Question

1. For this problem, use the following randomly generated list of accounts, placing them in appropriate order to prepare an income statement.

Accounts	($000,000)
Depreciation	25
General and administrative expenses	22
Sales	345
Sales expenses	18
Cost of goods sold	255
Lease expense	4
Interest expense	3

The following randomly constructed table requires that as part of your Critical Thinking Assignment you arrange the accounts into a well-labeled income statement. Make sure you label and solve for gross profit, operating profit, and net profit before taxes.

Using a 35% tax rate, calculate taxes paid and net profit after taxes.

Assuming a dividend of $1.10 per share with 4.25 million shares outstanding, calculate EPS and additions to retained earnings.

2. Explain why the income statement can also be called a “profit-and-loss statement.” What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves?

3. CS Industries, Inc. began 2016 with retained earnings of $25.32 million. During the year, it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders. Preferred stockholders, holding 500,000 shares, were paid two semiannual dividends of $0.75 per share. The firm had a net profit after taxes of $5.15 million. Prepare the statement of retained earnings for the year ended December 31, 2016.

Answer 1

1.

Income statement

Sales	345,000,000
Less: cost of goods sold	-255,000,000
Gross profit	90,000,000
Less: Operating expenses:
Depreciation	- 25,000,000
General and administrative expenses	- 22,000,000
Sales expenses	- 18,000,000
Operating profit	25,000,000
Less : Other expenses:
Lease expense	- 4,000,000
Interest expense	- 3,000,000
Profit before tax	18,000,000
Less: Income tax @35%	- 6,300,000
Profit after tax	11,700,000

Number of shares outstanding = 4,250,000

EPS = Profit after tax/Number of shares outstanding

= 11,700,000/4,250,000

= $2.75

Dividend per share = $1.10

Hence, total dividend paid = 4,250,000 x 1.10

= $4,675,000

Hence, addition to retained earnings = 11,700,000 - 4,675,000

= $7,025,000

2.

Income statement is also known as profit and loss statement because through income statement profit earned by a company or loss suffered is calculated. Hence, it is justified to call income statement, profit and loss statement.

Balance in Balance sheet means the balances of assets and liabilities as at a particular date. Balance sheet is always prepared at a particular date to show the financial status of a company. Financial status is nothing but the balances in assets and liabilities accounts of the company.

The two halves of the balance sheet i.e. assets and liabilities are always balanced i.e. equal to each other because whatever assets a company posseses, it must have been funded through either external funds (liabilities) or internal funds( shareholders' equity). Hence, the two halves of the balance sheet are always balanced.

3.

Number of common shares = 2,750,000

Quarterly dividend paid = $0.35 per share

Hence, annual dividend paid on common shares = 2,750,000 x 0.35 x 4

= $3,850,000   

Number of preferred shares = 500,000   

Semi-annual dividend paid = $0.75 per share

Hence, annual dividend paid on preferred shares = 500,000 x 0.75 x 2

= $750,000  

C.S. Industries, Inc.

Statement of retained earnings

For the year ended December 31, 2016

Retained earnings as at January 1, 2016		$25,320,000
Net profit after tax	5,150,000
Less: Equity dividend paid	-3,850,000
Less: Preferred dividend paid	- 750,000
Hence, addition to retained earnings		$550,000
Retained earnings as at December 31,2016		$25,870,000