Principles of Account II

Principles of Account II 1. Sharp Company has $18,000 to invest. The company is trying to decide between two alternative uses of the funds as follows:

Invest in Project A Invest in Project B

Investment required $ 18,000 $ 18,000 Annual cash inflows $ 6,500 $ 0 Single cash inflow at the end of 12 years $ 68,000 Life of the project 12 years 12 years

Sharp Company uses a 17% discount rate. (Ignore income taxes.) Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: a. Determine the net present value. (Negative amounts should be indicated by a minus sign. Round discount

factor(s) to 3 decimal places, other intermediate calculations and final answers to the nearest whole dollar.)

Net Present Value Project A $ Project B $

b. Which investment would you recommend that the company accept?

Project A

Project B

2. Wriston Company has $300,000 to invest. The company is trying to decide between two alternative uses of the funds. The alternatives are as follows:

A B Cost of equipment required $ 300,000 $ 0 Working capital investment required $ 0 $ 300,000 Annual cash inflows $ 56,000 $ 48,000 Salvage value of equipment in nine years $ 14,000 $ 0 Life of the project 9 years 9 years

The working capital needed for project B will be released for investment elsewhere at the end of nine years. Wriston Company uses a 10% discount rate. (Ignore income taxes.) Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: a. Calculate net present value for each project. (Negative amounts should be indicated by a minus sign.Leave

no cells blank - be certain to enter "0" wherever required. Round discount factor(s) to 3 decimal places,

other intermediate calculations and final answers to the nearest whole dollar.)

Net Present Value Project A $ Project B $

b. Which investment alternative (if either) would you recommend that the company accept?

Project A

Project B

3. On January 2, Fred Critchfield paid $19,500 for 990 shares of the common stock of Acme Company. Mr. Critchfield received an $0.85 per share dividend on the stock at the end of each year for six years. At the end of six years, he sold the stock for $23,000. Mr. Critchfield has a goal of earning a minimum return of 17% on all of his investments. (Ignore income taxes.) Click here to view Exhibit 11B-1 and Exhibit 11B-2, to determine the appropriate discount factor(s) using tables. Required: a. Determine the net present value. (Negative amount should be indicated by a minus sign. Round discount

factor(s) to 3 decimal places, other intermediate calculations and final answer to the nearest whole dollar.)

Net present value $ b. Did Mr. Critchfield earn a 17% return on the stock?

No

Yes

4. For the just completed year, Strident Company had net income of $70,000. Balances in the company’s current asset and current liability accounts at the beginning and end of the year were as follows:

December 31

End of Year

Beginning of Year

Current assets: Cash $ 60,000 $ 82,000 Accounts receivable $ 152,000 $ 182,000 Inventory $ 439,000 $ 370,000 Prepaid expenses $ 11,500 $ 14,000 Current liabilities: Accounts payable $ 354,000 $ 400,000 Accrued liabilities $ 8,000 $ 12,500 Income taxes payable $ 33,000 $ 29,000

The Accumulated Depreciation account had total credits of $48,000 during the year. Required: Using the indirect method, determine the net cash provided by (used in) operating activities for the year. (Amounts to be deducted and negative amounts should be indicated with a minus sign.)

Strident Company Statement of Cash Flows—Indirect Method (partial)

For This Year Ended December 31

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$ Adjustments to convert net income to a cash basis:

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$

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Net cash (Click to select)

operating activities $ 5. Paisley Company prepared the following statement of cash flows for the current year:

Paisley Company Statement of Cash Flows—Indirect Method

Operating activities:

Net income $ 41,400 Adjustments to convert net income to cash basis:

Depreciati on $ 20,600

Increase in accounts receivable

(60,200 )

Increase in inventory (25,400 )

Decrease in prepaid expenses

9,600

Increase in accounts payable

53,600

Decrease in accrued liabilities

(10,900 )

Increase in income taxes payable

3,000 (9,700 )

Net cash provided by operating activities

31,700

Investing activities:

Proceeds from the sale of equipment

15,700

Loan to Allen Company

(40,200 )

Additions to plant and equipment

(121,400 )

Net cash used for investing activities

(145,900 )

Financing activities:

Increase in bonds payable

90,000

Increase in common stock

39,400

Cash dividends (29,900 )

Net cash provided by financing activities

99,500

Net decrease in cash

(14,700)

Cash balance, beginning of year

27,300

Cash balance, end of year

$ 12,600

Required:

Compute Paisley Company’s free cash flow for the current year. (Negative amount should be indicated by a minus sign.)

