Q5 The Sleep Company had the following operating results for 2021-2022. In addition, the company paid dividends in both 2021 and 2022 of $61,800 per year and made capital expenditures in both years of $30,000 per year. The company's stock price in 2021 was $8 and $7 in 2022. The industry average earnings multiple for the mattress industry was 9 in 2022 and the free cash flow and sales multiples were 18 and 1.5, respectively. The company is publicly owned and has 1,000,000 shares of outstanding stock at the end of 2022. Balance Sheet, December 31, 2022 2021 Cash $ 346,000 $ 106,000 Accounts Receivable $ 356,000 $ 406,000 Inventory $ 256,000 $ 306,000 Total Current Assets $ 958,000 $ 818,000 Long-lived Assets 1,140,000 1,160,000 Total Assets $ 2,098,000 $ 1,978,000 Current Liabilities $ 206,000 $ 306,000 Long-term Debt 606,000 506,000 Shareholder Equity 1,286,000 1,166,000 Total Debt and Equity $ 2,098,000 $ 1,978,000 Income Statement, for year ended December 31, 2022 2021 Sales $ 4,780,000 $ 4,530,000 Cost of Sales 4,124,000 4,024,000 Gross Margin 656,000 506,000 Operating Expenses 353,000 403,000 Operating Income 303,000 103,000 Taxes 121,200 41,200 Net Income $ 181,800 $ 61,800 Cash Flow From Operations 2022 2021 Net Income $ 181,800 $ 61,800 Plus Depreciation Expense 50,000 50,000 + Decrease (-increase) in Accounts Receivable and Inventory 100,000 0 + Increase (-decrease) in Current Liabilities (-100,000) 0 Cash Flow from Operations $ 231,800 $ 111,800 Return on equity for 2022 is (rounded): Multiple Choice 13.9% 10.9% 12.8% 18.2% 14.8%
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Q5
The Sleep Company had the following operating results for 2021-2022. In addition, the company paid dividends in both 2021 and 2022 of $61,800 per year and made capital expenditures in both years of $30,000 per year. The company's stock price in 2021 was $8 and $7 in 2022. The industry average earnings multiple for the mattress industry was 9 in 2022 and the
| Balance Sheet, December 31, | ||
| 2022 | 2021 | |
|---|---|---|
| Cash | $ 346,000 | $ 106,000 |
| $ 356,000 | $ 406,000 | |
| Inventory | $ 256,000 | $ 306,000 |
| Total Current Assets | $ 958,000 | $ 818,000 |
| Long-lived Assets | 1,140,000 | 1,160,000 |
| Total Assets | $ 2,098,000 | $ 1,978,000 |
| Current Liabilities | $ 206,000 | $ 306,000 |
| Long-term Debt | 606,000 | 506,000 |
| Shareholder Equity | 1,286,000 | 1,166,000 |
| Total Debt and Equity | $ 2,098,000 | $ 1,978,000 |
| Income Statement, for year ended December 31, | ||
| 2022 | 2021 | |
|---|---|---|
| Sales | $ 4,780,000 | $ 4,530,000 |
| Cost of Sales | 4,124,000 | 4,024,000 |
| Gross Margin | 656,000 | 506,000 |
| Operating Expenses | 353,000 | 403,000 |
| Operating Income | 303,000 | 103,000 |
| Taxes | 121,200 | 41,200 |
| Net Income | $ 181,800 | $ 61,800 |
| Cash Flow From Operations | 2022 | 2021 |
|---|---|---|
| Net Income | $ 181,800 | $ 61,800 |
| Plus |
50,000 | 50,000 |
| + Decrease (-increase) in Accounts Receivable and Inventory | 100,000 | 0 |
| + Increase (-decrease) in Current Liabilities | (-100,000) | 0 |
| Cash Flow from Operations | $ 231,800 | $ 111,800 |
Return on equity for 2022 is (rounded):
-
13.9%
-
10.9%
-
12.8%
-
18.2%
-
14.8%
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