 * 8% ]
= 20,400

Note: No depreciation will be charge for new machine 40,000 in 20x2,

because this machine purchased at the last date of 20x2 (31 dec)

So, Accumulated Depreciation of 20x2 = [ 51,000 old + 20,400 new ]

= 71,400
 Few Facts of Cash Flow Statement
• Explains the changes in a company's cash balance.
• Cash flow is not the same as profit or net income!
• Divide into three part- Operating, Financing & Investing

• The cash flow statement answers the question: Is this

company generating cash or using cash !
• Discloses the total amount of cash used to purchase assets or
make other capital expenditures.
•  The ending cash flow for a particular period must equal the
cash shown on the balance sheet for that period. 
Cash Flow from Operating activities Step-Wise
Net income ( * Earnings after tax ) [I.St]
Add back Depreciation [I.St] Step 1 Cash Flow
* Change of All Current Assets Statement
* Change of All Current Liabilities
Net Cash flow from operating activities (A)

Cash Flow from Investing activities

Step 2
* Change of All Fixed Assets
Net Cash flow from Investing activities (B)

Cash Flow from Financing activities

Step 3
* Change of Long Term Liabilities
* Preferred Stock dividend paid [I.St]
* Common Dividend paid / cash div. [ Ret. Earnings St.]
Net Cash flow from Investing activities (C)

Net Increase ( or Decrease) in Cash Flow (A+ B +C ) Result

14, H.W Theory /MCQ