FINANCIAL MANAGEMENT

SAMPLE CASES (FINANCIAL STATEMENTS PREPARATION)

Case 1Income statement relationships.
Fill in the appropriate blanks for each of the independent situations below.
Company A Company B Company C
Sales revenue (a) $_______ $343,400 $540,000
Beginning inventory 52,600 (d) _______ 90,000
Net purchases 175,300 255,600 (g) _______
Ending inventory 52,200 108,000 63,000
Cost of goods sold (b) _______ (e) _______ 417,000
Gross profit 75,300 108,000 (h) _______
Operating expenses (c) _______ 50,000 48,000
Income before taxes 6,000 (f) _______ (i) _______

Case 2Multiple-step income statement.

Presented below is information related to Farr Company.

Retained earnings, December 31, 2012 $ 650,000

Sales revenue 1,400,000
Selling and administrative expenses 240,000
Hurricane loss (pre-tax) on plant (extraordinary item) 270,000
Cash dividends declared on common stock 33,600
Cost of goods sold 830,000
Gain resulting from computation error on depreciation charge in 2011 (pre-tax) 520,000
Other revenue 120,000
Other expenses 100,000

Instructions
Prepare in good form a multiple-step income statement for the year 2013. Assume a
30% tax rate and that 80,000 shares of common stock were outstanding during the
year.

Case 3Multiple-step income statement.

Shown below is an income statement for 2012 that was prepared by a poorly trained
bookkeeper of Howell Corporation.

Howell Corporation
INCOME STATEMENT
December 31, 2012
Sales revenue $ 915,000
Investment revenue 19,500
Cost of merchandise sold (408,500)
Selling expenses (145,000)
Administrative expenses (215,000)
Interest expense (13,000)
Income before special items 153,000
Special items
Loss on disposal of a component of the business (30,000)
Major casualty loss (extraordinary item) (60,000)
Net federal income tax liability (27,900)
Net income $ 35,100
Instructions
Prepare a multiple-step income statement for 2012 for Howell Corporation that is
presented in accordance with generally accepted accounting principles (including format
and terminology). Howell Corporation has 50,000 shares of common stock outstanding
and has a 30% federal income tax rate on all tax related items. Round all earnings per
share figures to the nearest cent.

Case 4Balance sheet presentation.

The following balance sheet was prepared by the bookkeeper for Kraus Company as of
December 31, 2012.
Kraus Company
Balance Sheet
as of December 31, 2012

Cash $ 85,000 Accounts payable $ 90,000

Accounts receivable (net) 52,200 Long-term liabilities 100,000
Inventory 57,000 Stockholders' equity 218,500
Investments 76,300
Equipment (net) 106,000
Patents 32,000
$408,500 $408,500

The following additional information is provided:

1. Cash includes the cash surrender value of a life insurance policy $9,400, and a bank
overdraft of $2,500 has been deducted.
2. The net accounts receivable balance includes:
(a) accounts receivabledebit balances $60,000;
(b) accounts receivablecredit balances $4,000;
(c) allowance for doubtful accounts $3,800.
3. Inventory does not include goods costing $3,000 shipped out on consignment.
Receivables of $3,000 were recorded on these goods.
4. Investments include investments in common stock, trading $19,000 and available-
for-sale $48,300, and franchises $9,000.
5. Equipment costing $5,000 with accumulated depreciation $4,000 is no longer used
and is held for sale. Accumulated depreciation on the other equipment is $40,000.

Instructions
Prepare a balance sheet in good form (stockholders' equity details can be omitted.)

Case 5Balance sheet presentation.

Given the following account information for Leong Corporation, prepare a balance sheet
in report form for the company as of December 31, 2012. All accounts have normal
balances.

