Question

Johnsn and Hill formed a company, and 2018 was their first year of operation.

a) To establish Johnson & Hill each contributed a total of $55,000 in exchange for common stock.

b) Johnson & Hillt specializes in high-end parties. The first year they conducted 96 events and revenue for the first year amounted to $480,000, of which 95% was to be paid by the date of the event and the remainder due within 30 days of the event

c) Clients owe $16,000 at the end of the year from the services provided in December.

d) At the beginning of the year, a storage building was rented, signing a two-year lease for $15,000 per year and making a $4,000 refundable security deposit. The first year’s lease payment and the security deposit were paid at the beginning of the year.

e) At the beginning of the year, the company purchased a computerized stage and lighting for $120,000 expected to be useful for twelve years. The company paid 20% down in cash and signed a four-year note at the bank for the remainder (with 10% interest-only to be paid annually until maturity). They also purchased a flatbed trailer to haul it with, for $8,000, also with an expected 15 year life. Johnson & Hill must lease a large truck to haul the trailer for each event, which costs $1,000 per day.

f) Other operating expenses, including wages, deprecation on other equipment, utilities, and rent on the storage building noted in (d) and (e) above, totaled $136,000 for the first year. No expenses were accrued or unpaid at the end of the year.

g) Johson & Hill purchased other equipment (tables & carts, ice machine, food heating trays and bags, helium tanks, music system, etc) for $10000 with an estimated life of 10 years and no salvage value. Salaries and wages for the year total $109467 including payroll taxes.

h) The company declared and paid a $50,000 cash dividend at the end of the first year.

i) Johnson & Hill is in the 35% corporate tax bracket.

1. Prepare a balance sheet as of the end of the first year.

2. Prepare a statement of retained earnings as of the end of the first year.

3. Prepare a statement of cash flows for the first year using the direct method in the Operating Activities section.

4. Complete a vertical analysis of the Income statement.

5. Did the company generate more or less cash flow from operations than it earned in net income? Explain why there is a difference.

6. Compute, explain & analyze the following ratios:

a) Gross Profit

b) Operating Leverage ratio

c) Return on common equity

d) Current ratio

e) Operating Cash flow to current liabilities

f) Long-term debt to assets

g) Interest coverage

Answer 1

1. Balance Sheet as at 31st December, 2018

Particulars	Amount ($)	Amount ($)
Assets :
Non Current Assets -
Computerized Stage	1,20,000
Flatbed Trailer	8,000
Other Equipment (tables & carts etc...)	10,000	1,38,000
Current Assets -
Security Deposit (pertaining to leasehold Storage Building)	4,000
Debtors / Receivables	0
Bank / Cash	3,48,400	3,52,400
TOTAL ASSETS		4,90,400
EQUITY & LIABILITIES
Capital -
Common Stock ($ 55,000 * 2)	1,10,000
Retained Earnings	2,39,600	3,49,600
Non Current Liabilities -
Loan for Computerized Stage	96,000
Outstanding Interest (9,600 * 2)	19,200	1,15,200
Current Liabilities -
Creditors for Services	16,000
Outstanding Interest for Computerized Stage	9,600	25,600
TOTAL EQUITY & LIABILITIES		4,90,400

2. STATEMENT OF RETAINED EARNINGS

Particulars	Amount ($)	Amount ($)
Operating Revenue		4,80,000
(Less) : Expenses -
Rent Expense	15,000
Interest Expense (9600*4)	38,400
Operating Expense ($ 1,36,000 - $ 15,000)	1,21,000
Service Expense	16,000
Total Expenses		1,90,400
NET REVENUE AFTER EXPENSE		2,89,600
(Less) : Dividend Paid		50,000
RETAINED EARNINGS		2,39,600

3. Cash Flow Statement

Particulars	Amount ($)	Amount ($)
Cash Flows From Operating Activities
Cash Received from Customers	4,80,000
Less : Cash paid for Rent	15,000
Less : Cash Paid for Security Deposit	4,000
Less : Cash Paid for Operating Expense	1,21,000
NET CASH FLOW FROM OPERATING ACTIVITIES		3,40,000
Cash Flow from Investing Activities
Purchase of Computerized Stage	24,000
Purchase of Flatbed Trailer	8,000
Purchase of Other Equipment	10,000
NET CASH FLOW FROM INVESTING ACTIVITIES		(42,000)
Cash Flow from Financing Activities
Payment of Interest	9,600
Payment of Dividend	50,000
NET CASH FLOWS FROM FINANCING ACTIVITIES		(59,600)
NET INCREASE / (DECREASE) IN CASH DURING THE YEAR		2,38,400
Add : Opening Balance - Brought in by the Owner		1,10,000
CLOSING CASH BALANCE AT THE END OF THE YEAR		3,48,400