Chapter 4

Pr. 4-146—Income statement.

Presented below is information (in thousands) related to Chen Company.

Retained earnings, December 31, 2014 ¥ 650,000

Sales revenue 1,400,000
Selling and administrative expenses 240,000
Loss on disposal of component (pre-tax) 260,000
Cash dividends declared on ordinary shares 33,600
Cost of goods sold 830,000
Gain resulting from computation error on depreciation charge in 2013 (pre-tax) 520,000
Rent revenue 120,000
Impairment loss 90,000
Interest expense 10,000

Instructions
Prepare in good form an income statement for the year 2015. Assume a 30% tax rate and that
there were 70,000 ordinary shares outstanding during the year.

Solution 4-146
Chen Company
INCOME STATEMENT
For the Year Ended December 31, 2015

Sales revenue ¥1,400,000

Cost of goods sold 830,000
Gross profit 570,000
Selling and administrative expenses (240,000)_
Other income and expense 120,000
Impairment loss (90,000)
Income from operations 360,000
Interest expense 10,000
Income before taxes 350,000
Income taxes (105,000)
Income from continuing operations 245,000
Discontinued operations, net of applicable income taxes of ¥78,000 (182,000)
Net income ¥ 63,000

Per share—
Income from continuing operating ¥ 3.50
Discontinued operations net of tax (2.60)
Net income ¥ 0.90
 Statement of Financial Position and Statement of Cash Flows 5-2

Pr. 4-147—Income statement form.

Wilcox Corporation had income from continuing operations of $900,000 (after taxes) in 2015. In
addition, the following information has not been considered.

1. A machine was sold for $140,000 cash during the year at a time when its book value was
$110,000. (Depreciation has been properly recorded.) The company often sells machinery of
this type.

2. Wilcox decided to discontinue its stereo division in 2015. During the current year, the loss on
the disposal of this component of the business was $170,000 less applicable taxes.

Instructions
Present in good form the income statement of Wilcox Corporation for 2015 starting with "income
from continuing operations." Assume that Wilcox's tax rate is 30% and 200,000 ordinary shares
were outstanding during the year.

Solution 4-147
Wilcox Corporation
Partial Income Statement
For the Year Ended December 31, 2015

Income from continuing operations $921,000*

Discontinued operations
Loss on disposal of a component of a business,
$170,000, less applicable income taxes, $51,000 (119,000)
Net income $802,000
Per share—Income from cont. operations $4.61
Discontinued operations, net of tax (0.60)
Net income $4.01

*Income from cont. operations (unadjusted) $900,000

Gain on sale of machinery (after tax) 21,000
Income from cont. operations (adjusted) $921,000
 Statement of Financial Position and Statement of Cash Flows 5-3

Pr. 4-148—Income statement.

Shown below is an income statement for 2015 that was prepared by a poorly trained bookkeeper
of Howell Corporation.

Howell Corporation
INCOME STATEMENT
December 31, 2015
Sales revenue $895,000
Interest revenue 19,500
Cost of merchandise sold (408,500)
Selling expenses (145,000)
Administrative expense (215,000)
Interest expense (13,000)
Income before special item 133,000
Special item
Loss on disposal of a component of the business (40,000)
Net income tax liability (27,900)
Net income $65,100

Instructions
Prepare an income statement for 2015 for Howell Corporation that is presented in accordance
with IFRS (including format and terminology). Howell Corporation has 50,000 ordinary shares
outstanding and has a 30% income tax rate on all tax related items. Round all earnings per share
figures to the nearest cent.

Solution 4-148
Howell Corporation
INCOME STATEMENT
For the Year Ended December 31, 2015

Sales $895,000
Cost of goods sold 408,500
Gross profit 486,500
Selling expenses $145,000
Administrative expenses 215,000 360,000
Other income: Interest revenue 19,500
Income from operations 146,000
Interest expense 13,000
Income before income taxes 133,000
Income taxes 39,900
Income from continuing operations 93,100
Loss from discontinued operations, net of applicable income tax of $12,000 28,000
Net income $65,100
 Statement of Financial Position and Statement of Cash Flows 5-4

Solution 4-148 (cont.)

