Accounting
What the Numbers Mean 10e
Demonstration Problem
Chapter 2 – Problem 20
Prepare an Income Statement, Balance Sheet,
and Statement of Changes in Stockholders’ Equity
Problem Definition
•
The following information was obtained from the records of Shae, Inc.:
Merchandise inventory
Notes Payable (long-term)
Sales
Buildings and equipment
Sales, general, and administrative expenses
Accounts receivable
Common stock (21,000 shares)
Income tax expense
Cash
Retained earnings, 1/1/13
Accrued liabilities
Cost of goods sold
Accumulated depreciation
Interest expense
Accounts payable
Dividends declared and paid during 2013
$132,000
150,000
450,000
252,000
36,000
60,000
105,000
42,000
96,000
64,500
9,000
270,000
108,000
24,000
45,000
19,500
Problem Definition
Except as otherwise indicated, assume that all
balance sheet items reflect account balances at
December 31, 2013, and that all income statement items reflect activities that occurred
during the year ended December 31, 2013.
There were no changes in paid-in-capital
during the year.
Problem Definition
a. Prepare an income statement and statement
of changes in stockholders’ equity for the
year ended December 31, 2013, and a balance
sheet at December 31, 2013, for Shae, Inc.
b. What is the company’s average income tax rate?
c. What interest rate is charged on long-term debt?
d. What is the par value per share of common
stock?
e. What is the company’s dividend policy?
Problem Solution
• Prepare an income statement for the year
ended December 31, 2013.
• Identify revenue and expense accounts:
Revenues:
Sales
Expenses:
Selling, general and
administrative expenses
Income tax expense
Cost of goods sold
Interest expense
Problem Solution
• Determine the order and presentation of the
revenue and expense accounts:
Gross Profit is
the first subtotal
shown.
SHAE, INC.
Income Statement
For the Year Ended December 31, 2013
Sales
Cost of goods sold
Gross profit
$450,000
(270,000)
$180,000
Include a
financial
statement
heading.
Problem Solution
SHAE, INC.
Income Statement
For the Year Ended December 31, 2013
Sales
Cost of goods sold
Gross profit
Selling, general, and admin. exp.
Income from operations
$450,000
(270,000)
$180,000
( 36,000)
$144,000
Income from operations (operating income) is a key measure of a
firm’s financial performance for a period of time.
Problem Solution
SHAE, INC.
Income Statement
For the Year Ended December 31, 2013
Sales
Cost of goods sold
Gross profit
Selling, general, and admin. exp.
Income from operations
Interest expense
Income before taxes
$450,000
(270,000)
$180,000
( 36,000)
$144,000
( 24,000)
$120,000
Interest expense is a non-operating expense.
Problem Solution
SHAE, INC.
Income Statement
For the Year Ended December 31, 2013
Sales
Cost of goods sold
Gross profit
Selling, general, and admin. exp.
Income from operations
Interest expense
Income before taxes
Income tax expense
Net income
$450,000
(270,000)
$180,000
( 36,000)
$144,000
( 24,000)
$120,000
( 42,000)
$ 78,000
Problem Solution
• Prepare a Statement of Changes in Stockholders’ Equity
for the year ended December 31, 2013.
SHAE, INC.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2013
Paid-in capital:
Retained earnings:
Paid-in capital and retained earnings
are the two primary components of
stockholders’ equity.
Include a
financial
statement
heading.
Problem Solution
SHAE, INC.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2013
Paid-in capital:
Common stock
Retained earnings:
Paid-in capital includes common
stock and additional funds paid-in,
or contributed, by stockholders.
$105,000
Problem Solution
SHAE, INC.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2013
Paid-in capital:
Common stock
Retained earnings:
Beginning balance
Net income for the year
Less: Dividends declared and paid during year
Ending balance
$105,000
$ 64,500
78,000
(19,500)
123,000
Net income increases and dividends decrease retained earnings.
Problem Solution
SHAE, INC.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2013
Paid-in capital:
Common stock
Retained earnings:
Beginning balance
Net income for the year
Less: Dividends declared and paid during year
Ending balance
Total stockholders’ equity
$105,000
$ 64,500
78,000
(19,500)
Total stockholders’ equity is the sum of PIC and RE.
123,000
$228,000
Problem Solution
• Prepare a balance sheet at December 31, 2013.
SHAE, INC.
Balance Sheet
December 31, 2013
Assets:
Liabilities:
Stockholders’ Equity:
The report format of the balance sheet shows
assets above liabilities and stockholders’ equity.
Problem Solution
SHAE, INC.
Balance Sheet
December 31, 2013
Assets:
Cash
Accounts receivable
Merchandise inventory
Total current assets
Noncurrent assets
Total assets
$ 96,000
60,000
132,000
$288,000
Current assets are listed in order
of liquidity, or nearness to cash.
Liabilities:
Stockholders’ Equity:
Total liabilities and stockholders’ equity
Problem Solution
SHAE, INC.
