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ABC vs. XYZ
Author(s):
Young, David W.
Functional Area(s):
   Financial Accounting
Setting(s):
   For Profit
Difficulty Level: Beginner
Pages: 3
Teaching Note: Available. 
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First Page and the Assignment Questions:

The ABC and XYZ companies, two divisions of Sesame Street Enterprises, were preparing their financial statements for the fiscal year ending December 31, 2002. Each company’s accountants had prepared a preliminary set of financial statements (Exhibits 1 and 2), and were about to prepare the corresponding Statements of Cash Flows.

Remarkably, the financial performance of the two companies was almost identical. The only difference seemed to be that XYZ Company had issued some common stock totaling $22,000, and had sold some land on which it had taken a loss of $7,000. The result was that XYZ had a net income of $33,000, whereas ABC had a net income of $40,000 (the difference being XYZ’s loss on the sale of the land).

As the controllers of the two companies discussed the similarities of their financial performance during 2002, ABC’s controller was shocked to learn that, although her company’s net income was $7,000 more than XYZ’s, and although, and both companies had begun the year with the same cash balance, her company’s cash position was considerably worse than XYZ’s as of year end. XYZ, it turned out, had a cash balance of $61,000, compared to only $30,000 for ABC.

I realize you received $22,000 in cash from your issue of additional common stock,” the ABC controller commented, “but you lost $7,000 on the sale of your land, and we both paid $15,000 in dividends. How can this translate into a cash balance that is $31,000 bigger than mine?

The XYZ controller, while pleased that his cash balance had grown by $42,000 (from $19,000 to $61,000), as compared to only a $11,000 increase for ABC Company (from $19,000 to $30,000), realized that the issuance of common stock was only part of the explanation. He resolved to work out the details in time for the two controllers’ next lunch meeting the following week.

Assignment

  1. Prepare SCFs for the ABC Company and the XYZ Company. What do these tell you about the performance of each company? You may find it helpful to use T accounts for the Land account to help you understand what happened.
  2. Prepare an explanation why the XYZ Company’s increase in cash was $31,000 more than the ABC company.