Equipment 50,000
Interest Expense 2,400
Interest Payable 600
Retained Earnings ?
Dividends 50,400
Land 137,320
Inventory 102,000
Bonds Payable 78,000
Notes Payable (due in 6 months) 19,400
Common Stock 60,000
Accumulated Depreciation - Equip. 10,000
Prepaid Advertising 5,000
Revenue 341,400
Buildings 80,400
Supplies 1,860
Taxes Payable 3,000
Utilities Expense 1,320
Advertising Expense 1,560
Salaries and Wages Expense 53,040
Salaries and Wages Payable 900
Accumulated Depr. - Bld. 15,000
Cash 35,000
Depreciation Expense 8,000

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SAMPLE CASES FOR FINANCIAL ANALYSIS:
Case 1: Assume the following sales data for a company:
2014 $1,050,000
2013 950,000
2012 800,000
2011 550,000
If 2011 is the base year, what is the percentage increase in sales from 2011 to
2013?
a. 100%
b. 90.9%
c. 72.7%
d. 52.4%

Case 2. The current assets of Margo Company are $300,000. The current liabilities
are $100,000. The current ratio expressed as a proportion is
a. 300%.
b. 3.0 : 1
c. .33 : 1
d. $300,000 $100,000.

Case 3. The following information pertains to Sampson Company. Assume that all
balance sheet amounts represent both average and ending balance figures.
Assume that all sales were on credit.

Assets
Cash and short-term investments $ 45,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $300,000

Liabilities and Stockholders Equity

Current liabilities $ 50,000
Long-term liabilities 90,000
Stockholders equitycommon 160,000
Total Liabilities and Stockholders Equity $300,000

Income Statement
Sales $ 120,000
Cost of goods sold 66,000
Gross profit 54,000
Operating expenses 30,000
Net income $ 24,000

Number of shares of common stock 6,000

Market price of common stock $20
Dividends per share .50

What is the current ratio for Sampson?

a. 1.80
b. 1.30
c. 1.40
d. .64
Case 4. The following information pertains to Sampson Company. Assume that all
balance sheet amounts represent both average and ending balance figures.
Assume that all sales were on credit.
Assets
Cash and short-term investments $ 45,000
Accounts receivable (net) 25,000
Inventory 20,000
Property, plant and equipment 210,000
Total Assets $300,000

Liabilities and Stockholders Equity

Current liabilities $ 50,000
Long-term liabilities 90,000
Stockholders equitycommon 160,000
Total Liabilities and Stockholders Equity $300,000

Income Statement
Sales $ 120,000
Cost of goods sold 66,000
Gross profit 54,000
Operating expenses 30,000
Net income $ 24,000

Number of shares of common stock 6,000

Market price of common stock $20
Dividends per share .50

What is the return on assets for Sampson?

a. 8.0%
b. 7.0%
c. 18.0%
d. 16.0%

Case 5: Selected financial statement data for Morgan Company are presented below.
12/31/12
Cash $ 10,000
Short-term investments 15,000
Accounts receivable 60,000
Inventories 75,000
Total current liabilities 100,000

Instructions
Compute the following ratios at December 31, 2012:
(a) Current.
(b) Acid-test.

Case 6. At January 1, 2012, Bella Company has beginning inventory of 2,000 DVD
players. Bella estimates it will sell 10,000 units during the first quarter of 2012
with a 12% increase in sales each quarter. Bellas policy is to maintain an ending
inventory equal to 25% of the next quarters sales. Each DVD player costs $100
and is sold for $150. How much is budgeted sales revenue for the third quarter of
2012?
a. $450,000
b. $1,950,000
c. $1,881,600
d. $12,544
Case 7. Novak Co. estimates its sales at 240,000 units in the first quarter and that
sales will increase by 24,000 units each quarter over the year. They have, and
desire, a 25% ending inventory of finished goods. Each unit sells for $25. 40% of
the sales are for cash. 70% of the credit customers pay within the quarter. The
remainder is received in the quarter following sale.

Cash collections for the third quarter are budgeted at

a. $4,068,000.
b. $5,904,000.
c. $7,092,000.
d. $8,208,000.

