6) Income Statement for CharmCorp:
2008 2009
Total sales 600 540
Cost of sales -532 -488
Gross Proit 68 52
Selling, general,
and administrative expenses -36 -21
Research and development -4 -5
Depreciation and amortization -5 -5
Operating Income 23 21
Other income 1 5
Earnings before interest
and taxes (EBIT) 24 26
Interest income (expense) -7 -7
Pretax income 14 19
Taxes -4 5
Net Income 10 14
Consider the above Income Statement for CharmCorp. All values are in millions of dollars.
If CharmCorp. has 4 million shares outstanding, and its managers and employees have
stock options for 2 million shares, what is its diluted EPS in 2008?
A) $0.83
B) $1.33
C) $1.67
D) $2.00
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) Which of the following statements regarding the income statement is INCORRECT?
A) The income statement shows the cash lows and expenses at a given point in time.
B) The income statement shows the low of revenues and expenses generated by a irm
between two dates.
C) The last or “bottom” line of the income statement shows a irm’s net income.
D) The irst line of an income statement lists the revenues from the sales of products or
services.
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
31
8) Gross proit is calculated as ________.
A) total sales – cost of sales – selling, general, and administrative expenses – depreciation
and amortization
B) total sales – cost of sales – selling, general, and administrative expenses
C) total sales – cost of sales
D) none of the above
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
9) Which of the following is NOT an operating expense?
A) interest expense
B) depreciation and amortization
C) selling, general, and administrative expenses
D) research and development
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
32
10) Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $millions)
2006 2005
Total sales 610.1 578.3
Cost of sales -500.2 -481.9
Gross proit 109.9 96.4
Selling, general, and
administrative expenses -40.5 -39.0
Research and development -24.6 -22.8
Depreciation and amortization -3.6 -3.3
Operating income 41.2 31.3
Other income — —
Earnings before interest and taxes (EBIT) 41.2 31.3
Interest income (expense) -25.1 -15.8
Pretax income 16.1 15.5
Taxes -5.5 -5.3
Net income 10.6 10.2
Price per share $16 $15
Sharing outstanding (millions) 10.3 8.0
Stock options outstanding (millions) 0.4 0.1
Stockholders’ Equity 126.6 63.6
Total Liabilities and Stockholders’ Equity 533.1 386.7
Refer to the income statement above. For the year ending December 31, 2006 Luther’s
earnings per share is closest to ________.
A) $0.51
B) $1.03
C) $0.82
D) $1.23
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
33
11) Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $millions)
2006 2005
Total sales 610.1 578.3
Cost of sales -500.2 -481.9
Gross proit 109.9 96.4
Selling, general, and
administrative expenses -40.5 -39.0
Research and development -24.6 -22.8
Depreciation and amortization -3.6 -3.3
Operating income 41.2 31.3
Other income — —
Earnings before interest and taxes (EBIT) 41.2 31.3
Interest income (expense) -25.1 -15.8
Pretax income 16.1 15.5
Taxes -5.5 -5.3
Net income 10.6 10.2
Price per share $16 $15
Sharing outstanding (millions) 10.0 8.1
Stock options outstanding (millions) 0.3 0.2
Stockholders’ Equity 126.6 63.6
Total Liabilities and Stockholders’ Equity 533.1 386.7
Refer to the income statement above. Assuming that Luther has no convertible bonds
outstanding, then for the year ending December 31, 2006 Luther’s diluted earnings per
share are closest to ________.
A) $1.03
B) $0.51
C) $0.82
D) $1.23
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
34
12) How does a irm select the dates for preparation of its income statement?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
13) What will be the efect on the income statement if a irm buys a new processing plant
through a new loan?
AACSB Objective: Analytic Skills
Author: SS
Question Status: Previous Edition
2.5 Income Statement Analysis
1) Price-earnings ratios tend to be high for fast-growing irms.
AACSB Objective: Analytic Skills
Author: DS
Question Status: Previous Edition
35
2) Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $millions)
2006 2005
Total sales 610.1 562.8
Cost of sales -500.2 -380.8
Gross proit 109.9 182
Selling, general, and
administrative expenses -40.5 -40.7
Research and development -24.6 -23.4
Depreciation and amortization -3.6 -3.3
Operating income 41.2 114.6
Other income — —
Earnings before interest and taxes (EBIT) 41.2 114.6
Interest income (expense) -25.1 -14.1
Pretax income 16.1 100.5
Taxes -5.5
-35.17
5
Net income 10.6
65.32
5
Price per share $16 $15
Sharing outstanding (millions) 10.2 8.0
Stock options outstanding (millions) 0.3 0.2
Stockholders’ Equity 126.6 63.6
Total Liabilities and Stockholders’ Equity 533.1 386.7
Refer to the income statement above. Luther’s operating margin for the year ending
December 31, 2005 is closest to ________.
