Use Questions 12 And 3 To Answer 41 Building A Balance Sheet
Use Question 12 And 3 To Answer 41 Building A Balance Sheet Lo1
Use question 1,2 and 3 to answer. Building a Balance Sheet [LO1] KCCO, Inc., has current assets of $5,300, net fixed assets of $24,900, current liabilities of $4,600, and long-term debt of $10,300. What is the value of the shareholders’ equity account for this firm? How much is net working capital?
Building an Income Statement [LO1] Billy’s Exterminators, Inc., has sales of $817,000, costs of $343,000, depreciation expense of $51,000, interest expense of $38,000, and a tax rate of 35 percent. What is the net income for this firm?
Dividends and Retained Earnings [LO1] Suppose the firm in Problem 2 paid out $95,000 in cash dividends. What is the addition to retained earnings?
Paper For Above instruction
The task involves several interrelated financial calculations based on provided data, specifically focusing on constructing a balance sheet, income statement, and understanding retained earnings. This comprehensive financial analysis enables a better grasp of the company’s financial position and performance.
Building a Balance Sheet and Calculating Shareholders' Equity and Net Working Capital
To determine the shareholders’ equity for KCCO, Inc., we start with the fundamental accounting equation: Assets = Liabilities + Shareholders’ Equity. The current assets are $5,300, and net fixed assets are $24,900, giving total assets of $30,200. Liabilities include current liabilities of $4,600 and long-term debt of $10,300, totaling $14,900. Therefore, the shareholders’ equity is calculated as:
Shareholders’ Equity = Total Assets - Total Liabilities = $30,200 - $14,900 = $15,300.
Net Working Capital (NWC) measures a company's liquidity and is defined as:
NWC = Current Assets - Current Liabilities = $5,300 - $4,600 = $700.
Thus, KCCO, Inc. has a shareholders’ equity of $15,300 and a net working capital of $700.
Constructing the Income Statement and Calculating Net Income
Producing the income statement for Billy’s Exterminators involves calculating gross profit, operating income, taxable income, and finally net income. Starting with sales of $817,000 and costs of $343,000, gross profit is:
Gross Profit = Sales - Costs = $817,000 - $343,000 = $474,000.
Subtracting depreciation expense of $51,000 yields operating income:
Operating Income = Gross Profit - Depreciation = $474,000 - $51,000 = $423,000.
Interest expense of $38,000 reduces this to taxable income:
Taxable Income = Operating Income - Interest = $423,000 - $38,000 = $385,000.
Applying the tax rate of 35%, the tax amount is:
Taxes = 0.35 × $385,000 = $134,750.
Consequently, net income is:
Net Income = Taxable Income - Taxes = $385,000 - $134,750 = $250,250.
Calculating Retained Earnings Addition
If Billy’s Exterminators paid dividends of $95,000, the addition to retained earnings is the net income minus dividends:
Addition to Retained Earnings = Net Income - Dividends = $250,250 - $95,000 = $155,250.
This amount will be added to the previous retained earnings balance, increasing the company's retained earnings for the period.
Conclusion
This integrated financial analysis underscores the importance of understanding basic accounting and financial principles. By calculating shareholder’s equity, net working capital, net income, and retained earnings, managers and investors gain insight into the company’s liquidity, profitability, and retained growth potential. Accurate financial statements facilitate better decision-making and strategic planning, essential for sustained corporate success.
References
- Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance (12th ed.). McGraw-Hill Education.