2-32 Cash versus Accrual Accounting
Yankton Company had sales of $240,000, all on accounts. Accounts receivable for
the year grew from $60,000 on January 1 to $110,000 on December 31. Expenses for
the year were $175,000, all paid in cash.
1- Compute Yankton’s net income on the cash basis of accounting.
2- Compute Yankton’s net income on the accrual basis of accounting.
3- Which basis gives a better measure of Yankton’s performance for 20X0?
Why?
2-33
1- Assume an opening balance sheet of
Cash $1,000
Paid-in capital $1000
2- Purchase inventory for $600 cash. Prepare a balance sheet.
3- Sell the entire inventory for $750 cash. Prepare a balance sheet. What does
retained earnings represent and how is it related to others balance sheet
accounts? Explain
4- Buy inventory for $300 cash and equipment for $800 cash. Prepare balance
sheet. What does retained earnings represent and how is it related to other
balance sheet accounts?
5- Buy inventory for $500 on open account. Prepare a balance sheet. What do
retained earnings and account payable represent and how are they related to
other balance sheet accounts?
2-35
The following data pertain to Liverpool Auto, Ltd. Total assets at January 1,
20X1, were 110,000 GBP, at December 31, 20X1, they were 126,000 GBP.
During 20X1, sales were 354,000 GBP, cash dividends declared were 5,000
GBP,and operating expenses ( exclusive of cost of goods sold) were 200,000
GBP. Total liabilities at December 31, 20X1, were 55,000 GBP; at January 1,
20X1, they were GBP 50,000. There were no additional capital paid in during
20X1.
1- Stockholders equity, January 1, 20X1, and December 31, 20X1 ?
2- Net income for 20X1 ? – ignore taxes
3- Cost of goods sold for 20X1 ?
2-38
Borders Group, Inc. operates Borders Bookstores. In the year ended January 31,
2009, Borders had revenues of $3,275.4 million and total expenses of $3,462.1
million. Borders retained earnings were $250.5 million at the beginning of the
year and $63.8 million at the end of the year.
1- Compute Borders Group’s net income for the year ended January 31, 2009.
2- Compute the amount of cash dividends declared by Borders group during the
year ended January 31, 2009.
2-43
CadBury plc, the British candy company, reported 2008 earnings of 364 millions
GBP under IFRS. Cash dividends were 295 million GBP. The company had an
average of 1,611 million common shares outstanding. No other type of stock was
outstanding. The market price of the stock at the end of year was approximately
6,000 GBP per share.
Compute EPS, P-E ratio, dividend yield and dividend payout ratio.
2-44
Chevron Corporation is one of the largest oil companies in the world. The company’s
revenue in 2008 was $273.005 billion. Net income was 23.931 $ billion. EPS was
$11.74. The company’s common stock is the only type of shares outstanding.
1- Compute the average number of common shares outstanding during the year
2- The dividend-payout ratio was 21.55%. What was the amount of dividends
per share? Compare this with EPS
3- The market price of the stock at the end of the year was $76.50 per share.
Compute a) dividend-yield and b) P-E ratio
2-45
R.J. Sen Corporation was formed on June 1, 20X0, when some stockholders
invested $100,000 in cash in the company. During the first week of June, the
company spent $85,000 cash for merchandise inventory (sportswear). During
the remainder of the month, total sales reached $115,000 of which $70,000 was
on open account. The cost of the inventory sold was $60,000. For simplicity,
assume that no other transactions occurred except that on June 28, R.J. Sen
Corporation acquired $34,000 additional inventory on open account.
1- By using the balance sheet equation approach, analyze all transactions for
June. Show all amounts in Thousands.
2- Prepare a balance sheet for June 30, 20X0
3- Prepare two statements for June, side to side. The first should use the accrual
basis of accounting to compute net income, and the second, the cash basis to
compute the difference between cash inflows and cash outflows. Which basis
provides a more informative measure of economic performance? Why?