Question

Spark Inc is a relatively new company and you have been recruited to assist the management with advice and getting to the correct financial figures.

1. Distinguish between a stock split and a stock dividend. Is there any reason for the difference in accounting treatment of these two events?

2. Assume that when you were in high school you saved $1,000 to invest for your college education. You purchased 200 shares of Smiley Incorporated, a small but growing company. Over the three years that you have owned the stock, the corporation's board of directors has taken the following actions:

• Declared a 2-for-1 stock split.

• Declared a 20 percent stock dividend.

• Declared a 3-for-1 stock split.

  The current price of the stock is $12 per share.

• 2.1. Calculate the current number of shares and the market value of your investment.

• 2.2. Explain the likely reason the board of directors of the company has not declared a cash dividend.

QUESTION 3 (Points 15)

3. Spark INC., had retained earnings at the beginning of the current year of $460,000. During the year the company earned net income of $250,000 and declared dividends as follows:

$1 per share for the current-year dividend on the 10,000 shares of preferred stock outstanding.
$1 per share for the dividend in arrears for one year on the 10,000 shares of preferred stock outstanding.
$0.50 per share for the current-year dividend on the 200,000 shares of common stock outstanding.
In addition, the company discovered an overstatement in the prior year's net income of $65,000 and corrected that error in the current year. Prepare a statement of retained earnings for the year ended 2019 and also Write a short report on your findings.

QUESTION 4 (Points 10)

4. At the beginning of the current year, Spark INC. had dividends payable of $1,600,000. During the current year, the company declared cash dividends of $4,500,000, of which $970,000 appeared as a liability at year-end.

4.1. Determine the amount of cash dividends paid during this year. QUESTION 5 (Points 30)

5. The accounting staff of Sparks INC has assembled the following information for the year ended December 31, 2019:

5.1. Prepare a statement of cash flows in the format Example below (Allison corporation) Place brackets around amounts representing cash outflows. Use the direct method of reporting cash flows from operating activities.

5.2. Some of the items above will be listed in your statement without change. However, you will have to combine certain given information to compute the amounts of
5.2.1. collections from customers,
5.2.2. cash paid to suppliers and employees, and

5.2.3. proceeds from sales of plant assets.
(Hint: Not every item listed is used in preparing a statement of cash flows.) Example of a statement of cash flow format:

QUESTION 6 (Points 30)

6. Comparative balance sheets report average total assets for the year of $2,575,000 and average total equity of $1,917,000 (dollar amounts in thousands, except earnings per share).

Sparks INC STATEMENT OF EARNINGS FOR THE YEAR ENDING DECEMBER 31, 2019

Net Sales ...... $4,395,253 Costs and expenses: ...... Costs of goods sold ...... (2,821,455) Operating expenses ...... (1,004,396) Interest revenue ...... 15,797 Earnings before income tax ...... $585,199 Income tax expense ...... (204,820) Net earnings ...... $380,379 Earnings per share ...... $1.70

6.1. Prepare an income statement for the year in a multiple-step format.

Compute the following:

6.2. Gross profit rate,

6.3. Net income as a percentage of net sales,

6.4. Return on assets, and

6.5. Return on equity for the year.

(Round computations to the nearest one-tenth of 1 percent.)

6.6. Explain why interest revenue is not included in the company's gross profit computation. .....END....

Answer 1

Solution ;

1.                     Sparks INC

                            Income statement

                   For the year ended 31, 2019

Sales		4395253
Less . Cost of goods sold		(2821455)
Gross profit		1573798
Operating expenses		(1004396)
Total operating expenses		569402
Operating income
Interest revenue		15797
Net income		585199

2. Gross profit rate = Gross profit / Net sale

                              = 1573798 / 4395253

                             = 0.36 %

3. Net income as a percentage of net sale = ( Net income / Sales ) * 100

                                                              = ( 585199 / 4395253 ) * 100

                                                              = 13.31 %

4. Return on asset = Net income / Total asset

                            = 585199 / 2575000

                            = 0.23

5. Return on equity = Net income / Shareholder's equity

                             = 585199 / 1917000

                             = 0.31%

6.Gross profit is the total revenue minus the expense directly related to the production of goods for sale ,

called cost of goods sold. Interest revenue is a non - operating income , which is not included gross profit .