Reference no: EM131702346

Exercise 1 - An analysis of comparative balance sheets, the current year's income statement, and the general ledger accounts of Wellman Corp. uncovered the following items. Assume all items involve cash unless there is information to the contrary. Indicate how each item should be classified in the statement of cash flows using these four major classifications: operating activity (indirect method), investing activity, financing activity, and significant noncash investing and financing activity.

(a) Payment of interest on notes payable.

(b) Exchange of land for patent.

(c) Sale of building at book value.

(d) Payment of dividends.

(e) Depreciation.

(f) Receipt of dividends on investment in stock.

(g) Receipt of interest on notes receivable.

(h) Issuance of common stock.

(i) Amortization of patent.

(j) Issuance of bonds for land.

(k) Purchase of land.

(l) Conversion of bonds into common stock.

(m) Sale of land at a loss.

(n) Retirement of bonds.

Exercise 2 - Below is the comparative balance sheets and income statement of Cheng Inc. From this information prepare a statement of cash flows for the year ended December 2017.

CHENG INC. Comparative Balance Sheets December 31
Assets	2017	2016
Cash	$80,800	$48,400
Accounts receivable	92,800	33,000
Inventory	117,500	102,850
Prepaid expenses	28,400	26,000
Investments	143,000	114,000
Equipment	270,000	242,500
Accumulated depreciation-equipment	(50,000)	(52,000)
Total	$682,500	$514,750
Liabilities and Stockholders' Equity
Accounts payable	$112,000	$67,300
Accrued expenses payable	16,500	17,000
Bonds payable	110,000	150,000
Common stock	220,000	175,000
Retained earnings	224,000	105,450
Total	$682,500	$514,750

 

CHENG INC. Income Statement For the Year Ended December 31, 2017
Sales revenue		$392,780
Less:
Cost of goods sold	$135,460
Operating expenses, excluding depreciation	12,410
Depreciation expense	46,500
Income tax expense	27,280
Interest expense	4,730
Loss on disposal of plant assets	7,500	233,880
Net income		$158,900

Additional information:

1. New equipment costing $85,000 were purchased for cash during the year.

2. Old equipment having an original cost of $57,500 was sold for $1,500 cash.

3. Bonds matured and were paid off at face value for cash.

4. A cash dividend of $40,350 was declared and paid during the year.

Further analysis reveals that accounts payable pertain to merchandise creditors.

Requirement - Prepare a statement of cash flows using the indirect method.

Exercise 3 -

Year 1

Net income-year ended 12/31                $12,500

Dividends                                              3,000

Return on net operating assets                13%

Return on equity                                    15%

Cost of equity                                        12%

What is Yutter's sustainable equity growth rate?

A. 9.12%

B. 9.88%

C. 11.4%

D. 12.0%

Exercise 4 - Below are selected ratios for Manufacturers Corporation. Use this information answer the following questions.

	Year 1	Year 2	Year 3
1. Net operating asset turnover	1.4	1.31	1.25
2. Inventory turnover	5.6	5.0	4.6
3. Accounts receivable turnover	12.1	11.9	12.1
4. Fixed assets turnover	1.3	1.29	1.29
5. Net operating profit margin	4.5%	4.6%	4.8%
6. Net operating assets/equity	2.10	1.98	1.77
7. EBIT/revenues	8.9%	8.6%	8.6%
8. Gross margin	20.1%	19.9%	19.8%
9. Income tax rate	35%	35%	35%

a. Calculate return on net operating assets for all three years. Identify reasons for any changes.

b. Calculate return on equity for all three years. Comment on changes.