Refer to the following financial statements for Crosby Corporation: CROSBY CORPORATION Income Statement For the Year Ended December 31, 20X2 Sales $ 3,880,000 Cost of goods sold 2,620,000 Gross profit $ 1,260,000 Selling and administrative expense 656,000 Depreciation expense 300,000 Operating income $ 304,000 Interest expense 87,900 Earnings before taxes $ 216,100 Taxes 155,000 Earnings after taxes $ 61,100 Preferred stock dividends 10,000 Earnings available to common stockholders $ 51,100 Shares outstanding 150,000 Earnings per share $ 0.34 Statement of Retained Earnings For the Year Ended December 31, 20X2 Retained earnings, balance, January 1, 20X2 $ 855,400 Add: Earnings available to common stockholders, 20X2 51,100 Deduct: Cash dividends declared and paid in 20X2 153,000 Retained earnings, balance, December 31, 20X2 $ 753,500 Comparative Balance Sheets For 20X1 and 20X2 Year-End 20X1 Year-End 20X2 Assets Current assets: Cash $ 134,000 $ 66,500 Accounts receivable (net) 526,000 531,000 Inventory 649,000 719,000 Prepaid expenses 66,800 39,100 Total current assets $ 1,375,800 $ 1,355,600 Investments (long-term securities) 99,500 82,900 Gross plant and equipment $ 2,520,000 $ 3,000,000 Less: Accumulated depreciation 1,450,000 1,750,000 Net plant and equipment 1,070,000 1,250,000 Total assets $ 2,545,300 $ 2,688,500 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 315,000 $ 558,000 Notes payable 510,000 510,000 Accrued expenses 76,900 58,000 Total current liabilities $ 901,900 $ 1,126,000 Long-term liabilities: Bonds payable, 20X2 198,000 219,000 Total liabilities $ 1,099,900 $ 1,345,000 Stockholders’ equity: Preferred stock, $100 par value $ 90,000 $ 90,000 Common stock, $1 par value 150,000 150,000 Capital paid in excess of par 350,000 350,000 Retained earnings 855,400 753,500 Total stockholders’ equity $ 1,445,400 $ 1,343,500 Total liabilities and stockholders’ equity $ 2,545,300 $ 2,688,500 a. Prepare a statement of cash flows for the Crosby Corporation: (Amounts to be deducted should be indicated with parentheses or a minus sign.) b. Compute the book value per common share for both 20X1 and 20X2 for the Crosby Corporation. (Round your answers to 2 decimals places.) c. If the market value of a share of common stock is 3.6 times book value for 20X2, what is the firm’s P/E ratio for 20X2? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
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.
Refer to the following financial statements for Crosby Corporation:
| CROSBY CORPORATION Income Statement For the Year Ended December 31, 20X2 |
|||
| Sales | $ | 3,880,000 | |
| Cost of goods sold | 2,620,000 | ||
| Gross profit | $ | 1,260,000 | |
| Selling and administrative expense | 656,000 | ||
| 300,000 | |||
| Operating income | $ | 304,000 | |
| Interest expense | 87,900 | ||
| Earnings before taxes | $ | 216,100 | |
| Taxes | 155,000 | ||
| Earnings after taxes | $ | 61,100 | |
| 10,000 | |||
| Earnings available to common stockholders | $ | 51,100 | |
| Shares outstanding | 150,000 | ||
| Earnings per share | $ | 0.34 | |
| Statement of For the Year Ended December 31, 20X2 |
||
| Retained earnings, balance, January 1, 20X2 | $ | 855,400 |
| Add: Earnings available to common stockholders, 20X2 | 51,100 | |
| Deduct: Cash dividends declared and paid in 20X2 | 153,000 | |
| Retained earnings, balance, December 31, 20X2 | $ | 753,500 |
|
Comparative Balance Sheets |
|||||||
| Year-End 20X1 |
Year-End 20X2 |
||||||
| Assets | |||||||
| Current assets: | |||||||
| Cash | $ | 134,000 | $ | 66,500 | |||
| 526,000 | 531,000 | ||||||
| Inventory | 649,000 | 719,000 | |||||
| Prepaid expenses | 66,800 | 39,100 | |||||
| Total current assets | $ | 1,375,800 | $ | 1,355,600 | |||
| Investments (long-term securities) | 99,500 | 82,900 | |||||
| Gross plant and equipment | $ 2,520,000 | $ 3,000,000 | |||||
| Less: |
1,450,000 | 1,750,000 | |||||
| Net plant and equipment | 1,070,000 | 1,250,000 | |||||
| Total assets | $ | 2,545,300 | $ | 2,688,500 | |||
| Liabilities and |
|||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 315,000 | $ | 558,000 | |||
| Notes payable | 510,000 | 510,000 | |||||
| Accrued expenses | 76,900 | 58,000 | |||||
| Total current liabilities | $ | 901,900 | $ | 1,126,000 | |||
| Long-term liabilities: | |||||||
| Bonds payable, 20X2 | 198,000 | 219,000 | |||||
| Total liabilities | $ | 1,099,900 | $ | 1,345,000 | |||
| Stockholders’ equity: | |||||||
| Preferred stock, $100 par value | $ | 90,000 | $ | 90,000 | |||
| Common stock, $1 par value | 150,000 | 150,000 | |||||
| Capital paid in excess of par | 350,000 | 350,000 | |||||
| Retained earnings | 855,400 | 753,500 | |||||
| Total stockholders’ equity | $ | 1,445,400 | $ | 1,343,500 | |||
| Total liabilities and stockholders’ equity | $ | 2,545,300 | $ | 2,688,500 | |||
a. Prepare a statement of
b. Compute the book value per common share for both 20X1 and 20X2 for the Crosby Corporation. (Round your answers to 2 decimals places.)
c. If the market value of a share of common stock is 3.6 times book value for 20X2, what is the firm’s P/E ratio for 20X2? (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
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