Per share
Income from continuing operations $1.86
Discontinued operations loss net of tax (0.56)
Net income $1.30

Pr. 4-149—Income statement.

Presented below is an income statement for Kinder Company for the year ended December 31,
2015.
Kinder Company
Income Statement
For the Year Ended December 31, 2015

Net sales $850,000

Costs and expenses:
Cost of goods sold 640,000
Selling, general, and administrative expenses 70,000
Other, net 20,000 730,000
Income before income taxes 120,000
Income taxes 36,000
Net income $ 84,000

Additional information:
1. "Selling, general, and administrative expenses" included a charge of $7,000 for impairment of
intangibles.
2. "Other, net" consisted of interest expense, $5,000, and a discontinued operations loss of
$15,000 before taxes. If the loss had not occurred, income taxes for 2015 would have been
$40,500 instead of $36,000.
3. Kinder had 20,000 ordinary shares outstanding during 2015.

Instructions
Prepare a corrected income statement, including the appropriate per share disclosures.
 Statement of Financial Position and Statement of Cash Flows 5-5

Solution 4-149
Kinder Company
Income Statement
For the Year Ended December 31, 2015

Net sales $850,000

Cost of goods sold 640,000
Gross profit $210,000
Selling, general, and administrative expenses 63,000
Other income and expense
Loss on impairment 7,000
Income from operations 140,000
Interest expense 5,000
Income before taxes 135,000
Income taxes 40,500
Income from continuing operations 94,500
Discontinued operations
Loss on disposal of component 15,000
Less applicable taxes 4,500 10,500
Net income $ 84,000

Per share—
Income from continuing operations $4.73
Discontinued operations, net of tax (0.53)
Net income $4.20
 Statement of Financial Position and Statement of Cash Flows 5-6

Pr. 4-150—Income statement and retained earnings statement.

Wang Corporation's capital structure consists of 40,000 ordinary shares. At December 31, 2015
an analysis of the accounts and discussions with company officials revealed the following
information:

Sales ¥1,050,000
Purchase discounts 18,000
Purchases 642,000
Loss on discontinued operations (net of tax) 28,000
Selling expenses 128,000
Cash 60,000
Accounts receivable 90,000
Share capital 200,000
Accumulated depreciation 180,000
Dividend revenue 8,000
Inventory, January 1, 2015 152,000
Inventory, December 31, 2015 125,000
Unearned service revenue 4,400
Accrued interest payable 1,000
Land 370,000
Patents 100,000
Retained earnings, January 1, 2015 290,000
Interest expense 17,000
General and administrative expenses 150,000
Dividends declared 29,000
Allowance for doubtful accounts 5,000
Notes payable (maturity 7/1/18) 200,000
Machinery and equipment 450,000
Materials and supplies 40,000
Accounts payable 60,000

The amount of income taxes applicable to ordinary income was ¥33,600, excluding the tax effect
of the discontinued operations loss which amounted to ¥12,000.

Instructions
(a) Prepare an income statement.
(b) Prepare a retained earnings statement.
 Statement of Financial Position and Statement of Cash Flows 5-7

Solution 4-150
WANG CORPORATION
Income Statement
For the Year Ended December 31, 2015

Sales ¥1,050,000
Cost of goods sold:
Merchandise inventory, Jan. 1 ¥152,000
Purchases ¥642,000
Less purchase discounts 18,000
Net purchases 624,000
Merchandise available for sale 776,000
Less merchandise inv., Dec. 31 125,000
Cost of goods sold 651,000

Gross profit 399,000

Selling expenses 128,000
General and administrative expenses 150,000 278,000
Other income and expense:
Dividend revenue 8,000
Income from operations 129,000
Interest expense 17,000
Income before income taxes 112,000
Income taxes 33,600
Income from continuing operations 78,400
Discontinued operations
Loss on disposal, less applicable taxes of $12,000 28,000
Net income ¥ 50,400

Per share of share capital—

Income from continuing operations ¥1.96
Discontinued operations, (0.70)
Net income ¥1.26

WANG CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2015

Retained earnings, January 1, 2015 ¥290,000

Add: Net income ¥50,400
Deduct: Dividends declared 29,000 21,400
Retained earnings, December 31, 2015 ¥311,400

Chapter 5
 Statement of Financial Position and Statement of Cash Flows 5-8

Ex. 5-124—Statement of cash flows ratios.

