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    Finance 745

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    Sara Karen
    Cathy Chen completed her first full year in business as a self-employed CPA. She billed $360,000 for accounting services. She had two employees and paid their annual salaries, plus employment taxes and benefits totaling $34,600. Office expenses were $10,400 and travel/entertainment was $17,000. Rent was $2,700 per month and depreciation was $15,600. Interest on business loans was $15,000 and her average tax rate was 30%.

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    Finance 745

    Uploaded by

    Sara Karen
    99 views5 pages
    Cathy Chen completed her first full year in business as a self-employed CPA. She billed $360,000 for accounting services. She had two employees and paid their annual salaries, plus employment taxes and benefits totaling $34,600. Office expenses were $10,400 and travel/entertainment was $17,000. Rent was $2,700 per month and depreciation was $15,600. Interest on business loans was $15,000 and her average tax rate was 30%.

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    Cathy Chen completed her first full year in business as a self-employed CPA. She billed $360,000 for accounting services. She had two employees and paid their annual salaries, plus employment taxes and benefits totaling $34,600. Office expenses were $10,400 and travel/entertainment was $17,000. Rent was $2,700 per month and depreciation was $15,600. Interest on business loans was $15,000 and her average tax rate was 30%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    99 views5 pages

    Finance 745

    Uploaded by

    Sara Karen
    Cathy Chen completed her first full year in business as a self-employed CPA. She billed $360,000 for accounting services. She had two employees and paid their annual salaries, plus employment taxes and benefits totaling $34,600. Office expenses were $10,400 and travel/entertainment was $17,000. Rent was $2,700 per month and depreciation was $15,600. Interest on business loans was $15,000 and her average tax rate was 30%.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 5

    P3-3 Income Statement Preparation

    On December 31, 2012, Cathy Chen, a self-employed certified public accountant (CPA)
    completed her first full year in business. During the year, she billed $360,000 for her
    accounting services. She had two employees, a bookkeeper and a clerical assistant. In
    addition to her monthly salary of $8,000, Ms. Chen paid annual salaries of $48,000
    and$36,000 to the bookkeeper and the clerical assistant, respectively. Employment taxes and
    benefit costs for Ms. Chen and her employees totaled $34,600 for the year. Expenses for
    office supplies, including postage, totaled $10,400 for the year. In addition, Ms. Chen spent
    $17,000 during the year on tax-deductible travel and entertainment associated with client
    visits and new business development. Lease payments for the office space rented (a tax-
    deductible expense) were $2,700 per month. Depreciation expense on the office furniture and
    fixtures was $15,600 for the year. During the year, Ms. Chen paid interest of $15,000 on the
    $120,000 borrowed to start the business. She paid an average tax rate of 30% during 2012.

    a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2012.

    b. Evaluate her 2012 financial performance.


    P3-7 Balance Sheet Preparation

    Adam and Arin Adams have collected their personal income and expense information and
    have asked you to put together an income and expense statement for the year ended
    December 31, 2012. The following information is received from the Adams family.

    Cash $ 300 Retirement funds, IRA


    $2,000
    Checking 3,000
    2011 Sebring
    Savings 1,200
    15,000
    IBM stocks 2,000
    2010 Jeep
    Auto loan 8,000 8,000

    Mortgage 100,000 Money market funds 1,200

    Medical bills payable 250 Jewelry and artwork

    Utility bills payable 150 3,000

    Real estate 150,000 Net worth


    76,500

    Household furnishings 4,200


    a. Create
    Credit card balance 2,000 a

    Personal loan 3,000

    personal balance sheet as of December 31, 2012. It should be similar to a corporate


    balance sheet.
    b. What must the total assets of the Adams family be equal to December 31, 2012?
    c. What was their net working capital (NWC) for the year? (NWC is the difference
    between total liquid assets and total current liabilities.)
    P3-8 Impact of Net Income on a firm’s Balance Sheet

    Conrad Air Inc. reported net income of $1, 365,000 for the year ended December 31,
    2013. Show how Conrad’s balance sheet would change from 2012 to 2013 depending on
    how Conrad “spend” those earnings as described in the scenarios appear below.

    Conrad Air Inc. Balance Sheet as of December 31, 2006.

    Assets Liabilities and Stockholders’ Equity

    Cash $ 120,000 Accounts payable $ 70,000

    Marketable securities 35,000 Short-term notes 55,000

    Accounts receivable 45,000 Current liabilities 125, 000

    Inventories 130,000 Long term debt 2,700,000

    Current Assets 330,000 Total liabilities 2,825,000

    Equipment 2,970,000 Common stock 500,000

    Buildings 1,600,000 Retained earnings 1,575,000

    Fixed assets 4,570,000 Stockholders equity 2,075,000

    Total Assets 4,900,000 Total liability and equity 4,900,000

    a. Conrad paid no dividends during the year and invested the funds in marketable
    securities.
    b. Conrad paid dividends totaling $500,000 and used the balance of the net income to
    retire (payoff) long term debt.
    c. Conrad paid dividends totaling $500,000 and invested the balance of the net income
    in building a new hangar.
    d. Conrad paid out all $1,365,000 as dividends to its stockholders.
    Analyze the overall financial position from both a cross-sectional and a time-series
    viewpoint. Break your analysis into evaluations of the firm’s liquidity, activity, debt,
    profitability, and market.

    Historical and Industry Average Ratios for Sterling Company

    Current ratio 1.40 1.55 1.85


    Quick ratio 1.00 0.92 1.05
    Inventory turnover 9.52 9.21 8.60
    Average collection period 45.6 days 36.9 days 35.5 days
    Average payment period 59.3 days 61.6 days 46.4 days
    Total asset turnover 0.74 0.80 0.74
    Debt ratio 0.20 0.20 0.30
    Time interest earned ratio 8.2 7.3 8.0
    Fixed payment coverage ratio 4.5 4.2 4.2
    Gross profit margin 0.30 0.27 0.25
    Operating profit margin 0.12 0.12 0.10
    Net profit margin 0.062 0.062 0.053
    Return on asset (ROA) 0.045 0.050 0.040
    Return on common equity 0.061 0.067 0.066
    Earnings per share (EPS) $1.75 $2.20 $1.50
    Price/earnings (P/E) ratio 12.0 10.5 11.2
    Market/book (M/B) ratio 1.20 1.05 1.10
    DuPont system of analysis

    use the following ratio information form Johnson international and the industry average for
    Johnson’s line of business to:

    a. Construct the DuPont system of analysis for both Johnson and the industry.
    b. Evaluate Johnson (and the industry) over 3 years period.
    c. Indicate in which areas Johnson require further analysis. Why?

    Johnson 2010 2011 2012

    Financial leverage multiplier 1.75 1.75 1.85

    Net profit margin 0.059 0.058 0.049

    Total asset turnover 2.11 2.18 2.34

    Industry average Financial


    leverage multiplier
    1.67 1.69 1.64
    Net profit margin
    0.054 0.047 0.041
    Total asset turnover
    2.05 2.13 2.15

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