WFU Law School
Law & Valuation
Chapter 3 - Accounting Basics

Chapter 3 - Problems

These problems cover:

  • balance sheet
  • income statement
  • cash flow

[cross reference to business valuation chapter]

"Bush told his senior aides Tuesday that he 'didn't want to see any stories' quoting unnamed administration officials in the media anymore, and that if he did, there would be consequences, said a senior administration official who asked that his name not be used."

--Joseph L. Galloway and James Kuhnhenn, “Bush orders officials to stop the leaks” (Philadelphia Inquirer, October 16; also cited in Washington Post, October 21, 2003)


Use the financial statemnets for Albega Corporation:
ALBEGA CORPORATION
Balance Sheet
December 31, 20xx
Assets
Liabilities
Current Assets   Current Liabilities
Cash
$ 50,000

Accounts Payable

$ 60,000

Accounts receivable
(net of allowance for bad debts of $5,000)

$175,000
Notes payable (including current portion of long-term debt)
$ 40,000

Inventory (FIFO)

$125,000

Income taxes payable

$ 25,000
Total current assets
$350,000
Total current liabilities
$125,000
Fixed Assets

Long Term Liabilities
5-year notes payable

$160,000

Land

$ 50,000
Total Liabilities
$285,000
Building
$ 75,000
 
Equipment
$ 50,000
SHAREHOLDERS' EQUITY
 
$175,000

Common stock
($1.00 par value; 1,000 shares authorized, issued and outstanding)

$ 1,000

Less:

Paid-in capital in excess of par value

$ 49,000

Accumulated depreciation

$ 50,000
Retained earnings
$150,000
Net fixed assets
$125,000

Total Shareholders' Equity

$200,000
   
Total Liabilities
and shareholders' equity
$485,000

ACME CORPORATION
Income Statement
Years ended December 31, 1998 - 2000
2000
1999
1998
Net sales
$500,000

Cost of goods sold and operating expenses

Cost of goods sold

$304,000

Depreciation

15,000
Selling and administrative expenses
100,000
 
$419,000
Operating Income
$ 81,000
Interest on long-term notes
13,000
Income before income taxes
$ 68,000
Income taxes
$18,000
Net income
$ 50,000
Net income per share
(1,000 shares outstanding)
$ 50

1. What is the effect on the Acme Balance Sheet of each of the following transactions? Consider each transaction separately.

a. Acme borrows $20,000, payable in 3 years at 8% interest, to purchase a parcel of land.

b. Acme purchases a parcel of land for $20,000 cash.

c. Acme collects $5,000 of accounts receivable.

d. Acme buys $10,000 of inventory on credit, with the total amount payable in 6 months.

e. Acme pays off $5,000 of a note due in 180 days.

2. What is the value of each of the following and what does each tell you about Acme?

a. Net working capital.

b. Current ratio.

c. Net quick assets.

d. Quick assets ratio.

e. Book value of conunon shares.

f. Asset coverage of debt.

g. Debt/equity ratio.

h. Earnings per share

i. Return on equity

j. Cash flow

3. Value Albega Corporation using the following methods: What are the advantages and disadvantages of each approach?

a. Book value

b. Liquidation value [some assumptions]

c. Cash flow or earnings [some assumptions]

d. Comparable [some assumptions]

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Chapter 3 - Accounting Basics

©2003 Professor Alan R. Palmiter

This page was last updated on: March 21, 2004