Mastery Problem: Statement of Cash Flows Championship Boxing, Inc. Champlonship Boxing, Inc. is a small manufacturer of cardboard boxes of all sizes. You have reported for your first day of work, and the company is in an uproar. Yearly financial statements are being prepared, but a computer malfunction of the company's new BOX-9000 computer has inadvertently erased parts of the company's balance sheet, along with almost all related data except the company's statement of cash flows. The IT department is working to retrieve earlier backups, but estimates that the reconstruction of the data will take about 24 hours. Unfortunately, financial statements are to be presented at a stockholders' meeting in one hour. The company uses the indirect method to prepare its statement of cash flows (rather than the direct method), so your new supervisor believes the missing data for the balance sheet can be prepared using the statement of cash flows. You are assigned this task, since you were top student in your business school class. Meanwhile, the supervisor will go to the stockholders' meeting and give some introductory remarks. In addition to the statement of cash flows, the following data survived the computer mishap: The investments were sold for $280,000 cash. Equipment was acquired for $152,000 cash. Land was acquired for $326,000 cash. There were no disposals of equipment during the year. 12,500 shares of common stock were sold for cash during the year. There was a 596,000 debit to Retained Earnings for cash dividends declared. Statement of Cash Flows Your supervisor has provided you with the following statement of cash flows, prepared using the indirect method. Recall that the statement of cash flows consists of three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Review the statement, and then proceed to the next panel. Championship Boxing, Inc. Statement of Cash Flows For the Year Ended December 31, 2048 Cash flows from (used for) operating activities: Net Income $186,540 Adjustments to reconcile net Income to net cash flow from operating activities: Depreciation 18,400 Gain on sale of investments (50,000) Changes in current operating assets and liabilities: Increase in accounts receivable (25,370) Irn Adjustments to reconcile net income to Tiet cash Tow Trom operating ACLIVILIES: Depreciation 18,400 Gain on sale of investments (50,000) Changes in current operating assets and liabilities: Increase in accounts receivable (25,370) Increase in inventories (33,450) Increase in accounts payable 41,100 Decrease in accrued expenses payable (12,470) Net cash flow from operating activities $ 124,750 Cash flows from (used for) investing activities: Cash received from sale of investments $280,000 Cash paid for purchase of land (326,000) (152,000) Cash paid for purchase of equipment Net cash flow used for investing activities (198,000) Cash flows from (used for) financing activities: Cash received from sale of common stock $187,500 Cash paid for dividends (91,200) Net cash flow from financing activities 96,300 Net increase in cash $23,050 Cash balance, January 1, 20Y8 585,920 Cash balance, December 31, 2048 $608,970 Balance Sheet Using the information on above, complete the following comparative balance sheet. Championship Boxing, Inc. Comparative Balance Sheet December 31, 2048 and 2017 Championship Boxing, Inc. Comparative Balance Sheet December 31, 2048 and 2017 2018 2017 Assets Cash $ 608,970 $585,920 Accounts receivable (net) 230,950 205,580 Inventories 651,870 618,420 Investments 0 230,000 Land 326,000 0 Equipment 705,200 553,200 Accumulated depreciation-equipment (166,400) -148,000 Total assets $ 2,356,590 2,045,120 Liabilities Accounts payable (merchandise creditors) $ 432,930 $391,830 Accrued expenses payable (operating expenses) 41,150 53,620 Dividends payable 24,000 19,200 Total liabilities $498,080 464,650 Stockholders' Equity Common stock, $4 par 150,000 $100,000 Paid-in capital in excess of par 417,500 280,000 Retained earnings 1,291,010 Inventories 651,870 618,420 Investments 0 230,000 Land 326,000 0 Equipment 705,200 553,200 Accumulated depreciation-equipment (166,400) -148,000 Total assets 2,356,590 2,045,120 Liabilities Accounts payable (merchandise creditors) 432,930 $391,830 Accrued expenses payable operating expenses) 