On December 31, 2022, the equity accounts of Book Creations, Inc., contained the following balances: Common stock ($10 par, 100,000 shares authorized) 30,000 shares issued and outstanding $300,000 Retained earnings $476,600 For the year 2022, the corporation had net income before income taxes of $176,300, income taxes of $35,260, and net income after taxes of $141,040. The corporation’s tax rate is 20 percent. An expansion of the existing plant at a cost of $564,300 is planned. The corporation’s president, who owns 60 percent of the corporation’s common stock, estimates that the expansion would result in an increased net income of approximately $176,300 before interest and taxes. The financial vice president forecasts that the increase would be only $88,150. Management is considering two possibilities for financing: Issuance of 20,000 additional shares of common stock for $29 per share. Issuance of $564,300 face amount, 10-year, 6 percent bonds payable, secured by a mortgage lien on the plant. Assume that profits from existing operations will remain the same.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
On December 31, 2022, the equity accounts of Book Creations, Inc., contained the following balances:
Common stock ($10 par, 100,000 shares authorized) 30,000 shares issued and outstanding | $300,000 |
$476,600 | |
For the year 2022, the corporation had net income before income taxes of $176,300, income taxes of $35,260, and net income after taxes of $141,040. The corporation’s tax rate is 20 percent.
An expansion of the existing plant at a cost of $564,300 is planned. The corporation’s president, who owns 60 percent of the corporation’s common stock, estimates that the expansion would result in an increased net income of approximately $176,300 before interest and taxes. The financial vice president
Management is considering two possibilities for financing:
- Issuance of 20,000 additional shares of common stock for $29 per share.
- Issuance of $564,300 face amount, 10-year, 6 percent bonds payable, secured by a mortgage lien on the plant.
Assume that profits from existing operations will remain the same.
![Assuming the financial vice president's estimate of earnings is correct, complete the following two-column table for each plan.
Issuing
Issuing
Bonds
Common
Stock
a. Net income before interest and taxes
b. Total bond interest
Taxable income
c. Total income tax
d. Total income after tax
le Present income after tax
f. Increase / Decrease in net income
g. Present EPS
h. Proposed EPS](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F71b82b19-0193-4355-bffd-2f22bedfd372%2Fb8bb491e-77e0-454f-a3fd-687207549174%2F5z42crl_processed.png&w=3840&q=75)
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