# Calculation of EPS and retained earnings

P3–5 Calculation of EPS and retained earnings  Everdeen Mining, Inc., ended 2015 with a net profit before taxes of \$436,000. The company is subject to a 40% tax rate and must pay \$64,000 in preferred stock dividends before distributing any earnings on the 170,000 shares of common stock currently outstanding.

a. Calculate Everdeen’s 2015 earnings per share (EPS).

b. If the firm paid common stock dividends of \$0.80 per share, how many dollars would go to retained earnings?

P3–13 Liquidity management  Bauman Company’s total current assets, total current liabilities, and inventory for each of the past 4 years follow:

 Item 2012 2013 2014 2015 Total current assets \$16,950 \$21,900 \$22,500 \$27,000 Total current liabilities 9,000 12,600 12,600 17,400 Inventory 6,000 6,900 6,900 7,200

a. Calculate the firm’s current and quick ratios for each year. Compare the resulting time series for these measures of liquidity.

b. Comment on the firm’s liquidity over the 2012–2013 period.

c. If you were told that Bauman Company’s inventory turnover for each year in the 2012–2015 period and the industry averages were as follows, would this information support or conflict with your evaluation in part b? Why?

 Inventory turnover 2012 2013 2014 2015 Bauman Company 6.3 6.8 7 6.4 Industry average 10.6 11.2 10.8 11

P4–3 MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of \$430,000 this year. The company’s financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of \$80,000 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule.

a. If the firm purchases the grinders before year-end, what depreciation expense will it be able to claim this year? (Use  Table 4.2  on page  120 .)

b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result?

Table 4.2 Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes

 Percentage by recovery year a Recovery year 3 years 5 years 7 years 10 years 1 33% 20% 14% 10% 2 45 32 25 18 3 15 19 18 14 4 7 12 12 12 5 12 9 9 6 5 9 8 7 9 7 8 4 6 9 6 10 6 11 4 Totals 100% 100% 100% 100% a These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actualdepreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance depreciation using the half-year convention. Year Cost (1) Percentages (from  Table 4.2 ) (2) Depreciation [(1) × (2)] (3) 1 \$40,000 20% \$ 8,000 2 40,000 32 12,800 3 40,000 19 7,600 4 40,000 12 4,800 5 40,000 12 4,800 6 40,000 5 2,000 Totals 100% \$40,000

P4–5  Classifying inflows and outflows of cash Classify each of the following items as an inflow (I) or an outflow (O) of cash, or as neither (N).

 Item Change (\$) Item Change (\$) Cash +100 Accounts receivable −700 Accounts payable −1,000 Net profits +600 Notes payable +500 Depreciation +100 Long-term debt −2,000 Repurchase of stock +600 Inventory +200 Cash dividends +800 Fixed assets +400 Sale of stock +1,000

P4–7 Cash receipts A firm has actual sales of \$65,000 in April and \$60,000 in May. It expects sales of \$70,000 in June and \$100,000 in July and in August. Assuming that sales are the only source of cash inflows and that half of them are for cash and the remainder are collected evenly over the following 2 months, what are the firm’s expected cash receipts for June, July, and August?

P4–12 Cash flow concepts The following represent financial transactions that Johnsfield & Co. will be undertaking in the next planning period. For each transaction, check the statement or statements that will be affected immediately.

 Statement Pro forma income Pro forma balance Transaction Cash budget statement sheet Cash sale Credit sale Accounts receivable are collected Asset with 5-year life is purchased Depreciation is taken Amortization of goodwill is taken Sale of common stock Retirement of outstanding bonds Fire insurance premium is paid for the next 3 years