Penn Foster Exam: 061696RR - Corporations 1 The Amanda Corp

Penn Foster Exam: 061696RR - CORPORATIONS 1. The Amanda Corporation Stockholders' Equity section includes the following information

Analyze the given sections of the stockholders' equity for The Amanda Corporation to determine the total selling price of the preferred stock. The information includes Preferred Stock valued at $12,000, Paid-in Capital in Excess of Par—Preferred at $2,700, Common Stock at $15,000, Paid-in Capital in Excess of Par—Common at $4,100, and Retained Earnings at $8,200. Calculate the total amount received from issuing the preferred stock, considering the paid-in capital and the par value of the preferred stock.

Furthermore, evaluate Rick Company's dividend distribution situation, where a $40,000 cash dividend is declared amid cumulative preferred stock and common stock with specified par values and dividends. Determine the breakdown of dividends to preferred and common shareholders, including the arrears of preferred dividends.

Additionally, interpret the utility of vertical analysis by identifying the base item on the income statement, and determine cash flows from operating activities using the indirect method based on provided receivable and net income figures.

Perform trend analysis on cost of goods sold across three years with 2009 as the base year, and analyze treasury stock transactions involving Casey Company's sale of treasury shares at different prices, adjusting paid-in capital accordingly.

Calculate the percentage change in operating expenses relative to net sales over two periods using vertical analysis, and compute the rate of return on equity given net income, preferred dividends, sales, and average common stockholders' equity.

Assess stock issuance for equipment in exchange for stock, detailing the journal entry components, and identify the stockholder rights associated with earnings distributions. Evaluate cash flow reporting for operating expenses with changes in prepaid expenses, and verify the accuracy of a statement of cash flows by analyzing changes in cash and cash equivalents.

Estimate cash payments for merchandise using inventory changes, calculate the quick ratio based on current assets and liabilities, and determine the rate of return on total assets considering net income, interest, and income taxes. Analyze dividend distributions to preferred and common stockholders for noncumulative preferred stock, and compute total par value for Isaiah Corporation's stockholders' equity.

Calculate Casey Company's cash conversion cycle based on turnover days, and determine net cash flows from operating activities given changes in net income, depreciation, accounts payable, and notes receivable, using the indirect method.

Paper For Above instruction

The analysis of stockholders' equity, dividend distributions, financial ratios, and cash flow components encompasses fundamental concepts essential for comprehensive financial assessment and understanding corporate financial health. These evaluations assist investors, management, and auditors in making informed decisions based on accurate financial data interpretation.

First, determining the total selling price of preferred stock from The Amanda Corporation's stockholders' equity involves summing the par value and the paid-in capital in excess of par. The Preferred Stock amount is $12,000, and the Paid-in Capital in Excess of Par—Preferred is $2,700. These figures indicate that the preferred stock's total selling price equals the sum of these two components, which is $14,700. This calculation confirms that the preferred stock's issuance accounted for a total consideration of $14,700, comprising the par value and the additional paid-in capital (Kieso, Weygandt, & Warfield, 2020).

Next, the dividend distribution scenario in Rick Company illustrates complexities in allocating dividends between preferred and common shareholders, especially when prior arrears exist. The company declares a $40,000 dividend, and preferred stock is $6,000 in arrears with a 6% dividend rate. The preferred shareholders are entitled to their cumulative dividends before any distribution to common shareholders. Therefore, the preferred dividend share includes the current dividend plus arrears, calculated as $6,000 for the current period, and the arrear amount, totaling $12,000. The remaining distributable amount is allocated to common shareholders, resulting in $28,000 for common stockholders. This allocation aligns with dividend policy principles and ensures preferred shareholders' rights are respected (Higgins, 2017).

Vertical analysis, a key tool for financial statement analysis, uses a base item for comparison to assess relative sizes of accounts. On the income statement, this base item is typically net sales because it provides a reference point for analyzing expenses and profitability. Understanding the proportions of expenses relative to sales enhances analysis of operational efficiency and profitability ratios (White, Sondhi, & Fried, 2003).

Regarding cash flows from operations, the indirect method starts with net income and adjusts for changes in working capital accounts such as accounts receivable. The provided accounts receivable increased from $215,000 to $245,000, a $30,000 increase, which reduces cash flow since it indicates cash used to increase receivables. Combining net income of $300,000 with this adjustment yields a cash flow of $270,000 ($300,000 - $30,000). This reflects the cash generated from operating activities, illustrating the importance of working capital management (Brigham & Ehrhardt, 2016).

The trend analysis of cost of goods sold (COGS) across three years shows incremental increases relative to a base year. Calculating trend percentages involves dividing current year's COGS by the base year's COGS. For 2011, COGS is $28,600, with 2009 as the base at $25,600. The trend percentage equals ($28,600 / $25,600) × 100 = 111.72%, indicating an 11.72% increase over the base year (Higgins, 2017).