41,150 53,620 Dividends payable 24,000 19,200 Total liabilities $498,080 464,650 Stockholders' Equity Common stock, $4 par 150,000 $100,000 Paid-in capital in excess of par 417,500 280,000 Retained earnings 1,291,010 Total stockholders' equity $1,858,510 Total liabilities and stockholders' equity $ 2,356,590 2,045,020 X Feedback Check My Work Review the relationships between the beginning and ending balance sheet amounts, and their effect on the statement of cash flows. Ratio of Liabilities to Stockholders' Equity and Times Interest Earned The following data were taken from the financial statements of Hunter Inc. for December 31 of two recent years: Current Previous Year Year Accounts payable $876,000 $203,000 $ Current maturities of serial bonds payable 520,000 520,000 Serial bonds payable, 10% 2,060,000 2,580,000 Common stock, $1 par value 90,000 110,000 Paid-in capital in excess of par 950,000 950,000 Retained earnings 3,280,000 2,610,000 The income before income tax expense was $696,600 and $609,500 for the current and previous years, respectively. a. Determine the ratio of liabilities to stockholders' equity at the end of each year. Round to one decimal place. Current year 0.8 Previous year 0.9 b. Determine the times interest earned ratio for both years. Round to one decimal place. Current year 2 X Previous year c. The ratio of liabilities to stockholders' equity has improved previous year. These results are the combined result of a larger the previous year. and the number of times bond interest charges were earned has improved from the income before income taxes and lower interest expense in the current year compared to Feedback Check My Work a. Divide total liabilities by total stockholders' equity. b. Divide the sum of income before income tax expense and interest expense by interest expense. Profitability Ratios The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 2017, 2016, and 2015: December 31 2017 2016 20Y5 Total assets $231,000 $208,000 $185,000 Notes payable (8% interest) 80,000 80,000 80,000 Common stock 32,000 32,000 32,000 Preferred 3% stock, $100 par 16,000 16,000 16,000 (no change during year) Retained earnings 77,030 59,170 48,000 The 2017 net income was $18,340, and the 20Y6 net income was $11,650. No dividends on common stock were declared between 2015 and 2047. Preferred dividends were declared and paid in full in 2016 and 2017. a. Determine the return on total assets, the return on stockholders' equity, and the return on common stockholders' equity for the years 2016 and 2047. When required, round to one decimal place. 2047 2016 Return on total assets 247.4 X % % Return on stockholders' equity % % Return on common stockholders' equity % % Since the return on assets is less than the return on stockholders' equity b. The profitability ratios indicate that the company's profitability has improved in both years, there must be positive leverage from the use of debt. East Point Retail, Inc., sells professional women's apparel through company-owned retail stores. Recent financial information for East Point is provided below (all numbers in thousands). Fiscal Year 3 Fiscal Year 2 Net income $153,100 $78,800 Interest expense 3,100 11,800 Fiscal Year 3 Fiscal Year 2 Fiscal Year 1 Total assets (at end of fiscal year) $3,905,000 $3,714,512 $3,254,718 Total stockholders' equity (at end of fiscal year) 1,333,026 1,306,630 944,798 Assume the apparel industry average return on total assets is 8.0%, and the average return on stockholders' equity is 15.0% for the year ended April 2, Year 3. a. Determine the return on total assets for East Point for fiscal Years 2 and 3. Round to one decimal place. Fiscal Year 3 % Fiscal Year 2 % b. Determine the return on stockholders' equity for East Point for fiscal Years 2 and 3. Round to one decimal place. Fiscal Year 3 % Fiscal Year 2 % c. The return on stockholders' equity is greater than the return on total assets due to the positive use of leverage. d. During fiscal Year 3, East Point's results were weak average. The return on stockholders' equity was less compared to the industry average. The return on total assets for East Point was less than the industry than the industry average. These relationships suggest that East Point has less leverage than the industry, on average