LOWZ COMPANY Comparative Balance Sheet December 31 2014 2013 Assets Cash $ 36,000 $ 23,000 Accounts receivable 25,000 34,000 Merchandise inventory 32,000 15,000 Property, plant, and equipment 50,000 78,000 Accumulated depreciation (21,000) (24,000) Total $122,000 $126,000 Liabilities and Stockholders' Equity Accounts payable $ 18,000 $ 23,000 Income taxes payable 9,000 8,000 Bonds payable 8,000 33,000 Common stock 28,000 24,000 Retained earnings 59,000 38,000 Total $122,000 $126,000 LOWZ COMPANY Income Statement For the Year Ended December 31, 2014 Sales $400,000 Cost of goods sold 270,000 Gross profit 130,000 Depreciation Expense 8,000 Operating expenses 37,000 Income from operations 85,000 Interest expense 5,000 Income before income taxes 80,000 Income tax expense 24,000 Net income $ 56,000 The following additional data were provided: During the year, equipment was sold for $17,000 cash. This equipment cost $28,000 originally and had a book value of $17,000 at the time of sale. Instructions: Prepare a statement of cash flows for Lowz Company using the direct method.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
LOWZ COMPANY
Comparative Balance Sheet
December 31
2014 2013
Assets
Cash $ 36,000 $ 23,000
Merchandise inventory 32,000 15,000
Property, plant, and equipment 50,000 78,000
Accumulated
Total $122,000 $126,000
Liabilities and
Accounts payable $ 18,000 $ 23,000
Income taxes payable 9,000 8,000
Bonds payable 8,000 33,000
Common stock 28,000 24,000
Total $122,000 $126,000
LOWZ COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales $400,000
Cost of goods sold 270,000
Gross profit 130,000
Depreciation Expense 8,000
Operating expenses 37,000
Income from operations 85,000
Interest expense 5,000
Income before income taxes 80,000
Income tax expense 24,000
Net income $ 56,000
The following additional data were provided:
- During the year, equipment was sold for $17,000 cash. This equipment cost $28,000 originally and had a book value of $17,000 at the time of sale.
Instructions: Prepare a statement of cash flows for Lowz Company using the direct method.
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