In treasury stock transactions, Casey Company sells 500 shares bought at $21 for $18. per share. The original purchase cost $21 per share, totaling $10,500. Selling at $18 per share results in a total sale of $9,000, a loss of $1,500. This loss impacts the Paid-in Capital in Excess of Par—Treasury account, which initially credits $2,400 for treasury stock. After adjustment, the remaining balance becomes a $900 credit, acknowledging the sale loss (Kieso et al., 2020).

Vertical analysis of operating expenses as a percentage of net sales provides insights into cost control. When sales increase from $40,000 to $80,000, and expenses rise from $30,000 to $50,000, the expense ratios are calculated as percentages: in the first period, ($30,000 / $40,000) × 100 = 75%, and in the second, ($50,000 / $80,000) × 100 = 62.5%. This change indicates improved expense management relative to sales growth (Higgins, 2017).

The rate of return on equity (ROE) measures profitability relative to shareholders' equity. Calculated as (Net income - Preferred dividends) / Average common equity, the given data results in an ROE of (($22,700 - $3,000) / $86,000) × 100 ≈ 22.9%, reflecting effective use of equity to generate profits (Brigham & Ehrhardt, 2016).

Stock issuance for equipment in exchange for stock involves debiting the equipment account by the market value ($3,000) and crediting common stock for its par value ($2,400) with the remaining credited to paid-in capital. This transaction does not include crediting common stock for $3,000, as that exceeds the par value, showcasing proper valuation and recording principles (Higgins, 2017).

The stockholder's right to receive earnings in the form of dividends is a fundamental shareholder right. Earnings are distributed as dividends, which are cash or additional stock, to shareholders with priority over other rights such as voting or liquidation rights (White et al., 2003).

Cash flow reporting for operating expenses, besides depreciation, includes adjustments for changes in prepaid expenses. Since prepaid expenses decreased by $7,000, actual cash paid is $335,000 + $7,000 = $342,000, as cash payments account for the decrease in assets (Brigham & Ehrhardt, 2016).

The journal entry for the equipment purchase involves debiting equipment and crediting common stock at the appropriate amounts based on par value and the total market value of $3,000. Part of the transaction involves crediting paid-in capital in excess of par if the issued stock exceeds the par value, but this is not part of the transaction if the stock equals the market value accurately recorded (Higgins, 2017).

The accuracy of the cash flows statement, specifically the cash and cash equivalents balance, can be verified by analyzing changes over the period, not just revenue, equity, or asset and liability accounts alone. Ensuring consistency between cash flow activities and cash balance movements underpins financial statement validity (White et al., 2003).

To compute cash payments for merchandise, inventory changes are considered, with beginning inventory at $60,000 and ending at $90,000, and COGS at $850,000. The formula adjusts COGS by the inventory increase, resulting in payments of $850,000 + ($90,000 - $60,000) = $880,000 (Brigham & Ehrhardt, 2016).

The quick ratio, also called acid-test ratio, assesses short-term liquidity. It is calculated as: (Cash + Accounts Receivable + Short-term Investments) / Current Liabilities. With cash of $56,000, receivables of $12,000, investments of $25,000, and liabilities of $60,000, the ratio is ($56,000 + $12,000 + $25,000) / $60,000 ≈ 1.55, indicating strong liquidity (Higgins, 2017).

Jane's return on total assets considers net income, interest expense, and taxes. The formula is (Net income + Interest expense) / Average total assets. With net income of $2,000, interest of $1,600, and average total assets of $100,000, the return is ($2,000 + $1,600) / $100,000 ≈ 3.6%, showing moderate asset utilization efficiency (Brigham & Ehrhardt, 2016).

Finally, the distribution of dividends in the case of noncumulative preferred stock involves paying only current dividends if earnings are sufficient. For a declared dividend of $40,000 and noncumulative preferred stock with a $6,000 dividend, the preferred shareholders receive $6,000, and the remaining $34,000 is distributed to common stockholders (Higgins, 2017). The Isaiah Corporation's total par value calculation involves summing the par values of preferred ($22,000) and common stock ($48,000), totaling $70,000. Casey Company's cash conversion cycle, given the turnover days, equals 81 days. The net cash flows from operating activities are computed by starting from net income and adjusting for changes in working capital, including depreciation and receivables, resulting in approximately $55,000.

References

• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
• Higgins, R. C. (2017). Analysis for Financial Management. McGraw-Hill Education.
• Kieso, D., Weygandt, J., & Warfield, T. (2020). Intermediate Accounting. Wiley.
• White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements. Wiley.