Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling $4,200,000. Jana Kingston Co. 000 Mary Ann Benson Co. Current liabilities $ 300,000 Current liabilities $0.600,000 Long-term debt, 10% 1,200,000 Common stock ($20 par) 2,900,000 Common stock ($20 par) 2,000,000 Retained earnings (Cash dividends, $328,000) 700,000 Retained earnings (Cash dividends, $220,000) 00.700,000 0 00.700,000 00 $4,200,000 00 $4,200,000 For the year, each company has earned the same income before interest and taxes. 00 0000 Jana Kingston Co. 0000 Mary Ann Benson Co. Income before interest and taxes $1,200,000** $1,200,000*** Interest expense 00120,000** 00–0–****** 00 1,080,000** 1,200,000*** Income taxes (20%) 00216,000** 00240,000*** Net income $ 864,000** $ 960,000*** At year-end, the market price of Kingston's stock was $101 per share, and Benson's was $63.50. Instructions a. Which company is more profitable in terms of return on total assets? b. Which company is more profitable in terms of return on common stockholders’ equity? c. Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year. d. From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why? e. What is the book value per share for each company?
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.
Shown below is the liabilities and
| Jana Kingston Co. | 000 | Mary Ann Benson Co. | |
| Current liabilities |
$ 300,000
|
Current liabilities |
$0.600,000
|
| Long-term debt, 10% |
1,200,000
|
Common stock ($20 par) |
2,900,000
|
| Common stock ($20 par) |
2,000,000
|
700,000
|
|
| Retained earnings (Cash dividends, $220,000) |
00.700,000
|
0 |
00.700,000
|
| 00 |
$4,200,000
|
00 |
$4,200,000
|
For the year, each company has earned the same income before interest and taxes.
| 00 | 0000 |
Jana Kingston Co.
|
0000 |
Mary Ann Benson Co.
|
| Income before interest and taxes |
$1,200,000**
|
$1,200,000***
|
||
| Interest expense |
00120,000**
|
00–0–******
|
||
| 00 |
1,080,000**
|
1,200,000***
|
||
| Income taxes (20%) |
00216,000**
|
00240,000***
|
||
| Net income |
$ 864,000**
|
$ 960,000***
|
At year-end, the market price of Kingston's stock was $101 per share, and Benson's was $63.50.
Instructions
a. Which company is more profitable in terms of return on total assets?
b. Which company is more profitable in terms of return on common stockholders’ equity?
c. Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.
d. From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why?
e. What is the book value per share for each company?
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