how do we find net income?
Rousey Manufacturing Company was started on January 1, 2008, when it acquired ,000 cash by issuing common stock. Rousey immediately purchased office furniture and manufacturing equipment costing ,000 and ,000, respectively. The office furniture had a 6-year useful life and a zero salvage value. The manufacturing equipment had a ,000 salvage value and an expected useful life of 5 years. The company paid ,000 for salaries of administrative personnel and ,000 for wages to production personnel. Finally, the company paid ,000 for raw materials that were used to make inventory. All inventory was started and completed during the year. Rousey completed production on 6,000 units of product and sold 5,000 units at a price of each in 2008. (Assume that all transactions are cash transactions.)
Net income = ?
Retained earnings = ?
Total assets = ?
Net cash flow from operating activities = ?
Net cash flow from investing activities = ?
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Depreciation of mfg equipment ($6k) goes into cost of goods manufactured, and depn of office equipment ($2k)goes into admin expenses. Total cost of gds mfd = raw mat’ls + production wages + factory overhead, i.e 18k + 15k + 6k = 39k. It cost 39k to manufacture 6k units, of which 5k were sold, so COGS = 32.5k and ending inventory = 6.5k
Net book value of mfg equip. = 34k – 6k = 28k
Nbv of office equip. = 12k – 2k = 10k
Ending cash bal. = 85k + 75k – 12k – 34k – 10k – 15k – 18k = 71k
Net Income:
Sales 75k
COGS (32.5k)
Admin. sal. (10k)
Admin. depn (2k)
NI = 30,500
This is the 1st yr, so Retained Earnings (RE) = NI = $30.5k
Total assets:
Fixed assets (at nbv) 38k (see above 28k + 10k)
Inventories 6.5k
Cash 71k
Total assets = 115,500
Net cash flow from op’g activities:
NI 30,500
Adjustment for:
Depn 8,000
Increase in inventory (6,500)
Net cash flow from op’g activities = 32,000
Net cash used in investing activities:
Purchase of fixed assets (46,000)
Net income = 30,500
Retained earnings = 30,500
Total assets = 115,500
Net cash flow from operating activities = 32,000
Net cash flow from investing activities = (46,000)
I get the following
Net income = $29,500
This is the $75K in sales less cost of good sold, salaries and depreciation on the furniture and inventory. I assumed a straight line method of depreciation since you didn’t specify.
Retained earnings = $29,500
Since this is the first year of operation and there is no previous balance to add this years net income to.
Total Assets = $114,500
Made up of $71,000 Cash, $10,000 NBV of Furniture, $28,000 NBV of Equipment and $5,500 in Inventory (1000 units @ $5.50 ea)
Cash flow from Operating activities = $29,500
Cash flow from investing = ??? Not sure if there is any. Unless you mean the $85K from the sale of stock, however, I would call that "cash flow from financing activities".
You might want to look at a few turnover ratios at the same time to see how well your assets and inventory are being used.
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