During 2005 Rustic Camp Sites experienced the following transactions.

1. RCS acquired $32,000 cash by issuing common stock.
2. RCS received $116,000 cash for providing services to customers (leasing camp sites).
3. RCS paid $13,000 cash for salaries expenses.
4. RCS paid a $9,000 cash dividend to the owners.
5. RCS sold land that had cost $100,000 for $100,000 cash.
6. RCS paid $47,000 cash for other operating expenses.

Required

1. Record the transaction data in a horizontal financial statements model like the following one. In the Cash Flow column, classify the cash flows as operating activities (OA), investing activities (IA), or financing activities (FA). The beginning balances have been recorded as an example. They are the ending balances shown on RCS’s December 31, 2004, financial statements illustrated in the chapter. Note that the revenue and expense accounts have a zero beginning balance. Amounts in these accounts apply only to a single accounting period. Balances are not carried forward from one accounting period to the next.
   
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2. Explain why there are no beginning balances in the Income Statement columns.
3. What amount of net income will RCS report on the 2005 income statement?
4. What amount of total assets will RCS report on the December 31, 2005, balance sheet?
5. What amount of retained earnings will RCS report on the December 31, 2005, balance sheet?
6. What amount of net cash flow from operating activities will RCS report on the 2005 statement of cash flows?
7. Assume that RCS has 20,000 shares of common stock outstanding that is selling at a market price of $33.60 per share. Determine the company’s P/E ratio. Based on the information shown in Exhibit 1-7, indicate whether investors believe RCS has a high-, medium-, or low-earnings growth potential.

Answer

1. 
   
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   *The letters NC on the last line of the column designate the net change in cash.



2. The revenue and expense accounts are temporary accounts used to capture data for a single accounting period. They are closed (amounts removed from the accounts) at the end of the accounting period and therefore always have zero balances at the beginning of the accounting cycle.
3. RCS will report net income of $56,000 on the 2005 income statement. Compute this amount by subtracting the expenses from the revenue ($116,000 Revenue − $13,000 Salaries expenses−$47,000 Other operating expense).
4. RCS will report total assets of $630,000 on the December 31, 2005, balance sheet. Compute total assets by adding the cash amount to the land amount ($230,000 Cash + $400,000 Land).
5. RCS will report retained earnings of $78,000 on the December 31, 2005 balance sheet. Compute this amount using the following formula: Beginning retained earnings + Net income − Dividends = Ending retained earnings. In this case, $31,000 + $56,000 − $9,000 = $78,000.
6. Net cash flow from operating activities is the difference between the amount of cash collected from revenue and the amount of cash spent for expenses. In this case, $116,000 cash inflow from revenue − $13,000 cash outflow for salaries expenses − $47,000 cash outflow for other operating expenses = $56,000 net cash inflow from operating activities.
7. Earnings per share = Net earnings ÷ Number of shares outstanding = $56,000 ÷ 20,000 shares = $2.80 per share. Price-earnings = Market price per share ÷ Earnings per share = $33.60 ÷ $2.80 = 12. Based on the information in Exhibit 1-7, a P/E ratio of 12 indicates that investors see RCS as a company with low earnings growth potential.