Cotton Company has the following balance sheets and retained earnings statements: 2022 2021 Cash $10,000 $15,000 Receivables 15,000 10,000 Inventories (FIFO) 18,000 23,000 Other Assets 40,000 15,000 $83,000 $63,000 Capital Stock $40,000 $30,000 Retained Earnings 43,000 33,000 $83,000 $63,000 Retained Earnings Jan 1 $33,000 $35,000 Income 15,000 12,000 Dividends -5,000 -14,000 Retained Earnin Dec 31 $43,000 $33,000 The above incomes and Retained Earnings balances are based on FIFO Cost of Goods Sold. Cotton changed from FIFO to LIFO on January 1, 2022. December 31, 2022 inventory at LIFO is $17,000 while December 31, 2021 inventory at LIFO is $21,000. Inventory at January 1, 2021 was zero. a. Prepare statements in the format above assuming 2022 will be shown by itself without reference to 2021. b. Journalize the change to LIFO at January 1, 2022.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
| Cotton Company has the following balance sheets and |
|||||||
| 2022 | 2021 | ||||||
| Cash | $10,000 | $15,000 | |||||
| Receivables | 15,000 | 10,000 | |||||
| Inventories (FIFO) | 18,000 | 23,000 | |||||
| Other Assets | 40,000 | 15,000 | |||||
| $83,000 | $63,000 | ||||||
| Capital Stock | $40,000 | $30,000 | |||||
| Retained Earnings | 43,000 | 33,000 | |||||
| $83,000 | $63,000 | ||||||
| Retained Earnings Jan 1 | $33,000 | $35,000 | |||||
| Income | 15,000 | 12,000 | |||||
| Dividends | -5,000 | -14,000 | |||||
| Retained Earnin Dec 31 | $43,000 | $33,000 | |||||
| The above incomes and Retained Earnings balances are based on FIFO Cost of Goods Sold. | |||||||
| Cotton changed from FIFO to LIFO on January 1, 2022. December 31, 2022 inventory at LIFO is $17,000 while December 31, 2021 inventory at LIFO is $21,000. | |||||||
| Inventory at January 1, 2021 was zero. | |||||||
| a. Prepare statements in the format above assuming 2022 will be shown by itself without reference to 2021. | |||||||
| b. Journalize the change to LIFO at January 1, 2022. |
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