Chapter 9, Problem 9.27P

To determine

Concept Introduction:

Balance Sheet: The financial Statement that reports the total assets, total liabilities and owner's equity of the business refers to a balance sheet. Balance sheet is prepared for specific time period either monthly, quarterly, half yearly or even annually to evaluate a financial health of the business and determine the net worth of the business.

Requirement 1a:

To prepare:

The completed balance sheet of Hoeman Inc, for the year ended December 31^st, 2016 and 2017.

Answer to Problem 9.27P

Below is the completed balance sheet of Hoeman Inc. for the year ended December 31^st, 2016 and December 31^st, 2017:

HOEMAN INC. Comparative Balance Sheets at December 31, 2017 and 2016
Assets	2017($)	2016($)
Current Assets:
Cash	$26,000	$23,000
Accounts receivable	62,000	67,000
Inventory	78,000	88,000
Total current assets	$166,000	$178,000
Land	$70,000	70,000
Buildings	207,500	145,000
Less: Accumulated depreciation	(60,000)	(52,500)
Total land, buildings and equipment	217,500	162,500
Total assets	383,500	340,500
Liabilities
Current liabilities:
Accounts payable	$83,500	$98,500
Notes Payable	77,500	62,000
Total current liabilities	$161,000	160,500
Long-term debt	$96,000	69,500
Stockholders' Equity
Common stock	$25,000	$22,500
Retained earnings	101,500	88,000
Total stockholders' equity	$126,500	$110,500
Total liabilities and stockholders' equity	$383,500	$340,500

Explanation of Solution

The missing amounts in balance sheet items are computed with the given additional information as below:

Accounts Receivables:

Accounts Receivables for December 31^st, 2016: $\$67,000$

Decrease in accounts receivables for the year: $\$5,000$

Accounts Receivables for December 31^st, 2017 $=\$67,000-\$5,000$

Accounts Receivables for December 31^st, 2017= $\$62,000$

Land:

Land at December 31^st, 2016: $\$70,000$

Land at December 31^st, 2017: $\$70,000$

The cost of land remains the same for the current year as it was not affected by any transactions and book value should be considered.

Buildings:

Buildings at December 31^st, 2016: $\$145,000$

Cost of new buildings for 2017: $\$62,500$

Buildings= $\$145,000+\$62,500$

Buildings= $\$207,500$

Accounts Payable:

Total current liabilities for December 31^st, 2017: $\$161,000$

Notes payable: $\$77,500$

Accounts payable for December 31^st, 2017 is computed by using the formula,

  $Totalcurrentliabilities=AccountsPayable+NotesPayable$

  $\$161,000=AccountsPayable+\$77,500$

Accounts Payable $=\$161,000-\$77,500$

Accounts payable for December 31^st, 2017= $\$83,500$

Retained earnings:

Retained earnings for December 31^st, 2016: $\$88,000$

Net income for 2017: $\$47,000$

Dividends paid during the year 2017: $\$33,500$

The retained earnings for the year end 2017 is computed by using the below formula:

  $Endingretainedearnings=Beginningretainedearnings+Netincome–Dividendspaid$

Ending retained earnings= $\$88,000+\$47,000-\$33,500$

Ending retained earnings= $\$101,500$

Retained earnings for December 31^st, 2017 is $\$101,500$

Long-term debt:

The long-term debt for the year end 2017 is computed by using the formula,

  $\begin{array}{l}Totalliabilitiesandstockholder’sequity=TotalCurrentLiabilities+Long-termdebt\\ +TotalStockholders’equity\end{array}$

Total liabilities and stockholder's equity: $\$383,500$

Total current liabilities: $\$161,000$

Using the above formula,

  $\$383,500=\$161,000+Long-termdebt+\$126,500$

  $\$383,500=Long-termdebt+\$287,500$

  $Long-termdebt=\$383,500-\$287,500$

Long-term debt $=\$96,000$

Note: Total liabilities and stockholder's equity is $383,500 considering the balance sheet equation:

  $TotalAssets=Totalliabilities+TotalStockholder’sEquity$

Conclusion:

Hence total assets of $383,500 is considered to be the total liabilities and stockholder's equity.

To determine

Concept Introduction:

Statement of Cash Flow: The financial statement which represents the cash inflows and outflows from operating, investing and financing activities of the company refers to cash flow statement. It is the measure used to ascertain the cash generated or used by the company during a given period.

Requirement 1b:

To prepare:

The statement of cash flow of Hoeman Inc. for the year ended December 31^st, 2017.

Answer to Problem 9.27P

Hoeman Inc. Statement of cash flows for the year ended December 31st, 2017
Cash flows from Operating activities:	$	$
Net income	47,000
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation on fixed assets (Buildings)	60,000
(Increase)/Decrease in current assets:
Accounts Receivables	5,000
Inventory	10,000
Increase/(Decrease) in current liabilities:
Accounts payable	(15,000)
Notes payable	15,500
Net cash provided by operating activities		122,500
Cash flows from investing activities:
Purchase of new buildings	(62,500)
Net cash used in investing activities		(62,500)
Cash flow from financing activities:
Payment of dividends	(33,500)
Net cash used in financing activities		(33,500)
Net increase in cash		26,500

Explanation of Solution

The general rule of preparing indirect cash flow statement states the following things:

1. If asset account increases, deduct the amount from net income.
2. If asset account decreases, add the amount to net income.
3. If liability account increases, add the amount to net income.
4. If liability account decreases, deduct the amount from net income.

Accounts Receivables:

Accounts receivables for the year end December 31^st, 2017 is decreased by $5,000 and hence it is added to the net income.

Inventory:

Inventory for the year end 2016: $\$88,000$

Inventory for the year end 2017: $\$78,000$

This indicates the decrease in the inventory for the year end 2017 by $10,000 and hence it is added to the net income.

Accounts Payable:

Accounts payable for the year end 2016: $\$98,500$

Accounts payable for the year end 2017: $\$83,500$

This indicates the decrease in accounts payable for the year end 2017 by $15,000 and hence it is deducted from net income.

Notes payable:

Notes payable for the year end 2016: $\$62,000$

Notes payable for the year end 2017 $:\$77,500$

This indicates the increase in notes payable for the year end 2017 of $15,500 and hence it is added to the net income.