Question 1 - Selected information about income statement accounts for the Reed Company is presented below (the company's fiscal year ends on December 31):
| |
2013
|
2012
|
|
Sales
|
$4,450,000
|
$3,550,000
|
|
Cost of goods sold
|
2,870,000
|
2,010,000
|
|
Administrative expenses
|
810,000
|
685,000
|
|
Selling expenses
|
370,000
|
322,000
|
|
Interest revenue
|
151,000
|
141,000
|
|
Interest expense
|
202,000
|
202,000
|
|
Loss on sale of assets of discontinued component
|
54,000
|
-
|
On July 1, 2013, the company adopted a plan to discontinue a division that qualifies as a component of an entity as defined by GAAP. The assets of the component were sold on September 30, 2013, for $54,000 less than their book value. Results of operations for the component (included in the above account balances) were as follows:
| |
1/1/13-9/30/13
|
2012
|
|
Sales
|
$410,000
|
$510,000
|
|
Cost of goods sold
|
(295,000)
|
(326,000)
|
|
Administrative expenses
|
(51,000
|
(41,000)
|
|
Selling expenses
|
(21,000
|
(31,000)
|
|
Operating income before taxes
|
$43,000
|
$112,000
|
In addition to the account balances above, several events occurred during 2013 that have not yet been reflected in the above accounts:
1. A fire caused $51,000 in uninsured damages to the main office building. The fire was considered to be an infrequent but not unusual event.
2. An earthquake caused $101,000 in property damage to one of Reed's factories. The amount of the loss is material and the event is considered unusual and infrequent.
3. Inventory that had cost $41,000 had become obsolete because a competitor introduced a better product. The inventory was sold as scrap for $5,000.
4. Income taxes have not yet been accrued.
Required: Prepare a multiple-step income statement for the Reed Company for 2013, showing 2012 information in comparative format, including income taxes computed at 40% and EPS disclosures assuming 400,000 shares of common stock.
Question 2 - The income statement and a schedule reconciling cash flows from operating activities to net income are provided below ($ in millions) for Mike Roe Computers.
|
MIKE ROE COMPUTERS
Income Statement For the Year Ended December 31, 2013
|
|
Sales
|
|
$148.60
|
|
Cost of goods sold
|
|
(89.30)
|
|
Gross margin
|
|
59.30
|
|
Salaries expense
|
$18.60
|
|
|
Insurance expense
|
10.60
|
|
|
Depreciation expense
|
4.30
|
|
|
Interest expense
|
5.30
|
(38.80)
|
|
Gains and losses:
|
|
|
|
Gain on sale of equipment
|
|
10.60
|
|
Loss on sale of land
|
|
(1.60)
|
|
Income before tax
|
|
29.50
|
|
Income tax expense
|
|
(14.75)
|
|
Net income
|
|
$14.75
|
|
Reconciliation of Net Income to Net Cash Flows from Operating Activities
|
|
Net income
|
$14.75
|
|
Adjustments for noncash effects:
|
|
|
Decrease in accounts receivable
|
4.30
|
|
Gain on sale of equipment
|
(10.60)
|
|
Increase in inventory
|
(5.30)
|
|
Increase in accounts payable
|
8.30
|
|
Increase in salaries payable
|
2.30
|
|
Depreciation expense
|
4.30
|
|
Decrease in bond discount
|
2.65
|
|
Decrease in prepaid insurance
|
1.30
|
|
Loss on sale of land
|
1.60
|
|
Increase in income tax payable
|
5.30
|
|
Net cash flows from operating activities
|
$28.90
|
Required:
1. Calculate each of the following amounts for Mike Roe Computers:
a. Cash received from customers during the reporting period.
b. Cash paid to suppliers of goods during the reporting period.
c. Cash paid to employees during the reporting period.
d. Cash paid for interest during the reporting period.
e. Cash paid for insurance during the reporting period.
f. Cash paid for income taxes during the reporting period.
2. Prepare the cash flows from operating activities section of the statement of cash flows (direct method).