P2.30Preparing Financial Statements from Accounting Events.

1.

Photovoltaics, Inc.
Spreadsheet
Assets / = / Liabilities / Shareholders’ Equity
Cash / Accounts
Receivable / Inventory / Land / Equipment / Building / Patent / Start-up
Costs / Notes
Payable / Common
Stock / Additional
Paid-In
Capital / Retained
Earnings
1. / 500,000 / 1. 500,000 / 1. 1,000,000
2. / -27,000 / 2. 27,000
3. / 8,125,000 / 3. 2,500,000 / 3. 5,625,000
3. / -121,875 / 3. 121,875
4. / -8,000,000 / 4. 1,300,000 / 4. 750,000 / 4. 2,750,000 / 4. 4,500,000 / 4. 1,300,000
5. / 476,125 / -- / 1,300,000 / 750,000 / 2,750,000 / 4,500,000 / 500,000 / 148,875 / 1,300,000 / 3,500,000 / 5,625,000 / --
5. / 384,000 / 5. / 96,000 / 5. / 480,000 / (revenues)
6. / -70,000 / 6. 70,000
6. -215,000 / 6. / -215,000 / (cost of goods sold)
7. / -2,700 / 7. / -2,700 / (insurance expense)
8. / -72,000
8. / -72,000 / (wage expense)
8. / -9,600
8. / -9,600 / (selling expense)
9. -225,000 / 9. / -225,000 / (depreciation expense-bldg)
9. -275,000 / 9. / -275,000 / (depreciation expense-equip)
9. -29,412 / 9. / -29,412 / (patent amortization)
9. / 9. -29,775 / 9. / -29,775 / (start-up costs)
10. / -40,000 / 10. / -40,000 / (executive compensation expense)
11. / -130,000 / 11. / -130,000 / (interest expense)
13. / -100,000 / 13. / -100,000 / (dividend)
435,825 / 96,000 / 1,155,000 / 750,000 / 2,475,000 / 4,275,000 / 470,588 / 119,100 / 1,300,000 / 3,500,000 / 5,625,000 / (648,487)

Note. Start-ups costs (Transaction #2) were capitalized, although Codification Topic 720-15 requires that they be expensed.

No Income tax payable is required due to the presence of a net operating loss carryforward of $548,487.

Opening balance sheet

Photovoltaics, Inc.
Balance Sheet
Beginning of Year 1
Assets / Liabilities & Shareholders’ Equity
Cash / $476,125 / Notes payable / $1,300,000
Inventory / 1,300,000 / Shareholders’ equity:
Equipment / 2,750,000 / Common stock / 3,500,000
Building
Land
Patent / 4,500,000
750,000
500,000 / Additional paid-in-
capital / 5,625,000
Start-up costs / 148,875 / Retained earnings / --
Total / $10,425,000 / Total / $10,425,000

Income statement

Photovoltaics, Inc.
Statement of Earnings
For Year 1
Revenues / $480,000
Less: Cost of goods sold / (215,000)
Gross profit / 265,000
Less:Employee wages / $72,000
Insurance expense / 2,700
Selling & administrative expense / 9,600
Depreciation expense-Building / 225,000
Depreciation expense-Equipment / 275,000
Amortization of Patent / 29,412
Start-up costs / 29,775
Executive compensation / 40,000
Interest expense / 130,000
(813,487)
Net loss / $(548,487)

Balance sheet at end of first year

Photovoltaics, Inc.
Balance Sheet
End of Year 1
Assets / Liabilities & Shareholders’ Equity
Current: / Liabilities
Cash / $435,825 / Notes payable / $1,300,000
Accounts receivable / 96,000 / Shareholders’ equity
Inventory / 1,155,000 / Common stock / 3,500,000
Total / 1,686,825 / Additional paid-in-capital / 5,625,000
Noncurrent / Retained earnings / (648,487)
Land / $750,000
Equipment (net) / 2,475,000
Building (net) / 4,275,000
Patent (net) / 470,588 / Total liabilities & shareholders’ equity / $9,776,513
Start-up costs (net) / 119,100
Total / 8,089,688
Total assets / $9,776,513

Statement of Cash Flows

Photovoltaics, Inc.
Statement of Cash Flow
For Year 1
Cash flow from operations
Cash sales / $384,000
Cash cost of goods sold / (70,000)
Cash wages (72,000+40,000) / (112,000)
Cash selling, general and administrative expense
(2,700 + 9,600) / (12,300)
Cash interest / (130,000)
59,700
Cash flow from investing / 0
Cash flow from financing
Dividends paid / (100,000)
(100,000)
Decrease in cash
Cash, beginning of year
Cash, end of year / (40,300)
476,125
$435,825

2.A prospective investor would probably want to consider the following issues:

  1. Although sales were forecasted to be $480,000 in the first year, what is the demand for the photovoltaic arrays thereafter?
  2. At what level of sales will the company be at breakeven?
  3. Although there is not much debt on the balance sheet, the cash balance is very small. Is the small but positive cash flow from operations sufficient to sustain the business through the start-up phase?

Clearly, the decision to pay a dividend (especially a large one) at this early stage is unwise. The dividend of $100,000 exceeded the cash flow from operations of $59,700, thus eating away at the firm’s small cash balance. This decision should be reconsidered.