Ch. 10, Part 1
Limited liability
Name the two factors which affect retained earnings.
Net income and dividends
Formula: Beginning RE + Net Income - Dividends = Ending Retained Earnings
Vertical analysis expresses each income statement item as a percentage of _________.
Bonus: What would we divide by when we perform vertical analysis on a balance sheet?
Sales
Bonus: total assets
During 2024, Wendy's Coffee Shop reports total liabilities of $125,000 and total equity of $345,000. Calculate Wendy's debt-to-equity ratio.
Hint: Debt to Equity Ratio = Total Liabilities / Total Equity
0.36
________ stock is the number of shares that have been sold to investors.
Bonus: What is the difference between this type of stock and issued stock?
Authorized stock
A company issues 20,000 shares of $1 par value preferred stock for $5 per share.
Record the journal entry to record the issuance of preferred stock.
Debit Cash 100,000
Credit Preferred Stock 20,000; Additional Paid-In Capital 80,000
___________ analysis calculates the amount and percentage change of an account over time.
Bonus: What is the formula we use to calculate a percent increase or decrease?
Horizontal
Bonus: (Year 2 - Year 1) / Year 1
________ is a company's ability to pay its current liabilities.
________ is a company's ability to pay its current AND long-term liabilities.
(1) liquidity
(2) solvency
Sunny's Boutique issues 2,000 shares of $1 par value common stock at $10 per share. Later, the company purchases 150 shares at a cost of $20 per share.
Record the journal entry for the purchase of treasury stock.
Debit Treasury Stock $3,000
Credit Cash $3,000
Great Outdoors issues 3,000 shares of $0.01 par value common stock to provide funds to expand the business. The issue price is $15 per share.
Record the journal entry for the issuance of common stock.
Debit Cash $45,000
Credit Common Stock $30; Additional Paid-In Capital $44,970
In 2024, Dixon Apparel's net sales totaled $1.1 million. The company's cost of goods sold totaled $423,016. Using vertical analysis, calculate COGS as a percentage of sales.
38.5%
If a company has a high inventory turnover ratio and a low average days in inventory, what does that tell us about its operations?
It sells inventory quickly
Paul's Pizza Shop issues 1,000 shares of $1 par value common stock at $28 per share. Later, the company repurchases 100 shares at a cost of $45 per share. Then, they resell the 100 shares of treasury stock at $50 per share.
Record the journal entry for reselling the treasury stock.
Debit Cash 5,000
Credit Treasury Stock 4,500; Additional Paid-In Capital 500
True/False: Companies pay dividends on treasury stock.
False
In 2024, King Photography's total assets were $345,613. In 2023, the company's total assets were $423,150. Using horizontal analysis, calculate the percent increase or decrease in total assets.
In 2024, Grey's Autoshop reports net sales of $250,000 and cost of goods sold of $187,000. Calculate the company's gross profit ratio for 2024.
Hint: Gross Profit Ratio = Gross Profit / Net Sales
25.2%
Vogue has 1,500 shares of 5%, $40 par value cumulative preferred stock issued at the beginning of 2022. All remaining shares are common stock. The company did not pay dividends in 2022 or 2023, but plans to pay total dividends of $20,000 in 2024.
Calculate the following:
(1) Preferred dividends in arrears for 2022 and 2023.
(2) Preferred dividends for 2024.
(3) Remaining dividends to common stockholders.
(1) 6,000
(2) 3,000
(3) 11,000
Number of shares: 52,000
Par value per share: $0.50
Market price per share: $15
Karen's Bakery has net income of $500,000 on sales revenue of $857,000. Total assets were $1,100,000 at the beginning of the year and $1,800,000 at the end of the year.
Calculate Karen's return on assets, profit margin, and asset turnover ratios.
Hint: Return on Assets = Net Income / Average Total Assets
Hint: Profit Margin = Net Income / Net Sales
Hint: Asset Turnover Ratio = Net Sales / Average Total Assets
Return On Assets: 34.5%
Profit Margin: 58.3%
Asset Turnover: 0.59 times
Verizon Wireless has a current ratio of 0.8 to 1, based on current assets of $400 million and current liabilities of $500 million.
How would a $50 million purchase of inventory on account affect the current ratio (increase, decrease, or no change)?
Increase (0.82)