Financial statements for Hilton Company are presented below:
Hilton Company
Statement of Financial Position
December 31, 2015
Assets Equity & Liabilities
Buildings and equipment $150,000 Share capital–ordinary $ 65,000
Accumulated depreciation— Retained earnings 60,000
buildings and equipment (50,000)
Patents 20,000
Accounts receivable 35,000 Bonds payable 50,000
Cash 40,000 Accounts payable 20,000
$195,000 $195,000

Hilton Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Cash flows from operating activities
Net income $45,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in accounts receivable $(16,000)
Increase in accounts payable 8,000
Depreciation expense 15,000
Gain on sale of equipment (6,000)
Amortization of patents 2,000 3,000
Net cash provided by operating activities 48,000
Cash flows from investing activities
Sale of equipment 12,000
Purchase of land (25,000)
Purchase of buildings and equipment (48,000)
Net cash used by investing activities (61,000)
Cash flows from financing activities
Payment of cash dividend (15,000)
Sale of bonds 40,000
Net cash provided by financing activities 25,000
Net increase in cash 12,000
Cash, January 1, 2015 28,000
Cash, December 31, 2015 $40,000

At the beginning of 2015, Accounts Payable amounted to $12,000 and Bonds Payable was
$10,000.

Instructions
Calculate the following for Hilton Company:
a. Current cash debt coverage
b. Cash debt coverage
c. Free cash flow
 Statement of Financial Position and Statement of Cash Flows 5-9

Solution 5-124
Net cash provided by operating activities
a. Current cash debt coverage = ——————————————————
Average current liabilities

$48,000 $48,000
= ——————————— = ———— = 3.0 : 1
($12,000 + $20,000) ÷ 2 $16,000

Net cash provided by operating activities

b. Cash debt coverage = ——————————————————
Average total liabilities

$48,000 $48,000
= ——————————— = ———— = 1.0 : 1
($22,000 + $70,000) ÷ 2 $46,000

c. Free cash flow = Net cash provided by operating activities –

capital expenditures and dividends

= $48,000 – *$73,000 – $15,000 = $(40,000)

*$25,000 + $48,000
 Statement of Financial Position and Statement of Cash Flows 5 - 10

PROBLEMS

Pr. 5-125—Statement of financial position presentation.

The following statement of financial position was prepared by the bookkeeper for Kraus Company
as of December 31, 2015.
Kraus Company
Statement of Financial Position
as of December 31, 2015

Investments £ 76,300 Equity £215,500

Equipment (net) 96,000 Non-current liabilities 100,000
Patents 32,000 Accounts payable 78,000
Inventories 57,000
Accounts receivable (net) 52,200
Cash 80,000
£393,500 £393,500

The following additional information is provided:

1. Cash includes the cash surrender value of a life insurance policy £12,400, and a bank
overdraft of £2,500 has been deducted.
2. The net accounts receivable balance includes:
(a) accounts receivable—debit balances £60,000;
(b) accounts receivable—credit balances £4,000;
(c) allowance for doubtful accounts £3,800.
3. Inventories do not include goods costing £5,000 shipped out on consignment. Receivables of
£5,000 were recorded on these goods.
4. Investments include investments in ordinary shares, trading £19,000 and non-trading
£48,300, and franchises £9,000.
5. Equipment costing £5,000 with accumulated depreciation £4,000 is no longer used and is
held for sale. Accumulated depreciation on the other equipment is £40,000.

