Reported Earnings and Financial Position ♦ 161
You have been asked to inspect the financial statements of the Chopper Builders Company. For
each item below, indicate which financial statement you would inspect to determine the
information noted. Use the following letters to indicate the individual financial statements.
a.
Income statement
b.
Balance sheet
c.
Statement of stockholders’ equity
27. Total amount of dividends paid during the year, including any that were paid in a form other than
cash.
28. Accrual-based results of the current period’s operating activities.
29. The average price that was received for shares of the company’s common stock when originally
sold.
30. Total price paid to obtain the goods that were sold this period.
31. The amount of receivables owed to the firm at the end of the period.
32. Cost of buildings and machinery the company owns.
33. The cumulative amount of profits the company has earned over its life that have not been
distributed to owners.
34. The total amount of stock issued during the year.
35. The amount of credit purchases not yet paid for.
36. The sources of finances used to acquire resources.
162 ♦ Chapter 4
PROBLEM
1. Information about Space Travel Corporation, which sells rocket engines, is shown below:
Common shares outstanding
150,000
Advertising expense
$ 9,000
Cost of goods sold
330,000
Depreciation expense
13,500
Income tax expense
15,000
Income tax payable
7,500
Interest expense
6,000
Payments to owners
4,500
Retained earnings
37,500
Salaries expense
45,000
Sales revenue
450,000
Required:
Compute (a) gross profit, (b) income from operations, (c) net income and (d) earnings per share
for the period.
2. Sandovar Company reported the following income statement for June 2007:
Sandovar Company
Income Statement
For the Month Ended June 30, 2007
$736,000
552,000
$184,000
88,000
54,000
(22,000)
120,000
64,000
20,000
$ 44,000
$4.40
Required:
Determine (a) gross profit, (b) product cost expensed during year, (c) non-product operating
expenses, (d) operating income, (e) net income and (f) earnings per share.
gross profit
$120,000 = $450,000 – $330,000
b.
income from operations
$52,500 = $120,000 – 9,000 – 13,500 – 45,000
net income
$31,500 = $52,500 – 6,000 – 15,000
d.
earnings per share for the period
0.21 = $31,500/150,000
Reported Earnings and Financial Position ♦ 163
3. Information about Iron Horses, which sells motorcycles, is shown below:
20,000
24,000
660,000
28,000
20,000
14,000
10,000
30,000
70,000
120,000
900,000
Required:
Compute (a) gross profit, (b) income from operations, (c) net income and (d) earnings per share
for the period.
gross profit
$240,000 = $900,000 – 660,000
b.
income from operations
$68,000 = $240,000 –24,000 -28,000 – 120,000
net income
$38,000 = $68,000 – 10,000 – 20,000
d.
earnings per share for the period
$1.90 = $38,000 ÷ 20,000
Gross profit
b.
Product cost expensed during year
Non-product operating expenses
d.
Operating income
Net income
Earnings per share
164 ♦ Chapter 4
4. Environmental Company reported the following income statement for November 2007:
Environmental Company
Income Statement
For the Month Ended November 30, 2007
$319,000
238,000
$81,000
27,000
18,500
4,500
50,000
31,000
10,000
$21,000
$2.10
Required:
Determine (a) gross profit, (b) product cost expensed during year, (c) non-product operating
expenses, (d) operating income, (e) net income and (f) earnings per share.
5. You are reviewing a set of financial statements and come across the following headings. Indicate
with an “X” the financial statement you would expect to find the heading listed on. Some items
may appear on more than one statement or not at all.
Income
Statement
Balance Sheet
Statement of
Stockholders’
Equity
a.
Earnings per share
b.
Dividends paid
c.
Accumulated depreciation
d.
Prepaid insurance
e.
Wages payable
f.
Cost of goods sold
g.
Sales revenue
h.
Interest expense
i.
Interest payable
j.
Contributed capital
a.
Gross profit
$ 81,000
b.
Product cost expensed during year
238,000
c.
Non-product operating expenses
45,500
d.
Operating income
35,500
e.
Net income
21,000
Earnings per share
$2.10
Reported Earnings and Financial Position ♦ 165
6. Cowhand’s Bar-B-Q House went into business on January 1, 2007. The following information is
available at December 31, 2007:
Sales revenue for the year
$300,000
Cash on hand at 12-31-2007
8,000
Contributed capital
50,000
Wages payable at year end
15,000
Cash received from customers during the year
190,000
Dividends paid during the year
8,000
Expenses incurred during the year (depreciation expense = $0)
195,000
Cash paid to buy long-term assets during the year
25,000
Accounts receivable at year-end
?
Required:
Determine the correct amount for each of the following:
a.
What is the amount of net income?
b.
What amount should be reported for retained earnings at year-end 2007?
c.
What is the amount of accounts receivable at year end?
a.
c.
Earnings per share
b.
Dividends paid
Accumulated depreciation
d.