A) 10.18%
B) 16.29%
C) 20.36%
D) 24.43%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
36
3) Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $millions)
2006 2005
Total sales 610.1 569.6
Cost of sales -500.2 -389.2
Gross proit 109.9 180.4
Selling, general, and
administrative expenses -40.5 -39.6
Research and development -24.6 -21.6
Depreciation and amortization -3.6 -3.3
Operating income 41.2 115.9
Other income — —
Earnings before interest and taxes (EBIT) 41.2 115.9
Interest income (expense) -25.1 -14.2
Pretax income 16.1 101.7
Taxes -5.5 -35.595
Net income 10.6 66.105
Price per share $16 $15
Sharing outstanding (millions) 10.2 8.0
Stock options outstanding (millions) 0.3 0.2
Stockholders’ Equity 126.6 63.6
Total Liabilities and Stockholders’ Equity 533.1 386.7
Refer to the income statement above. Luther’s net proit margin for the year ending
December 31, 2005 is closest to ________.
A) 11.61%
B) 5.80%
C) 9.28%
D) 13.93%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
37
4) Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $millions)
2006 2005
Total sales 610.1 553.6
Cost of sales -500.2 -357.1
Gross proit 109.9 196.5
Selling, general, and
administrative expenses -40.5 -38.8
Research and development -24.6 -21.8
Depreciation and amortization -3.6 -3.4
Operating income 41.2 132.5
Other income — —
Earnings before interest and taxes (EBIT) 41.2 132.5
Interest income (expense) -25.1 -15.9
Pretax income 16.1 116.6
Taxes -5.5 -40.81
Net income 10.6 75.79
Price per share $16 $15
Sharing outstanding (millions) 10.2 8.0
Stock options outstanding (millions) 0.3 0.2
Stockholders’ Equity 126.6 63.6
Total Liabilities and Stockholders’ Equity 533.1 386.7
Refer to the income statement above. Luther’s earnings before interest, taxes,
depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest
to ________.
A) $271.8 million
B) $108.7 million
C) $163.1 million
D) $135.9 million
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
38
5) Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $millions)
2006 2005
Total sales 610.1 579.1
Cost of sales -500.2 -378.8
Gross proit 109.9 200.3
Selling, general, and
administrative expenses -40.5 -39.6
Research and development -24.6 -20.9
Depreciation and amortization -3.6 -3.7
Operating income 41.2 136.1
Other income — —
Earnings before interest and taxes (EBIT) 41.2 136.1
Interest income (expense) -25.1 -15.2
Pretax income 16.1 120.9
Taxes -5.5 -42.315
Net income 10.6 78.585
Price per share $16 $15
Sharing outstanding (millions) 10.2 8.0
Stock options outstanding (millions) 0.3 0.2
Stockholders’ Equity 126.6 63.6
Total Liabilities and Stockholders’ Equity 533.1 386.7
Refer to the income statement above. Luther’s return on equity (ROE) for the year ending
December 31, 2005 is closest to ________.
A) 247.12%
B) 98.85%
C) 123.56%
D) 148.27%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
39
6) Luther Corporation
Consolidated Income Statement
Year ended December 31 (in $millions)
2006 2005
Total sales 610.1 573.3
Cost of sales -500.2 -389.6
Gross proit 109.9 183.7
Selling, general, and
administrative expenses -40.5 -39.8
Research and development -24.6 -22.7
Depreciation and amortization -3.6 -3.2
Operating income 41.2 118
Other income — —
Earnings before interest and taxes (EBIT) 41.2 118
Interest income (expense) -25.1 -14.3
Pretax income 16.1 103.7
Taxes -5.5 -36.295
Net income 10.6 67.405
Price per share $16 $15
Sharing outstanding (millions) 10.2 8.0
Stock options outstanding (millions) 0.3 0.2
Stockholders’ Equity 126.6 63.6
Total Liabilities and Stockholders’ Equity 533.1 386.7
Refer to the income statement above. Luther’s return on assets (ROA) for the year ending
December 31, 2005 is closest to ________.
A) 17.43%
B) 34.86%
C) 13.94%
D) 1.99%
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
40