Finance 355 ~ Principles of Financial Management Fall 2012

NO CLASS on Thursday, September 13.

Names:

ACC Review Assignment

Complete the problems below with 1-2 classmates; showing your work for proper credit. The problems below pertain to your review of financial statements and accounting concepts in chapters 2-3. You will find that the problems below closely resemble problems in your textbook. This assignment is worth 15 points and is due at the beginning of class on Tuesday, September 18. 1. Kramerica Industries recently opened as a sole proprietorship and recorded the following transactions during the first month in business: (1) Purchased $60,000 of fixed assets, putting 10% down and borrowing the remainder. (2) Sold 2,000 units of product at an average price of $55 each. Half of the sales were on credit, none of which had been collected as of the end of the month. (3) Recorded cost of goods sold of $26,000 related to the above sales. (4) Purchased $35,000 worth of inventory and paid cash. (5) Incurred other expenses (including the interest from the loan) of $6,000, all of which were paid in cash. (6) Kramericas tax rate is 40%. (Taxes will be paid in a subsequent period.) a. What is Kramericas Net Income for its first month of business?

b.

What was Kramericas Net Cash Flow from the first month in business?

2. Bania Inc. has after tax profits (net income) of $750,000 and is fully financed by shareholders equity. Kenny Bania, the sole shareholder, has a $5.5million investment in the business. If Bania borrows $1.75 million at 7% and uses it to retire stock, how will this transaction change Banias ROE if earnings before interest and taxes remain the same? Assume a 35% tax rate and that the loan reduces equity dollar for dollar.

3. Frank Costanza started his own business recently. He began by depositing $7,000 of his own money (equity) in a business account. Once hed done that his balance sheet was as follows: Assets Liabilities and Equity Cash $7,000 Equity $7,000 Total Assets $7,000 Total L&E $7,000 During the next month, his first month of business, he completed the following transactions: (All payments were made with checks out of the bank account.) Purchased $2,750 worth of inventory, paying $1,200 down and owing the vendor the remainder. Used $700 of the inventory in making product Paid employees wages on the last day of the month of $1,300. Sold the entire product made in the first month on credit for $6,000. Paid rent of $1,500. a. Construct a balance sheet for Franks business at the end of its first month.

b. Construct Franks income statement for the first month. (Ignore taxes.)

c. Construct a statement of Franks Cash Flow from Operating Activities during this first month.

d. Is Franks business profitable in an accounting sense? In a cash flow sense? Why?