Case 8. Maddux Manufacturing estimates its sales at 200,000 units in the first quarter
and that sales will increase by 20,000 units each quarter over the year. They
have, and desire, a 25% ending inventory of finished goods. Each unit sells for
$35. 40% of the sales are for cash. 70% of the credit customers pay within the
quarter. The remainder is received in the quarter following sale.

Cash collections for the third quarter are budgeted at

a. $4,746,000.
b. $6,888,000.
c. $8,274,000.
d. $9,576,000.

Case 9. A company has budgeted direct materials purchases of $400,000 in March

and $640,000 in April. Past experience indicates that the company pays for 70%
of its purchases in the month of purchase and the remaining 30% in the next
month. During April, the following items were budgeted:
Wages Expense $200,000
Purchase of office equipment 96,000
Selling and Administrative Expenses 64,000
Depreciation Expense 48,000
The budgeted cash disbursements for April are
a. $864,000.
b. $568,000.
c. $928,000.
d. $976,000.

Case 10. Rachel Industries expects to purchase $180,000 of materials in July and
$210,000 of materials in August. Three-quarters of all purchases are paid for in
the month of purchase, and the other one-fourth are paid for in the month
following the month of purchase. How much will August's cash disbursements for
materials purchases be?
a. $135,000
b. $157,500
c. $202,500
d. $210,000

Case 11. Porath Manufacturing Co. reported the following information for 2012:
October November December
Budgeted sales $1,240,000 $1,160,000 $1,440,000
All sales are on credit.
Customer amounts on account are collected 50% in the month of sale and
50% in the following month.
 How much cash will Porath receive in November?
a. $580,000
b. $1,300,000
c. $1,200,000
d. $1,160,000

Case 12. The following information was taken from Yang Companys cash budget for
the month of July:
Beginning cash balance $480,000
Cash receipts 304,000
Cash disbursements 544,000
If the company has a policy of maintaining a minimum end of the month cash
balance of $400,000, the amount the company would have to borrow is
a. $160,000.
b. $80,000.
c. $240,000.
d. $96,000.

Case 13. The following credit sales are budgeted by McNaughton Industries:
January $204,000
February 300,000
March 420,000
April 360,000
The company's past experience indicates that 70% of the accounts receivable
are collected in the month of sale, 20% in the month following the sale, and 8% in
the second month following the sale. The anticipated cash inflow for the month of
April is
a. $370,320.
b. $336,000.
c. $360,000.
d. $352,800.

Case 14. A company's past experience indicates that 60% of its credit sales are
collected in the month of sale, 30% in the next month, and 5% in the second
month after the sale; the remainder is never collected. Budgeted credit sales
were:
January $360,000
February 216,000
March 540,000
The cash inflow in the month of March is expected to be
a. $406,800.
b. $307,800.
c. $324,000.
d. $388,800.

Case 15. Blake Taylor Co. reported the following information for 2012:
October November December
Budgeted sales $460,000 $440,000 $540,000
Budgeted purchases $240,000 $256,000 $288,000
All sales are on credit.
Customer amounts on account are collected 50% in the month of sale and
50% in the following month.
Cost of goods sold is 35% of sales.
 Blake Taylor purchases and pays for merchandise 60% in the month of
acquisition and 40% in the following month.
Accounts payable is used only for inventory acquisitions.
How much cash will Blake Taylor receive during November?
a. $220,000
b. $490,000
c. $450,000
d. $440,000

SAMPLE CASE FOR INVESTMENTS

Case 1Investment in equity securities.
Agee Corp. acquired a 30% interest in Trent Co. on January 1, 2013, for $500,000. At
that time, Trent had 1,000,000 shares of its $1 par common stock issued and
outstanding. During 2013, Trent paid cash dividends of $160,000 and thereafter
declared and issued a 5% common stock dividend when the fair value was $2 per
share. Trent's net income for 2013 was $360,000. What is the balance in Agees equity
investment account at the end of 2013?

Solution 17-123
Cost $500,000
Share of net income (.30 $360,000) 108,000
Share of dividends (.30 $160,000) (48,000)
Balance in equity investment account $560,000

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