Accounting 122

Group Project Problem 1 100 Points

The comparative financial statements of the Summer Company are as follows.

The market price of the Summer Company common stock was $36 on December 31, 2016 and $11.20 on December 31, 2017.

Summer Company

The Summer Company Retained Earnings Statement For the years Ended December 31, 2017 and 2016 2017 2016 Retained Earnings. Jan. 1, $209,500 $149,400 Add: Net Income 27,10070,100 Less: Dividends Declared Retained Earnings Dec. 31 \begin{tabular}{l|r|} & (10,000) \\ \hline$236,600 & $209,500 \end{tabular} The Summer Company Income Statement For the years ended December 31, 2017 and 2016 Sales less: Cost of Merchandise Sold Gross Profit Depreciation Expense Income from Operations Add: Other Income: Gain on sale of equipment \begin{tabular}{|r|r|} \hline 2017 & 2016 \\ \hline$260,000 & $521,000 \\ 200,000 & 387,500 \\ \hline 60,000 & 133,500 \\ \hline 11,000 & 8,500 \\ \hline \end{tabular} Less: Other Expenses: Loss on sale of equipment Less: Interest Expense Income before Income Tax Less: Income Tax expense \begin{tabular}{|r|r|} \hline & 8,000 \\ \hline$39,000 & $97,000 \\ 33,900 & 5,900 \\ \hline$35,100 & $91,100 \\ \hline 8,000 & 21,000 \\ \hline$27,100 & $70,100 \\ \hline \end{tabular} The following transactions occurred during 2017 to assist you in preparing the Statement of Cash Flows for 2017. A. Dividends were declared in 2016 and paid 2017. B. Purchased Treasury Stock for $10,000 on 1/1/2017. C. Sold Treasury Stock receiving cash. D. Sold Plant Assets, receiving cash. The net book value of the plant asset was $20,000. E. Paid off a portion of the agertypte. F. Retired bonds at their maturity value. G. Amortized the Discount on Bonds Payable. H. Issued common stock, receiving cash. Requirec 1. Prepare the Statement of Cash Flows for the year ended December 31, 2017. (Show all required computations). Assume that your manager, who has a marketing background ask you the following questions 2-5, after reviewing the Statement of Cash Flows for 2017 and 2016 As you can see from the premise of the questions, that your manager does not have a basic understanding of the statement of cash flows. Take that into consideration when answering questions 2-5. 2. "How can Depreciation be a cash flow"? 3. "How can a gain on the sale of non-current assets be a deduction from Net Income in determining the Cash Flow from Operating Activities? 4. "How can a Loss on the Sale of non current assets be be an addition to Net Income in determining Cash Flow from Operating Activities? 5. "Why does the bank need a Statement of Cash Flows anyway? They can compute the increase or decrease in cash flow from the Balance Sheet for the last two years"? 6. Prepare the following financial statement analysis for the 2017 and 2016. Define each measure and whether the Summer Company did better or worse and why? A. Current ratio. B. Quick ratio. C. Rate of Return on Total Assets. D. Rate of Return on Common Stockholders' Equity. E. Earnings Per Share on Common Sock. (When computing the earnings per share assume there is no Treasury Stock). Use the outstanding shares as of 12/31/2017 for 2017 and the outstanding shares as of 12/31/2016 for 2016. Do not use the weighted average outstanding shares. F. Accounts Receivable Turnover. Assume all Sales are on account. G. Average collection period. Assume all Sales are on account. H. Inventory Turnover. I. Debt to equity ratio J. Times Interest Earned Ratio. K. Price Earnings Ratio. L. Operating Cash Flow to current liability ratio M. Vertical analysis for the Income Statement for 2017 and 2016