PROBLEM 1:
WIDGET Company has the following adjusted trial balance at December 31, 2006. No dividends have been declared.

Account

Debit

Credit

Cash

$1,500

 

Accounts Receivable

2,000

 

Interest receivable

30

 

Prepaid Insurance

2,300

 

Notes Receivable

3,000

 

Equipment

12,000

 

Accumulated Depreciation

 

$300

Accounts payable

 

1,600

Accrued Expenses Payable

 

3,820

Income Taxes payable

 

2,900

Unearned rent revenue

 

600

Contributed capital

 

2,400

Retained earnings

 

1,000

Sales revenue

 

42,000

Interest Revenue

 

30

Rent revenue

 

300

Wages expense

21,600

 

Depreciation expense

300

 

Utilities expense

220

 

Insurance expense

100

 

Rent expense

9,000

 

Income Tax Expense

2,900

 

     TOTAL

$54,950

$54,950

Q1. Prepare in proper form an income statement for 2006.  Widget Company’s core operations related to computer technology.  How much net income did Widget Company generate during 2006?
Q2. Prepare in proper form a statement of retained earnings for 2006.
Q3. Prepare in proper from a balance sheet on December 31, 2006.  Are the company’s assets financed primarily by debt or equity?
Q4. Prepare the closing journal entries on December 31, 2006.

PROBLEM 2:
The comparative financial statements for Joe’s Company showed the following summarized data:

 

 

Increase (Decrease) 2004 over 2003

 

2004

2003                      Amount                 Percentage

Income Statement

 

 

Sales revenue

110,000

99,000

Cost of Goods sold

52,000

48,000

Gross Profit

58,000

51,000

Operating Expenses

36,000

33,000

Interest Expense

4,000

4,000

Income before income taxes

18,000

14,000

Income tax expense (30%)

5,400

4,200

Net Income

12,600

9,800

Balance Sheet

 

 

Cash

49,500

18,000

Accounts receivable (net)

37,000

32,000

Inventory

25,000

38,000

Property and equipment (net)

95,000

105,000

Total assets

206,500

193,000

Accounts payable

42,000

35,000

Income taxes payable

1,000

500

Note payable, long term

40,000

40,000

Total liabilities

83,000

75,500

Capital stock (par $10)

90,000

90,000

Retained earnings

33,500

27,500

Total liabilities and equity

206,500

193,000

1. Complete the final two columns shown beside each item in the comparative financial statements above.  Does anything jump out at you from the year over year analysis?
2. Given the data above, compute the following:

a. Compute the gross profit percentages in 2004 and 2003. Is the trend going in the right direction?
b. Compute the net profit margin ratios in 2004 and 2003. Is the trend going in the right direction?
c. Compute the earnings per share for 2004 and 2003. Does the trend look good or bad? Explain.
d. Stockholders’ equity totaled $100,000 at the end of 2002. Compute the return on equity ratios for 2004 and 2003. Is the trend going in the right direction?
e. Net property and equipment totaled $110,000 at the end of 2002. Compute the fixed asset turnover ratios for 2004 and 2003. Is the trend going in the right direction?
f. Compute the debt-to-assets ratios for 2004 and 2003. Is debt providing financing for a larger or smaller proportion of the company’s asset growth? Explain.
g. Compute the times interest earned ratios for 2004 and 2003. Do they look good or bad?  Explain.
h. After Joe released its 2004 financial statements, the company’s stock was trading at $18.  After the release of its 2003 financial statements, the company’s stock price was $15 per share.  Compute the P/E ratios for both years. Does it appear that investors have become more (or less) optimistic about Joe’s future success?