Instructions
Prepare a statement of financial position in good form (shareholders' equity details can be
omitted.)
 Statement of Financial Position and Statement of Cash Flows 5 - 11

Solution 5-125
Kraus Company
Statement of Financial Position
As of December 31, 2015

Assets
Investments
Non-trading securities £48,300
Cash surrender value of life insurance 12,400 £60,700

Property, plant, and equipment

Equipment 135,000 (5)
Less: Accumulated depreciation 40,000 95,000

Intangible assets
Patents 32,000
Franchises 9,000 41,000

Current assets
*Equipment held for sale 1,000 (4)
Inventories 62,000 (3)
Accounts receivable £55,000 (2)
Less: Allowance for doubtful accounts 3,800 51,200
Trading securities 19,000
Cash 70,100 (1)
Total current assets 203,300
Total assets £400,000

Equity and Liabilities

Equity £ 215,500
Non-current liabilities £100,000
Current liabilities
Accounts payable £82,000 (6)
Bank overdraft 2,500
Total current liabilities 84,500
Total liabilities 184,500
Total liabilities and equity £400,000

(1) (£80,000 – £12,400 + £2,500)

(2) (£60,000 – £5,000)
(3) (£57,000 + £5,000)
(4) (£5,000 – £4,000)
(5) (£96,000 + £40,000 – £5,000 + £4,000)
(6) (£78,000 + £4,000)

*An alternative is to show it as an other asset.

 Statement of Financial Position and Statement of Cash Flows 5 - 12

Pr. 5-128—Statement of cash flows preparation.

Selected financial statement information and additional data for Johnston Enterprises is
presented below. Prepare a statement of cash flows for the year ending December 31, 2016

Johnston Enterprises
Statement of Financial Position and Income Statement Data
December 31, December 31,
2016 2015
Property, Plant, and Equipment HK$1,241,000 HK$1,122,000
Less: Accumulated Depreciation (476,000) (442,000)
765,000 680,000
Current Assets:
Inventory 391,000 340,000
Accounts Receivable 238,000 306,000
Cash 153,000 119,000
Total Current Assets 782,000 765,000

Total Assets HK$1,547,000 HK$1,445,000

Equity:
Share Capital–Ordinary HK$ 510,000 HK$ 467,500
Retained Earnings 374,000 340,000
Total Equity 884,000 807,500

Non-Current Liabilities:
Bonds Payable 340,000 391,000

Current Liabilities:
Accounts Payable 187,000 102,000
Notes Payable 51,000 68,000
Income Taxes Payable 85,000 76,500
Total Current Liabilities 323,000 246,500

Total Liabilities 663,000 637,500

Total Liabilities & Equity HK$1,547,000 HK$1,445,000

Sales Revenue HK$1,615,000 HK$1,513,000

Less Cost of Goods Sold 731,000 731,000
Gross Profit 884,000 782,000
Expenses:
Depreciation Expense 153,000 136,000
Salaries and Wages Expense 391,000 357,000
Interest Expense 34,000 34,000
Loss on Sale of Equipment 17,000 0
Income Before Taxes 289,000 255,000
Less Income Tax Expense 119,000 102,000
Net Income HK$ 170,000 HK$ 153,000
 Statement of Financial Position and Statement of Cash Flows 5 - 13

Additional Information:
During the year, Johnston sold equipment with an original cost of HK$153,000 and accumulated
depreciation of HK$119,000 and purchased new equipment for HK$272,000.

Solution 5-128
Johnston Enterprises
Statement of Cash Flows
For the Year Ended December 31, 2016

Net Income HK$ 170,000

Cash flow from operating activities

Depreciation expense HK$153,000
Loss on sale of equipment 17,000
Decrease in accounts receivable 68,000
Increase in inventory (51,000)
Increase in accounts payable 85,000
Decrease in notes payable (17,000)
Increase in tax payable 8,500 263,500
Net cash provided by operating activities 433,500

Cash flow from investing activities

Sale of equipment 17,000
Purchase of equipment (272,000)
Net cash used by investing activities (255,000)

Cash flow from financing activities

Retirement of bonds payable (51,000)
Issuance of ordinary shares 42,500
Payment of dividends (136,000)**
Net cash used by financing activities (144,500)

Net increase in cash 34,000

Beginning cash 119,000
Cash at end of year HK$153,000

**Beginning R/E  Net income  Dividends  Ending R/E

HK$340,000  HK$170,000  Dividends  HK$374,000
Dividends  HK$136,000