Financial Statement Investigation A02-11-2015

FSI Revised 01-30-2020

WRITE-UP ASSIGNMENT #2

Glo-Stick, Inc.
Using the following T-Accounts, Income Statement and Balance Sheet from the Solution to Glo-Stick, Inc.
Assignment #1, prepare a formal direct method cash flow statement and indirect method cash flow state-
ment for Glo-Stick.
Balance Sheet T-Accounts - Assets

Cash Accounts Receivable

----------------------------------------------- -----------------------------------------------
+ | - + | -
1. 300,000 | 11. 100,000 |
2. 300,000 | |
| 120,000 3. |
| 200,000 4. |
| 150,000 5. |
| 50,000 6. |
| 200,000 7. |
| 20,000 8. -----------------------------------------------
| 400,000 9. Balance at |
| 120,000 10. 12/31/2019 100,000 |
11. 850,000 | =======================|=======================
| 25,000 12.
-----------------------|-----------------------
Subtotals 1,450,000 | 1,285,000 Plastics & Chemicals (Inventory) -
-----------------------|----------------------- -----------------------------------------------
Balance at | + | -
12/31/2019 165,000 | 6. 50,000 |
=======================|======================= 7. 250,000 |
| 275,000 c.
-----------------------|-----------------------
Balance at |
12/31/2019 25,000 |
=======================|=======================

Patent Accumulated Amortization – Patent

----------------------------------------------- -----------------------------------------------
+ | - - | +
3. 120,000 | | 30,000 d.
-----------------------|----------------------- -----------------------|-----------------------
Balance at | | Balance at
12/31/2019 120,000 | | 30,000 12/31/2019
=======================|======================= =======================|=======================

Building Accumulated Depreciation – Building

----------------------------------------------- -----------------------------------------------
+ | - - | +
4. 200,000 | | 5,000 a.
-----------------------|----------------------- -----------------------|-----------------------
Balance at | | Balance at
12/31/2019 200,000 | | 5,000 12/31/2019
=======================|======================= =======================|=======================

Machinery Accumulated Depreciation – Machinery

----------------------------------------------- -----------------------------------------------
+ | - - | +
5. 150,000 | | 15,000 b.
-----------------------|----------------------- -----------------------|-----------------------
Balance at | | Balance at
12/31/2019 150,000 | | 15,000 12/31/2019
=======================|======================= =======================|=======================

Norman J. Bartczak, Columbia University, prepared this suggested solution as a basis for class discussion. Copyright © 2015,
Norman J. Bartczak.
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Glo-Stick, Inc. – Write-Up Assignment #2 A02-11-2015
Revised 01-30-2020

Balance Sheet T-Accounts – Liabilities & Equity

Accounts Payable (Liability) Bank Loan (Liability)

----------------------------------------------- -----------------------------------------------
- | + - | +
| 50,000 7. | 300,000 2.
-----------------------|----------------------- -----------------------|-----------------------
| Balance at | Balance at
| 50,000 12/31/2019 | 300,000 12/31/2019
=======================|======================= =======================|=======================

Taxes Payable (Liability)

-----------------------------------------------
- | +
| 12,000 e.
-----------------------|-----------------------
| Balance at
| 12,000 12/31/2019
=======================|=======================

Common Stock (Equity) Retained Earnings (Equity)

----------------------------------------------- -----------------------------------------------
- | + - | +
| 300,000 1. | 48,000 f.
-----------------------|----------------------- -----------------------|-----------------------
| Balance at | Balance at
| 300,000 12/31/2019 | 48,000 12/31/2019
=======================|======================= =======================|=======================

Income Statement T-Accounts "Closed Out" to

Retained Earnings on the Balance Sheet
------------------------------------------------------------------------------------------------
Expenses | Revenues
- | +
8. Advertising expense 20,000 |
9. Direct labor & overhead 400,000 |
10. Corporate salaries & other 120,000 |
| 850,000 Sale of Glo-Sticks – Cash Collected 11.
| 100,000 Sale of Glo-Sticks – On Account 11.
12. Interest expense 25,000 |
a. Depreciation expense building 5,000 |
b. Depreciation expense machinery 15,000 |
c. Plastics & chemicals used 275,000 |
d. Amortization expense patent 30,000 |
--------------------------------------------|---------------------------------------------------
Subtotals 890,000 | 950,000
--------------------------------------------|---------------------------------------------------
e. Calculate income tax expense = |
$950,000 - $890,000 = $50,000 |
times the tax rate of 20% = 12,000 |
--------------------------------------------|---------------------------------------------------
Subtotals 902,000 | 950,000
--------------------------------------------|---------------------------------------------------
f. Close the Income Statement |
T-account with Net Income 48,000 |
--------------------------------------------|---------------------------------------------------
Totals 950,000 | 950,000
============================================|===================================================

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A02-11-2015 Glo-Stick, Inc. – Write-Up Assignment #2
Revised 01-30-2020

Glo-Stick, Inc.
Income Statement for the Year Ended December 31, 2019

Revenues $950,000

Cost of Goods Sold (“COGS”):

Plastics & Chemicals 275,000
Direct Labor & Overhead 400,000
Depreciation – Machinery 15,000
Depreciation – Building 5,000
Gross Profit 255,000

Selling, General & Administrative Expenses (“SG&A”):

Corporate Salaries 120,000
Advertising Expense 20,000
Amortization of Patent 30,000

Operating Profit, i.e. Earnings before Interest & Taxes 85,000

Interest Expense 25,000

Earnings before Income Taxes 60,000

Provision for Income Taxes (Tax Expense) 12,000

Net income (exclusive of tax) $ 48,000

NOTE: The Machinery is directly used in the production of the Glo-Sticks so its Depreciation
would be considered part of the Cost of Goods Sold. In this case, we will assume that the Build-
ing is used primarily as the factory where the Glo-Sticks are produced and, as a result, its De-
preciation is also considered as part of the Cost of Goods Sold. If the company had bought a
“headquarters” Building in which no Glo-Sticks were manufactured, the Depreciation for the
headquarters Building would not be considered as part of Cost of Goods Sold. It would be con-
sidered as either part of SG&A Expenses or Other Operating Expenses. The Amortization of the
Patent would likely be separately classified, as it is here. However, it would be considered an
operating expense even though it is not going to recur in this case.

Glo-Stick, Inc.
Balance Sheet at December 31, 2019

Assets: Liabilities and Equity:

Cash $165,000 Accounts Payable $ 50,000
Accounts Receivable 100,000 Taxes Payable 12,000
Plastics and Chemicals 25,000 Current Liabilities 62,000
Currents Assets 290,000 Bank Loan 300,000
Building, Gross 200,000 Total Liabilities 362,000
Less: Accumulated Depreciation (5,000)
Building, Net 195,000 Shareholders’ Equity
Machinery, Gross 150,000 Common Stock 300,000
Less: Accumulated Depreciation (15,000) Retained Earnings 48,000
Machinery, Net 135,000 Total Equity 348,000
Patent, Gross 120,000
Less: Accumulated Amortization (30,000)
Patent, Net 90,000
Total Assets $710,000 Total Liabilities & Equity $710,000