Free cash flow $ 6. A comparative balance sheet and income statement for Eaton Company follow:

Eaton Company Comparative Balance Sheet

December 31, 2011 and 2010 2011 2010 Assets Cash $ 61 $ 18 Accounts receivable 306 230

Inventory 157 194 Prepaid expenses 8 6

Total current assets 532 448

Property, plant, and equipment

524 446

Less accumulated depreciation

85 71

Net property, plant, and equipment

439 375

Long-term investments 28 34

Total assets $ 999 $ 857

Liabilities and Stockholders' equity

Accounts payable $ 304 $ 225

Accrued liabilities 72 79

Income taxes payable 73 65

Total current liabilities 449 369

Bonds payable 196 172

Total liabilities 645 541

Common stock 207 222

Retained earnings 147 94

Total stockholders’ equity

354 316

Total liabilities and stockholders' equity

$ 999 $ 857

Eaton Company

Income Statement For the Year Ended December 31, 2011

Sales $ 754 Cost of goods sold 449

Gross margin 305 Selling and administrative expenses

218

Net operating income 87

Nonoperating items:

Gain on sale of investments

$ 6

Loss on sale of equipment

(2) 4

Income before taxes 91

Income taxes 23 Net income $ 68

During 2011, Eaton sold some equipment for $19 that had cost $31 and on which there was accumulated depreciation of $10. In addition, the company sold long-term investments for $12 that had cost $6 when purchased several years ago. A cash dividend was paid during 2011 and the company, repurchased $15 of its own stock. Eaton

did not retire any bonds during 2011. Required: 1. Using the indirect method, determine the net cash for operating activities for 2011. (Negative amount should

be entered with a minus sign.)

Net cash provided by

operating activities $ 2. Using the information in (1) above, along with an analysis of the remaining balance sheet accounts, prepare a

statement of cash flows for 2011. (Amounts to be deducted and negative amounts should be indicated with a minus sign.)

Eaton Company

Statement of Cash Flows For the Year Ended December 31, 2011

Operating activities:

Net income

$ Adjustments to convert net income to cash basis:

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$

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Net cash provided by

operating activities Investing activities:

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Net cash used in

investing activities Financing activities:

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Net cash used in

financing activities

Net increase in cash

Cash balance, January 1, 2011 Cash balance, December 31, 2011 $

7. Foxboro Company’s income statement for Year 2 follows:

Foxboro Company Income Statement

Sales $ 718,000 Cost of goods sold 354,000 Gross margin 364,000 Selling and administrative expenses 218,000

Net operating income 146,000 Gain on sale of equipment 8,000

Income before taxes 154,000 Income taxes 61,600 Net income $ 92,400

Its balance sheet amounts at the end of Years 1 and 2 are as follows:

Foxboro Company Balance Sheet

Year 2 Year 1 Assets Cash $ 49,200 $ 63,500 Accounts receivable 260,000 141,000

Inventory 319,000 283,000 Prepaid expenses 8,000 16,000

Total current assets 636,200 503,500

Plant and equipment 630,000 501,000

Accumulated depreciation 165,600 130,600

Net plant and equipment

464,400 370,400

Loan to Harker Company

47,000 0

Total assets $ 1,147,600 $ 873,900

Liabilities and Stockholders' equity

Accounts payable $ 318,000 $ 264,000

Accrued liabilities 42,000 51,000

Income taxes payable 84,800 80,900

Total current liabilities 444,800 395,900

Bonds payable 206,000 115,000

Total liabilities 650,800 510,900

Common stock 344,000 272,000

Retained earnings 152,800 91,000

Total stockholders' equity

496,800 363,000

Total liabilities and stockholders' equity

$ 1,147,600 $ 873,900

Equipment that had cost $30,700 and on which there was accumulated depreciation of $11,800 was sold during Year 2 for $26,900. The company declared and paid a cash dividend during Year 2. It did not retire any bonds or repurchase any of its own stock. Required: 1. Using the indirect method, compute the net cash for operating activities for Year 2. (Negative amount should

be indicated by a minus sign.)

Net cash (Click to select)

operating activities $ 2. Prepare a statement of cash flows for Year 2. (Amounts to be deducted and negative amounts should be

indicated with a minus sign.)

Foxboro Company Statement of Cash Flows

Year ending last day of Year 2 Operating activities:

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$ Adjustments to convert net income to cash basis:

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$

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Net cash (Click to select)

operating activities Investing activities:

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Net cash (Click to select)

investing activities Financing activities:

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Net cash (Click to select)

financing activities

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Cash balance, beginning of year Cash balance, end of year $

3. Compute the free cash flow for Year 2. (Negative amount should be indicated by a minus sign.)

Free cash flow $