Prepaid insurance
Wages payable
Cost of goods sold
g.
Sales revenue
h.
Interest expense
Interest payable
Contributed capital
166 ♦ Chapter 4
7. Aspenglow Company had the following expenses during November:
1.
Rent on factory building used to produce products
$ 2,400
2.
Rent on administrative office building
1,800
3.
Compensation for factory workers who assemble products
18,000
4.
Compensation for administrative office workers
6,000
5.
Advertising expense
1,400
6.
Commissions paid to sales force on sales
2,800
7.
Materials used to produce products
8,000
8.
Cost to heat factory building used to produce products
600
Required:
Determine the total (a) product cost and (b) period cost for November.
8. Slade Enterprises had the following transactions during its first month:
1.
Owners contributed $30,000 to start the firm.
2.
Inventory costing $16,000 was purchased for cash.
3.
The first month’s rent of $4,000 was paid in cash.
4.
One-half of the inventory was sold to customers on credit for $12,400.
5.
Advertising was run costing $3,600. It will be billed and paid for during the second
month.
6.
Additional inventory costing $14,000 was purchased and sold to customers for
$22,000 cash.
7.
At month end the employees were paid $5,000 in cash and an additional $1,600 of
wages was owed to them, but had not been paid.
8.
On the last day of the month, equipment costing $11,000 was purchased for cash.
Required:
Prepare a schedule that shows how net income from operations for the first month is determined.
1.
2.
3.
4.
5.
6.
7.
8.
Total
Reported Earnings and Financial Position ♦ 167
9. Zero Soda Bottling has just completed its end-of-period analysis and adjustments. Account
balances as of December 31, 2007 are as follows:
Cash
$280,000
Owners’ equity
$ 920,000
Accounts receivable
180,000
Sales revenue
1,240,000
Merchandise
460,000
Cost of goods sold
620,000
Equipment
340,000
Wages expense
240,000
Accounts payable
90,000
Utility expense
130,000
Required:
Prepare an Income Statement.
240,000
Revenues: ($12,400 + $22,000)
Expenses:
Cost of goods sold ($8,000 + $14,000)
Advertising
Wages ($5,000 + $1,600)
Total expenses
Net income (loss)
168 ♦ Chapter 4
10. On March 1, 2007, Alana and Eva started the Decorating Review Company. They offer a complete
line of decorative items and decorating services. Following are the transactions occurring during
the first month of business:
1. The business was started by each partner contributing $9,000.
2. Each partner also contributed $6,000 worth of antique items from their own collections to the
business.
3. The annual business license and permits totaled $1,500 and were paid in cash. (Hint: This will
require an adjusting entry. Use the asset account titled Prepaid Business Fees.)
4. A used delivery van was purchased by paying $3,000 down and signing a three-year note
payable for the $15,000 balance. Interest expense on this loan is $1,800 for the first year. The
first payment is due April 15. (Hint: This will require an adjusting entry).
5. An inventory of accessories was purchased on credit for $4,500.
6. A shop was rented for $500 monthly, and the first month’s rent was paid.
7. Advertising costing $700 was run in the newspaper. The bill had not yet come by the end of
the month and had not been paid.
8. Services totaling $6,000 were performed during the month for cash.
9. Services totaling $10,000 were performed during the month on credit.
10. Accessories costing a total of $5,000 were sold to customers for $8,000 cash.
11. Gas, oil, and maintenance on the delivery van totaling $300 were paid for.
12. At the end of the month, Alana and Eva each withdrew $1,000 from the business for personal
expenses.
Required
Prepare an income statement for the month of March.
Reported Earnings and Financial Position ♦ 169
11. Palomo Company reported the following balance sheet at October 31, 2007:
Palomo Company
Balance Sheet
October 31, 2007
$10,000
13,000
14,000
$37,000
20,000
3,000
17,000
$54,000
$ 6,000
5,000
11,000
35,000
8,000
43,000
$54,000
Required:
Determine (a) current assets, (b) property, plant, and equipment, (c) total assets, (d) total liabilities,
and (e) stockholders’ equity.
12. The Molusk Shrimp Company has the following account balances and other information available
at April 30, 2007:
Accounts receivable
$178,000
Operating expenses
$192,000
Common stock
200,000
Cash
112,000
Income tax expense
75,200
Bonds payable (due
4-20-12)
20,000
Retained earnings
?
Accounts payable
100,000
Sales revenue
900,000
Cost of goods sold
520,000
Buildings
220,000
Required:
Determine the following amounts at April 30, 2007.
a.
Total assets
b.
Working capital
c.
Gross profit
d.
Retained earnings
e.
Net income
f.
Working capital ratio
Current assets
$37,000
b.
Property, plant, and equipment
17,000
Total assets
54,000
d.
