The following information pertains to Diane Company. Assume that all balance sheet amounts represent both average and ending balance figures and that all sales were on credit. Use this information to answer the question that follow. Assets Cash and short-term investments $ 30,000 Accounts receivable (net) 20,000 Inventory 15,000 Property, plant, and equipment 185,000 Total assets $250,000 Liabilities and Stockholders' Equity Current liabilities $ 45,000 Long-term liabilities 70,000 Stockholders' equity—Common 135,000 Total liabilities and stockholders' equity $250,000 Income Statement Sales $85,000 Cost of goods sold 45,000 Gross margin $40,000 Operating expenses (15,000) Interest expenses (5,000) Net income $20,000 Number of shares of common stock outstanding 6,000 Market price of common stock $20 Total dividends paid $9,000 Cash provided by operations $30,000 Using the data provided for Diane Company, what is the price-earnings ratio? a.8.0 times b.2.5 times c.6.0 times d.4.0 times
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.
The following information pertains to Diane Company. Assume that all
Assets
Cash and short-term investments $ 30,000
Accounts receivable (net) 20,000
Inventory 15,000
Property, plant, and equipment 185,000
Total assets $250,000
Liabilities and
Current liabilities $ 45,000
Long-term liabilities 70,000
Stockholders' equity—Common 135,000
Total liabilities and stockholders' equity $250,000
Income Statement
Sales $85,000
Cost of goods sold 45,000
Gross margin $40,000
Operating expenses (15,000)
Interest expenses (5,000)
Net income $20,000
Number of shares of common stock outstanding 6,000
Market price of common stock $20
Total dividends paid $9,000
Cash provided by operations $30,000
Using the data provided for Diane Company, what is the price-earnings ratio?
a.8.0 times
b.2.5 times
c.6.0 times
d.4.0 times
Price earnings ratio of the company means ratio of company's share price with its earnings per share.
Price Earnings ratio = Market price per share/ Earnings per share
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