Chapter Two - Wiley

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88 CHAPTER 2 A Further Look at Financial Statements
Income tax expense 1,135
Income taxes payable 1,135
Interest expense 57
Interest payable 57
Long-term notes payable 5,700
Prepaid rent 2,280
Rent expense 760
Retained earnings, beginning 13,960
Salaries expense 6,840
Net income $ 3,127
Tot. current assets $28,172
Tot. assets $46,301
Compute ratios; comment on
relative profitability, liquidity,
and solvency.
(SO 5, 7, 8)
Instructions
(a) Prepare an income statement and a retained earnings statement for Cheung Corporation
for the year ended April 30, 2005.
(b) Prepare a classified balance sheet for Cheung as of April 30, 2005.
(c) Explain how each financial statement interrelates with the others.
P2-5A Comparative statement data for Campo Company and Gabelli Company, two
competitors, are presented here. All balance sheet data are as of December 31, 2005, and
December 31, 2004.
Campo Company Gabelli Company
2005 2004 2005 2004
Net sales $450,000 $920,000
Cost of goods sold 260,000 620,000
Operating expenses 140,000 52,000
Interest expense 3,000 10,000
Income tax expense 11,000 65,000
Current assets 180,000 $110,000 700,000 $550,000
Plant assets (net) 705,000 470,000 800,000 750,000
Current liabilities 60,000 52,000 250,000 275,000
Long-term liabilities 215,000 68,000 200,000 160,000
Additional information: Cash provided by operations for 2005 was $20,000 for Campo
and $185,000 for Gabelli. The average number of shares outstanding was 200,000 for
Campo and 400,000 for Gabelli. The stock price at December 31, 2005, was $2.50 for
Campo and $7 for Gabelli.
Instructions
(a) Comment on the relative profitability of the companies by computing the net income,
earnings per share, and price-earnings ratios for both companies for 2005.
(b) Comment on the relative liquidity of the companies by computing working capital,
the current ratios, and the current cash debt coverage ratios for both companies for
2005.
(c) Comment on the relative solvency of the companies by computing the debt to total
assets ratio and the cash debt coverage ratio for each company for 2005.
Compute liquidity, solvency,
and profitability ratios.
(SO 5, 7, 8)
P2-6A
The comparative statements of Brandon Company are presented here.
BRANDON COMPANY
Income Statements
For the Years Ended December 31
2005 2004
Net sales $712,000 $574,000
Cost of goods sold 420,000 335,600
Selling and administrative expense 143,880 149,760
Interest expense 7,920 7,200
Income tax expense 32,000 24,000
Net income $108,200 $ 57,440