Prepare the financial statements at May31 for David Palmer, Attorney at Law.

David Palmer Attorney at Law Balance Sheet As of May 31, 2002 Assets 1. Current Assets Cash Accounts Receivable Marketable Securities Total Current Assets 2. Fixed Assets Equipment Total Fixed Assets Liabilities and Owner’s Equity 3. Current Liabilities Accounts Payable Notes Payable Total Current Liabilities 4. Long-Term Liabilities Total Liabilities 5.Owner’s Equity Your Name, Capital Total Liabilities and Owner’s Equity

David Palmer Attorney at Law Income Statement For the Month Ended May 31, 2002 1. Revenues Fees Earned 2. Expenses Rent Expense Salaries Expense Utilities Expense Telephone Expense Total Expense 3. Net Income

David Palmer Attorney at Law Owner’s Equity For the Month Ended May31, 2002 David Palmer, Capital, May 1 Add: Net Income David Palmer, Capital, May31

4. On June 1, Linda Hills started Natural Cosmetics Co., a company that provides individual skin care treatment to clients at their residence, by investing $20,000 cash in the business. Following are the assets and liabilities of the company at June 30 and the revenues and expenses for the month of June:

Cash Accounts Receivable Fees Earned Cosmetic Supplies on Hand* Advertising Expense Automobile

$10,000 2,000 5,000 2,400 300 18,000

Notes Payable Accounts Payable Supplies Expense Gas and Oil Expense Miscellaneous Expense Equipment

$10,000 900 1,200 700 200 3,000

*on hand – в наличности, в распоряжении

Linda made no additional investment in June, but withdrew $1,100 in cash for personal use during the month.

a) Prepare an income statement and owner’s equity statement for the month of June and a balance sheet at June 30, 2002

b) Prepare an income statement and owner’s equity statement for June assuming cosmetic supplies on hand at June 30 were $2,000 and a total of $1,600 of supplies were used.

5. Listed below are some items found in the financial statements for Alpine Sports, a company producing sportswear and gear. Indicate in which financial statements the following items would appear.

a) Accounts Receivable b) Revenue c) Gross Profit d) Net Cash Used in Investing e) Marketable Securities f) Retained Earnings g) Operating Expenses h) Redemptions of Securities i) Net Sales

j) Property and Equipment k) Common Stock l) Net Income m) Long-Term Notes n) Income Taxes o) Cash and Cash Equivalents at End of Year p) Accrued Expenses

6. Imagine that you head the accounting department of a business enterprise. Prepare three main financial statements for your company.

7. Read the dialogue between Andrew, a financial analyst, and his friend Bob. Do you agree with Andrew’s view on the problem? Can you add anything to his arguments? Reproduce the main points of the dialogue. If you have your personal or opposing opinion on the problem, express it in your dialogue.

Bob – Good morning, Andrew! How are you getting on?

Andrew – Oh, Bob! Nice to see you. Any problems? You look so anxious.

Bob – I need your professional advice, Andrew. You see, I want to invest

money into some company.

Andrew – A good idea. I’ll do my best to help you. So, what are you going to

begin with?

Bob – I think first of all I’ll have to read the annual reports to learn about

the company’s financial strength and profit potential.

Andrew – In fact most publicly traded corporations “tell all” in their financial

reports to shareholders, but finding the important information in them isn’t easy. You’ll need to know how to read annual reports.

Bob – Would you help me then? I fully trust to your expertise and

experience.

Andrew – Glad to hear that. The point is that the real story about the

company’s financial health is often buried in footnotes and dense

tables.

Bob – What do you mean?

Andrew – Any certified public accountant will tell you right off the bat if a

company’s report conforms with “generally accepted accounting

principles” .Then go to the footnotes. Check to see whether

earnings are up or down. If they are down only because of a

change in accounting, maybe that’s good! The company owes less

tax and has more money in its pocket.

Bob – And if earnings are up?

Andrew – Maybe that’s bad. They may be up because of a special windfall

that won’t happen again next year. The footnotes often tell the

whole story.

Bob – What about the letter from the chairman addressed to the

shareholders? I guess, the chairman’s tone reflects the personality,

the well-being of the company.

Andrew – In this letter the chairman should tell you how the company fared

this year. But more important, the letter should tell you why. Keep

an eye out for sentences that start with “ Except for …” and “

Despite the…” They’re clues to problems.

Bob – What’s the way to avoid problems?

Andrew – Find out what happened and why. For example, look for what’s

new in each line of business. Is management getting the company

in good shape to weather the tough and competitive years ahead?

Bob – What other sources can be used to find the important information ?

Andrew – One source is a balance sheet. Begin digging into the numbers!

The difference between current assets and current liabilities is

working capital, a key figure to watch from one annual report to

another. If working capital shrinks, it could mean trouble.

Bob – I see. The second basic source of numbers is the income

statement, isn’t it?

Andrew – You’re right. It shows how much money the company made or lost

over the year. By the way, what figure in the income statement

would you first look at?

Bob – It’s in the income statement at the bottom: earnings per share.

Andrew – Watch out. It can fool you! The company’s management could

boost earnings by selling off a plant. Or by cutting the budget for

research and advertising.

Bob – It sounds true. What number in the income statement is worth

looking at first then?

Andrew – The number you should look at first is net sales. When sales go

down, the company may be in trouble and it is selling off a losing

business.. If so, profits may be soaring.

Bob – I never thought that figuring out an annual report was going to be

so difficult! What else should I know?

Andrew – Get out your pocket calculator, and turn to the balance sheet.

Divide long-term liabilities by owners’ equity. That’s the debt-to-

equity ratio.

Bob – What does it mean?

Andrew – A high ratio means the company borrows a lot of money to spark its

growth. That’s okay – if sales grow, too, and if there’s enough cash

on hand to meet the payments.

Bob – A company doing well on borrowed money can earn big profits for

its shareholders. Am I right?

Andrew – Sure. But if sales fall, watch out. The whole enterprise may slowly

sink. Some companies can handle high ratios; the others can’t.

Bob – What would you advise me in this case?

Andrew – You have to compare. Is the company’s debt-to-equity ratio better

or worse than it used to be? Better or worse than the industry

norms? Better or worse after this recession than it was after the

last recession ? In company-watching, comparisons are all. They

tell you if management is staying on top of things.

Bob – Thank you very much, Andy. I appreciate your helping me greatly.

Andrew – Always glad to help an old friend. And keep in mind – each year,

companies give you more and more information in their annual

reports. Profiting from that information is up to you. I hope you

profit from mine.