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WEEK 4 (1) Answer the following questions. a. Your friend C. J. Gibson cannot understand how the characteristic of corporate management is both an advantage and a disadvantage. Clarify this problem for C. J. b. Identify and explain two other disadvantages of a corporation. (3) The corporate charter of Gagne Corporation allows the issuance of a maximum of 100,000 shares of common stock. During its first 2 years of operation, Gagne sold 70,000 shares to shareholders and reacquired 4,000 of these shares. After these transactions, how many shares are authorized, issued, and outstanding? Shares authorized Shares issued Shares outstanding (4) Diaz, Inc. purchases 1,000 shares of its own previously issued $5 par common stock for $11,000. Assuming the shares are held in the treasury, what effect does this transaction have on. (a) net income (b) total assets (c) total paid-in capital (d) total stockholders' equity (5) Identify the events that result in credits and debits to retained earnings. Debits 1. 2. Credits 1. (6) Deane Corporation has 10,000 shares of $15 par value common stock outstanding when it announces a 3-for-1 split. Before the split, the stock had a market price of $120 per share. After the split, how many shares of stock will be outstanding, and what will be the approximate market price per share? Outstanding share Market price per share (7) What was the total cost of Tootsie Roll's treasury stock at December 31, 2011? What was the amount of the 2011 cash dividend? What was the total charge to Retained Earnings for the 2011 stock dividend? (Enter the amounts in thousands.) Treasury stock $ Cash dividend $ Stock dividend charged to retained earnings $ (8) Krause Corp. has a return on assets of 12%. It plans to issue bonds at 8% and use the cash to repurchase stock. What effect will this have on its debt to total assets ratio and on its return on common stockholders' equity? Effect Debt to total assets ratio Return on common stockholders' equity (9) Hatch Inc.'s common stock has a par value of $1 and a current market price of $15. Explain why these amounts are different. (10) What is the formula for the payout ratio? What does it indicate? (11) Mark Paxson maintains that the statement of cash flows is an optional financial statement. Do you agree? (12) Answer the following questions. What are the sources (inflows) of cash in a statement of cash flows? What are the uses (outflows) of cash? (13) Why is it necessary to use comparative balance sheets, a current income statement, and certain transaction data in preparing a statement of cash flows? (14) Why is it necessary to convert accrual-basis net income to cash-basis net income when preparing a statement of cash flows? (15) Identify five items that are adjustments to convert net income to net cash provided by operating activities under the indirect method. (16) During 2014, Markowitz Company exchanged $1,700,000 of its common stock for land. Indicate how the transaction would be reported on a statement of cash flows, if at all. (17) Give the formulas under the direct method for computing (a) cash receipts from customers and (b) cash payments to suppliers. (18) Detwiler Inc. reported sales of $2 million for 2014. Accounts receivable decreased $150,000 and accounts payable increased $300,000. Compute cash receipts from customers, assuming that the receivable and payable transactions are related to operations. Cash receipts from customer $ (19) In the direct method, why is depreciation expense not reported in the cash flows from operating activities section? (20) Describe the indirect method for determining net cash provided (used) by operating activities. (21) Indicate which of the following items would be reported as an extraordinary item on Pitchford Corporation's income statement. (a) Loss from damages caused by a volcano eruption in Iona. (b) Loss from the sale of short-term investments. (c) Loss attributable to a labor strike. (d) Loss of inventory from flood damage because a warehouse is located on a flood plain that floods every 5 to 10 years. (e) Loss on the write-down of outdated inventory. (f) Loss from a foreign government's expropriation of a production facility. (g) Loss from damage to a warehouse in southern California from a minor earthquake. (22) Garvey Inc. reported 2013 earnings per share of $3.26 and had no extraordinary items. In 2014, earnings per share on income before extraordinary items was $2.99, and earnings per share on net income was $3.49. Do you consider this trend to be favorable? (23) Jennifer Gorman believes that the analysis of financial statements is directed at two characteristics of a company: liquidity and profitability. Is Jennifer correct? Jennifer correct. (24) Answer the following questions: If Neer Company had net income of $300,000 in 2013 and it experienced a 24.5% increase in net income for 2014, what is its net income for 2014? Net income $ If 6 cents of every dollar of Neer's revenue is net income in 2013, what is the dollar amount of 2013 revenue? Dollar amount of revenue $ (25) Tom Vernon is puzzled. His company had a profit margin of 10% in 2014. He feels that this is an indication that the company is doing well. Andrea Travis, his accountant, says that more information is needed to determine the company's financial well-being. Who is correct? is correct. (26) What does each type of ratio measure? (a) Liquidity ratios. (b) Solvency ratios. (c) Profitability ratios. (27) At year-end, the price-earnings ratio of General Motors was 11.3, and the price-earnings ratio of Microsoft was 28.14. Which company did the stock market favor? Explain. (28) Holding all other factors constant, indicate whether each of the following changes generally signals good or bad news about a company. (a) Increase in profit margin. (b) Decrease in inventory turnover. (c) Increase in current ratio. (d) (i) Decrease in earnings per share by decrease in net income. (d) (ii) Decrease in earnings per share by increase in stockholders' investment. (e) Increase in price-earnings ratio. (f) Increase in debt to assets ratio. (g) Decrease in times interest earned. (29) Kono Inc. has net income of $200,000, average shares of common stock outstanding of 40,000, and preferred dividends for the period of $20,000. What is Kono's earnings per share of common stock? (Round answer to 2 decimal places, e.g. 15.25.) Kono's earnings per share $ (30) Explain how the choice of one of the following accounting methods over the other raises or lowers a company's net income during a period of continuing inflation. Use of FIFO instead of LIFO for inventory costing. Use of a 6-year life for machinery instead of a 9-year life. Use of straight-line depreciation instead of declining balance depreciation