Advanced Financial Accounting - II - Preston University

INSTRUCTIONS:Prepare a statement of cash flows for Cleveland Company using the direct method accompanied a reconciliationschedule. Assume the short-term investments are available-for-sale securities.Sandburg Corporation was formed 5 years ago through a public subscription of common stock. Robert Frost,who owns 15% of the common stock, was one of the organizers of Sandburg and is its current president. Thecompany has been successful, but it currently is experiencing a shortage of funds. On June 10, Robert Frostapproached the Spokane National Bank, asking for a 24-month extension on two $35000 notes, which are due onJune 30, 2007, and September 30,2007. Another note of $6,000 is due on March 31,2008, but he expects nodifficulty in paying this note on its due date. Frost explained that Sandburg's cash flow problems are dueprimarily to the company's desire to finance a $300,000 plant expansion over the next 2 fiscal years throughinternally generated funds.The Commercial Loan Officer of Spokane National Bank requested financial reports for the last 2 fiscal years.These reports are reproduced below:SANDBURG COPORATIONSTATEMENT OF FINANCIAL POSITIONAS OF MARCH 31Assets 2007 2006Cash $ 18,200 $ 12,500Notes receivable 148,000 132,000Accounts receivable (net) 131,800 125,500Inventories (at cost) 95,000 50,000Plant & equipment (net of depreciation) 1,449,000 1,420,500Total assets $1,842,000 $1,740,500Liabilities and Owners' EquityAccounts payable $ 69,000 $ 91,000Notes payable 76,000 61,500Accrued liabilities 9,000 6,000Common stock (130,000 shares, $10 par) 1,300,000 1,300,000Retained earnings 388,000 282,000Total liabilities and owners' equity $1,842,000 $1,740,500•Cash dividends were paid at the rate of $1 per share in fiscal year! 2006 and $2 per share in fiscal year'2007.SANDBURG COPORATIONINCOM STATEMENTFOR THE FISCAL YEARS ENDED MARCH 312007 2006Sales $3,000,000 $2,700,000Cost of goods sold" 1,530,000 1,425,000Gross margin $1,470,000 $1,275,000Operating expenses 860,000 780,000Income before income taxes $ 610,000 $ 495,000Income taxes (40%) 244,000 198,000 .Net income $ 366,000 $ 297,000•Depreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended •March 31,2006 and 2007 respectively, are included in cost of goods sold.1NSGTRUCTIONS:1a. Compute the following items for Sandburg Corporation:i. Current ratio for fiscal years 2006 and 2007.ii. Acid-test (quick) ratio for fiscal years 2006 and 2007.iii. Inventory turnover for fiscal year 2007.jiv. Return on assets for fiscal years 2006 and 2007. (Assume total assejts were $1,688,500 at 31-03-2005)v. Percentage change in sales, cost of good sold gross margin and net income after taxes from fiscal year2006 to 2007.b. Assume that the percentage changes experienced in. fiscal year 2007 as compared with fiscal year 2006 forsales and cost of goods sold will be repeated in each of the next 2 yearsi Is Sandburg's desire to finance theplant expansion from internally generated funds realistic? Discuss.Pnge5 of3