Question E3-1 You are a summer intern at the office of a local tax prepar

E3-1

You are a summer intern at the office of a local tax preparer. To test your basic knowledge of financial statements, your manager, who graduated from your alma mater 2years ago, gives you the following list of accounts and asks you to prepare a simple income statement using those accounts.

Accounts ($000,000)
Depreciation 25
General and admin expenses 22
Sales 345
Sales expenses 18
Cost of goods sold 255
Lease expense 4
Interest expense 3

a. Arrange the accounts into a well-labeled income statement. Make sure you label and solve for gross profit, operating profit and net profit before taxes.
b. Using a 35% tax rate, calculate taxes paid and net profit after taxes.
c. Assuming a dividend of $1.10 per share with 4.25 million shares outstanding, calculate EPS and additions to retained earnings.

E3-2
Explain why the income statement can also be called a “profit-and-loss statement.”
What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves?

E3-3
Cooper Industries, Inc., began 2012 with retained earnings of $25.32 million. During the year it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders. Preferred stockholders, holding 500,000 shares, were paid two semiannual dividends of $0.75 per share. The firm had a net profit after taxes of $5.15 million. Prepare the statement of retained earnings for the year ended Dec. 31,2012.

E3-4
Bluestone Metals, Inc., is a metal fabrication firm manufactures prefabricated metal part for customers in a variety of industries. The firm’s motto is “ If you need it, We can make it.” The CEO of Bluestone recently held a board meeting during which he extolled the virtues of the corporation. The company, he stated confidently, had the capability to build any product and could do so using a lean manufacturing model. The firm would soon be profitable, claimed the CEO, because the company used state-of-the-art technology to build a variety of products while keeping inventory levels low. As a business press reporter, you have calculated some ratios to analyze the financial health of the firm. Bluestone’s current ratios and quick ratios for the past 6 years are shown in the table below:

2007 2008 2009 2010 2011 2012 .
Current ratio 1.2 1.4 1.3 1.6 1.8 2.2
Quick ratio 1.1 1.3 1.2 0.8 0.6 0.4

What do you think of the CEO’s claim that the firm is lean and soon to be profitable? (Hint : Is there a possible warning sign in the relationship between the two ratios?)
E3-5
If we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.43, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock equity?

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