Question

Corporation

Walker Corporation is a company that makes accounting software programs. You are a senior accountant at Walker Corporation. Your job is to create internal reports for management. The Chief Operating Officer (COO), Rye Mason received your latest report. While she feels that the report is informative, there are several things that do not make sense to her. Her concerns are below:

Walker Corporation distributed $60,000 of cash dividends in the year 2017. Walker Corporation distributed its last dividend in 2014, so the issuance of such a large dividend is newsworthy. Its outstanding common stock has a par value of $400,000 and its 6% cumulative preferred stock has a par value of $100,000 at the end of 2017. As a common stockholder, the COO expected the preferred shareholders to receive $6,000 and the common shareholders to receive the remaining $54,000. The COO does not understand why the common shareholders will not receive $54,000.

The company bought back 3,000 shares of its $50 par value common stock for $180,000 in August 2017. The company also had a year over year reduction in stockholder’s equity. The COO would like to know why stockholder’s equity declined.

The company had net income of $100,000 for the year 2017. The ending balance of the cash account for 2017 was $150,000. She does not understand the difference between the cash account and net income. The COO also questions why Walker Corporation only declared $50,000 in dividends if the company had a net income of $100,000 and a cash balance of $150,000.

The COO noticed that a report mentioned a prior period error. She wonders why Walker Corporation did not reissue financial statements to account for the $10,000 overstatement of depreciation expense. She would also like to understand the process for recording prior period adjustments.

The COO does not understand the difference between earnings per share and return on equity. She would specifically like to know why shareholder’s care about these metrics… why do investors care about these metrics?

The COO would like to know the ending retained earnings balance assuming retained earnings had a $230,000 balance at the beginning of 2017. She does not remember what statement to look for this information. She would like for you to tell her which financial statements have the retained earnings balance and explain the calculation of retained earnings.

You are to write a memorandum to the COO that addresses her concerns and questions. Be sure to use the APA format for your memo. The memo should be at least one page, but no greater than two pages in length.

Answer 1

MEMO

To: Rye Mason, COO, Walker Corporation

From: Senior Accountant

Date: 12.02.2018

Memo Number: XXX

Subject: Regarding reply of the memo number XXX

The various explanations sorted by you are provided as follows:

Item No. 01: Why Cash Dividend was not shown as a bifurcation into Equity and Preference Dividend:

The said dividend has been reported as $ 60,000 because this amount has been paid to the Equity Shareholders and not Preference Shareholders. The Preference Shareholders have been paid separately in cash an amount of $ 6,000 so this adjustment is justified.

Item No. 02: Why there are so many buybacks of Common Stock:

The Common Stock Holders are being paid at the rate of 13.50% and the preference share holders are being paid at much less rate of 6% so it is advisable to buy back the common stock so from the profits so that we do not have to pay so much in the name of dividend.

Item 3: Balance Profit of $ 50,000. Where is it?

Profits during the year cannot be measured merely in terms of cash. There are non-cash profits also as most of the time the sales are on credit basis. So unless the payments are recovered from debtors cash cannot be realized.

Dividend has been declared less because:

1. Some of the amount has been retains to be re invested in future business ventures.
2. Balance amount has been used to buy back common stock.

Item 4: Why the prior period error has not been rectified by correcting the financial statements?

The said errors pertaining to prior period can be corrected in the next financial year by making a schedule of this error and it is not necessary to make such changes in the same financial year.

Item 5: Retained earnings calculations?

The opening retaining earnings are : $ 230,000

The profits for the year were $ 150,000

The amount of dividend paid were $ 60,000

The amount spent in buyback is $ 180,000

So the balance shall be $140,000