2-8. Identify whether each of the following items increases or decreases cash flow:

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1 Problems 2-8. Identify whether each of the following items increases or decreases cash flow: Increase in accounts receivable Increase in notes payable Depreciation expense Increase in investments Decrease in accounts payable Decrease in prepaid expenses Increase in inventory Dividend payment Increase in accrued expenses Increase in accounts receivable decreases cash flow (use) Increase in notes payable increases cash flow (source) Depreciation expense increases cash flow (source) Increase in investments decreases cash flow (use) Decrease in accounts payable decreases cash flow (use) Decrease in prepaid expense increases cash flow (source) Increase in inventory decreases cash flow (use) Dividend payment decreases cash flow (use) Increase in accrued expenses increases cash flow (source) Quantum Technology had $640,000 of retained earnings on December 31, The company paid common dividends of $30,000 in 2001 and had retained earnings of $500,000 on December 31, How much did Quantum Technology earn during 2001, and what would its earnings per share be if 40,000 shares of common stock were outstanding? Quantum Technology Retained earnings, December 31, $ 640,000 Less: Retained earnings, December 31, ,000 Change in retained earnings... $ 140,000 Add: Common stock dividends... 30,000 Earnings available to common stockholders... $ 170,000 S-4

2 Earnings per share $170,000 = 40,000shares = $4.25per share For December 31, 2001, the balance sheet of Baxter Corporation is as follows: Current Assets Cash... $ 10,000 Accounts receivable... 15,000 Inventory... 25,000 Prepaid expenses... 12,000 Fixed Assets Plant and equipment (gross) $250,000 Less: Accumulated Depreciation... 50,000 Net plant and equipment ,000 Total assets... $262,000 Liabilities Accounts payable... $ 12,000 Notes payable... 20,000 Bonds payable... 50,000 Stockholders' Equity Common stock... $ 75,000 Paid-in-capital... 25,000 Retained earnings... 80,000 Total liabilities and Stockholders' equity...$262,000 Sales for 2001 were $220,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was $22,000. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, and interest expense on the bonds payable was 12 percent. These interest expenses are based on December 31, 2000, balances. The tax rate averaged 20 percent. Two thousand dollars in preferred stock dividend were paid and $8,400 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding. During 2001, the cash balance and prepaid expenses balance were unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 2001, at a cost of $35,000. Accounts payable increased by 25 percent. Notes payable increased by $6,000 and bonds payable decreased by $10,000, both at the end of the year. The common stock and paid-in capital in excess of par accounts did not change. a. Prepare an income statement for b. Prepare a statement of retained earnings for c. Prepare a balance sheet as of December 31, S-5

3 Baxter Corporation 2001 Income Statement a. Sales... $220,000 Cost of good sold (60%) ,000 Gross profit... $ 88,000 Selling and administrative expense... 22,000 Depreciation expense (8%)... 20,000 1 Operating profit (EBIT)... $ 46,000 Interest expense... 8,000 2 Earnings before taxes... $ 38,000 Taxes (20%)... 7,600 Earnings after taxes (EAT)... $ 30,400 Preferred stock dividends... 2,000 Earnings available to common stockholder. $ 28,400 Shares outstanding... 10,000 Earnings per share... $ % * $250,000 = $20,000 2 (10% * $20,000) + (12% * $50,000) = $8,000 S-6

4 b Statement of Retained Earnings Retained earnings balance, January 1, 2001 $ 80,000 Add: Earnings available to common stockholders, ,400 Deduct: Cash dividend declared in ,400 Retained earnings balance, December 31, $100, Balance Sheet Current Assets Liabilities Cash... $10,000 Accounts payable $15,000 Accounts 16,500 Notes payable... 26,000 receivable... Inventory... 27,500 Bonds payable... 40,000 Prepaid expenses 12,000 $66,000 $81,000 Fixed Assets Stockholders' Equity Gross plant... $285,000 Common stock... $ 75,000 Accumulated depr... (70,000) 3 Paid in capital in excess of par... 25,000 Net plant ,000 Retained earnings 100,000 Total assets... $281,000 Total Liability & Equity... $281,000 3 $50,000 + $20,000 = $70,000 S-7

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