Balance Sheet
December 31, 2013
Assets:
Cash
Accounts receivable
Merchandise inventory
Total current assets
Buildings and equipment
Less: Accumulated depreciation
Total assets
Liabilities:
Stockholders’ Equity:
Total liabilities and stockholders’ equity
$ 96,000
60,000
132,000
$288,000
252,000
(108,000)
144,000
$432,000
Accumulated depreciation is a
contra asset account.
Problem Solution
SHAE, INC.
Balance Sheet
December 31, 2013
Assets:
Total assets
Liabilities:
Accounts payable
Accrued liabilities
Notes payable (long-term)
Total liabilities
Stockholders’ Equity:
Total liabilities and stockholders’ equity
$432,000
$ 45,000
9,000
150,000
$204,000
As with assets, liabilities are
often classified as current and
noncurrent.
Problem Solution
SHAE, INC.
Balance Sheet
December 31, 2013
Assets:
Total assets
$432,000
Liabilities:
Total liabilities
$204,000
Stockholders’ Equity:
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$105,000
123,000
228,000
CS, RE, and Total SE are taken from the Statement of Changes in SE.
Problem Solution
SHAE, INC.
Balance Sheet
December 31, 2013
Assets:
Total assets
$432,000
Liabilities:
Total liabilities
$204,000
Stockholders’ Equity:
Total stockholders’ equity
Total liabilities and stockholders’ equity
228,000
$432,000
Total assets = Total liabilities + Total stockholders’ equity
Problem Solution
SHAE, INC.
Balance Sheet
December 31, 2013
Assets:
Cash
Accounts receivable
Merchandise inventory
Total current assets
Buildings and equipment
Less: Accumulated depreciation
Total assets
Liabilities:
Stockholders’ Equity:
Total liabilities and stockholders’ equity
Completed asset
side of balance
sheet.
$ 96,000
60,000
132,000
$228,000
252,000
(108,000)
144,000
$432,000
Problem Solution
SHAE, INC.
Balance Sheet
December 31, 2013
Completed liability
and stockholders’
equity side.
Assets:
Total assets
Liabilities:
Accounts payable
Accrued liabilities
Notes payable (long-term)
Total liabilities
Stockholders’ equity:
Common stock
Retained earnings
Total stockholders’ equity
Total liabilities and stockholders’ equity
$432,000
$ 45,000
9,000
150,000
$204,000
$105,000
123,000
228,000
$432,000
Problem Solution
a.
Prepare an income statement and statement of
changes in stockholders’ equity for the year
ended December 31, 2013, and a balance sheet at
December 31, 2013.
b. What is the company’s average income tax
rate?
c. What interest rate is charged on long-term debt?
d. What is the par value per share of common
stock?
e. What is the company’s dividend policy?
Problem Solution
The company’s average income tax rate
would be computed by dividing income tax
expense by earnings before taxes:
$42,000 / $120,000 = 35% average tax rate
Problem Solution
a.
Prepare an income statement and statement of
changes in stockholders’ equity for the year
ended December 31, 2013, and a balance sheet
at December 31, 2013.
b. What is the company’s average income tax rate?
c. What interest rate is charged on long-term
debt?
d. What is the par value per share of common
stock?
e. What is the company’s dividend policy?
Problem Solution
The interest rate charged on long-term debt
is a function of interest expense divided by
long-term debt:
$24,000 / $150,000 = 16% interest rate
This assumes that the year-end balance of long-term debt
is representative of the average long-term debt account
balance throughout the year.
Problem Solution
a.
b.
c.
d.
e.
Prepare an income statement and statement of
changes in stockholders’ equity for the year
ended December 31, 2013, and a balance sheet
at December 31, 2013.
What is the company’s average income tax rate?
What interest rate is charged on long-term debt?
What is the par value per share of common
stock?
What is the company’s dividend policy?
Problem Solution
The par value per share of common stock
can be determined simply by dividing the
dollar amount for common stock by the
number of common shares outstanding:
$105,000 / 21,000 shares = $5 par value per share
Problem Solution
a.
Prepare an income statement and statement of
changes in stockholders’ equity for the year
ended December 31, 2013, and a balance sheet
at December 31, 2013.
b. What is the company’s average income tax rate?
c. What interest rate is charged on long-term debt?
d. What is the par value per share of common
stock?
e. What is the company’s dividend policy?
Problem Solution
Shae, Inc. appears to have a policy of
paying a fixed percentage of net income as
a dividend to shareholders, computed as the
dividends declared and paid divided by net
income:
$19,500 / $78,000 = 25% dividend payout policy
Accounting
What the Numbers Mean 10e
You should now have a better understanding
of how to prepare financial statements.
Remember that there is a demonstration problem for
each chapter that is here for your learning benefit.
David H. Marshall
Wayne W. McManus
Daniel F. Viele