Total liabilities
11,000
Stockholders’ equity
43,000
170 ♦ Chapter 4
13. Mountaintop Excursions, Inc. has the following information available at December 31, 2007:
Cost of goods sold
$12,000
Cash paid for inventory
$10,800
Interest payable
1,600
Buildings
40,000
Cash paid for wages
6,000
Other expenses
12,400
Prepaid insurance
400
Accounts payable
3,800
Cash received from
customers
20,000
Cash paid for interest
1,340
Depreciation expense
2,400
Common stock
23,400
Accounts receivable
4,000
Cash
6,000
Sales revenue
33,200
Retained earnings
?
Required:
Prepare an income statement and balance sheet in good form.
Sales revenue
Cash
Cost of goods sold
Accounts receivable
Buildings
Gross profit
Operating expenses
Total assets
Pre-tax income
Income tax expense
Accounts payable
Bonds payable
20,000
Net income
Common stock
Retained earnings
Total liabilities &
equity
Reported Earnings and Financial Position ♦ 171
14. Transatlantic Corporation had the following account balances at October 31, 2007
Accounts payable
$ 18,000
Accounts receivable
20,000
Accumulated depreciation
8,000
Cash
12,000
Cost of goods sold
300,000
Equipment
44,000
Inventory
28,000
Owners’ equity
?
Rent expense
6,000
Sales revenue
380,000
Wages expense
48,000
Required:
Prepare (a) an income statement for the year ended October 31, 2007 (b) a balance sheet as of
October 31, 2007.
Sales revenue
Cost of goods sold
Gross margin
Depreciation expense
Other expenses
Net income
Cash
Accounts receivable
Prepaid insurance
Buildings
Total assets
Accounts payable
Interest payable
Common stock
Retained earnings
Total liabilities and equity
172 ♦ Chapter 4
15. Vesuvius Company had the following account balances at August 31, 2007
Accounts payable
$ 20,000
Accounts receivable
40,000
Accumulated depreciation
14,000
Cash
32,000
Cost of goods sold
280,000
Equipment
38,000
Inventory
30,000
Owners’ equity
36,000
Rent expense
10,000
Sales revenue
420,000
Wages expense
60,000
Required:
Prepare (a) an income statement for the year ended August 31, 2007, (b) a balance sheet as of
August 31, 2007.
Sales revenue
Expenses:
Cost of goods sold
Wages expense
Rent expense
Total expenses
Net income
Assets:
Cash
Accounts receivable
Inventory
Equipment
Less: Accumulated depreciation
Total assets
Liabilities:
Accounts payable
Equity:
Owners’ equity
Reported Earnings and Financial Position ♦ 173
16. At January 1, 2007 Best Books Company reported contributed capital of $700,000 and retained
earnings of $350,000. During 2007, the firm had sales of $1,800,000 and expenses of $1,550,000.
Common stock was issued during July for $400,000 and bonds were issued during October for
$600,000. Dividends of $70,000 were paid on December 15, 2007.
Required:
Prepare a statement of stockholders’ equity at December 31, 2007.
174 ♦ Chapter 4
17. At January 1, 2007, Piedmont Company reported contributed capital of $225,000 and retained
earnings of $125,000. During 2007, the firm had sales of $500,000 and expenses of $412,500.
Common stock was issued during July for $75,000 and bonds were issued during October for
$100,000. Dividends of $25,000 were paid on December 15, 2007.
Required:
Prepare a statement of stockholders’ equity at December 31, 2007.
18. On December 31, 2007, the Real Weapons Factory reported total stockholders’ equity of $447,200.
On that date, total contributed capital was $360,000. During 2007, the firm had total sales of
$3,600,000; expenses of $2,950,000; and paid dividends of $166,000. Common stock was issued
on May 12, 2008, for $310,000 and $249,400 was used to buy new equipment the next day.
Required:
Prepare a statement of stockholders’ equity at December 31, 2008
Reported Earnings and Financial Position ♦ 175
ESSAY
1. You are showing an income statement to a friend who asks why there are at least three separate
lines that appear to yield “income” information. Identify the general structure of an income
statement and explain each one. Differentiate among each of the lines that show “income” in one
form or another.
2. Clearly differentiate between product cost and a period cost. Give an example of each and discuss
how each flows through the accounting system. Discuss how these costs are sometimes treated
differently for internal or external reporting purposes.
176 ♦ Chapter 4
3. Discuss the similarity and difference between the terms “depreciation” and “depletion.” Do they
represent the same thing or are they conceptually different from one another?
4. Differentiate between the net income that is reported on the income statement and the term
“comprehensive net income.”
5. Most balance sheets that are presented in corporate annual reports can be described as being
classified balance sheets and as being comparative balance sheets. Explain what is meant by
classified and comparative in this context and what benefits these features add to the balance
sheet.
6. It is sometimes said that one of the limitations of financial statements is the use of historical costs.
Why might this be a limitation? What other attribute might be more relevant to statement users?
178 ♦ Chapter 4
7. Explain the five primary limitations of financial statements.