Question

2. Very Intormation: On December 30th, Terry's management completed negotiations with one of their suppliers to cover Terry's $28,000 account with shares of Terry's common stock. Rather than issue additional shares (and deal with the requirements of the SEC), Terry issued the supplier 7,200 shares of the treasury stock originally purchased on November 15, Year 3. As a relatively new public corporation, Terry still has several large investors that hold seats on its d and have significant control over the company's decisions. These investors have expressed concern with the company's new Indirect Method Statement of Cash Flows and have asked the management team to switch to a Direct Method Statement with the required Schedule to Reconcile Net Income to Cash Provided from Operations. Because of the influence of these investors, Terry's management team has no choice but to agree with their request (although, they aren't thrilled with the extra work this change will cause). They have asked you to convert the current Statement of Cash Flows into a Direct Method version. The management team has decided to condense the line items used in the CFO section to include only seven (7) lines: Customers, Inventory, Selling Expenses, Administrative Expenses, Rent, Interest, and Taxes. In addition, they would like to know the effect of their contract with the supplier, if any, on the following ratios:

Answer 1

Requirement :1) Debt Equity ratio Liabiities/ Equity Given Given Liabilities stock holders equity Debt Equity ratio 5,671,811.00 2,642,484.00 2.15 Current ratio Current liabiities Current assets Given Given Current liabilities Current assets Current ratio 1,078,964.00 1,722,315.00 0.63 ROE Net Income stock holders equity ROE Net income/ Equity Given Given 666,534.00 2,642,484.00 0.25 Requirement:5) Debt Equity ratio Liabiities/ Equity Given Given Liabilities Stock holders equity Debt Equity ratio 5,643,811.00 2,646,445.00 2.13 Current ratio Current liabiities Current assets Given Given Current liabilities Current assets Current ratio 1,050,964.00 1,722,315.00 0.61 ROE Net Income Stock holders equity ROE Net income/ Equity Given Given 688,794.00 2,646,445.00 0.26

Requirement:2) & 3) Entry Particulars Debit $ Credit $ Accounts payable 28,000 Gain on settlement of accounts payable 29,600 Treasury stock 57,600 (Issue of treasury stock -7200 shares for settlement of supplier a/c @ $8 per share) Income tax expense (29600 *25%) 7,400 7,400 Profit and loss account (25% computed as $222,136/$888,732) (Income tax expense booked at 25% on Gain on settlement) Terry Co., Income statement For the year ended December 31, Year 3 $ $ 8,390,400 Sales revenue Sales revenue Less: Sales discounts Sales returns Net sales revenue 89,100 708,750 797,850 7,592,550 4,692,326 2,900,224 Cost of Goods sold Cost of Goods sold Gross Profit Operating activities Selling expenses Advertising expenses 151,875 Bad debts Miscellaneous selling expenses Sales force selling expenses Selling commission expenses Shipping expenses 68,850 39,488 111,375 405,000 66,319

66,319 842,907 Shipping expenses Total selling expenses Administrative expenses Executive salaries expense Depreciation & Amortisation expense Insurance expense Miscellaneous admin expenses Office supplies expense R&D expense Utilities expense Total Administrative expenses Income from operations Other Gains and losses Rent revenue Interest expense Gain on settlement Income from continuing operations before taxes Income tax expenses @ 25%( $ 222, 198+$7400) Net income 354,375 480,644 29,363 3,999 31,388 121,500 60,750 1,082,019 975,298 25,312 111,818 29,600 - 56,906 918,392 - 229,598 688,794

Terry Co., Balance sheet As of 12/31/Year 3 Assets Year 3 Year 2 Current assets Cash 148,815 405,000 729,000 40,500 - 723,000 60,750 101,250 1,722,315 688,500 202,500 1,134,000 121,500 81,000 2,227,500 A/R Allowance for Bad debts Inventory Prepaid insurance Prepaid rent Total Current assets Long term investments Loans to other businesses Expansion fund Total long term investments PPE Land Building 324,000 41,420 365,420 324,000 41,420 365,420 891,000 648,000 567,000 648,000 ROU asset Equipment Accumulated depreciation Total PPE Intangible assets Patents, net 3,564,665 2,268,000 1,290,644 - 6,081,021 1,053,000 810,000 1,458,000 121,500 121,500 Total assets 8,290,256 4,172,420

486,000 81,000 564,537 211,714 4,813 140,300 89,100 40,500 1,050,964 121,500 101,250 40,500 830,250 486,000 Liabilities and Stockholders Equity Current liabilities Accounts payable Income tax payable Interest payable Unearned revenue Wages payable Current portion of Loans payable Total Current liabilities Long term debt Lease liability Loans payable Bonds payable-net Notes payable Total Long term debt-net Total liabilities Stockholders equity Common stock ($1 par, 560,000 authorised, 320000 issued and 311,200 outstanding) Additional paid in capital Treasury shares (800 shares owned) Retained earnings (2,122,954-7400-29600 -74839) Accumulated OCI Total stockholders equity Total liabilities and stockholders equity 2,808,988 445,500 204,359 1,134,000 4,592,847 5,643,811 648,000 1,134,000 1,964,250 320,000 320,000 243,000 273,720 6,400 2,070,315 11,190 - 2,646,445 8,290,256 1,656,360 11,190 2,208,170 4,172,420 To note : The balance sheet is not already tallying in the question, to tally it in recomputation $74839 adjusted in Retained earnings