Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–21
(20-30 min.) E 11-23A
Req. 1
Bowersox International Corporation
Statement of Comprehensive Income
Year Ended December 31, 2014
Net income …………………………………………………………………
$3,500,000
Other comprehensive income (loss):
Net unrealized gains on available–for-sale securities,
net of tax ……………………………………………………………………
$100,000
Foreign currency translation gains, net of tax ……………..
150,000
Other comprehensive income (loss) …………………………...
250,000
Comprehensive income ………………………………………………
$3,750,000
Req. 2
a. Net income is added to retained earnings.
b. Net unrealized gains from available-for-sale securities are included
(15-20 min.) E 11-24A
Req. 1
Sears reports sales revenue, service revenue, and operating income by
Req. 2
Req. 3
Kmart improved from a $34 million operating loss to $5 million operating
income. Sears Domestic reduced their operating loss from $1,447
million to $656 million. Sears Canada reported the worst performance
Req. 4
The investor learns more details about the individual parts that make up
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–23
(15-20 min.) E 11-25B
Req.1
Dion Cycles, Inc.
Income Statement
Year Ended September 30, 2014
Thousands
Net sales ……………………………………………………………………
$14,900
Total operating expenses ……………………………………………
12,700
Income from continuing operations before
income tax …………………………………………………………….
2,200
Income tax expense …………………………..……………………….
650
Income from continuing operations …………………………….
1,550
Income from discontinued operations,
$280, less income tax, $83 ………………………………………
197
Income before extraordinary item ……………………………….
1,747
Extraordinary loss, $13, less income tax saving, $4 ……..
(9)
Net income ………………………………………………………………..
$1,738
Req.2
Dion Cycles, Inc.
Statement of Comprehensive Income
Year Ended September 30, 2014
Thousands
Net income ………………………………………………………………
$1,738
Other comprehensive income (loss):
Unrealized gain on investments in AFSS, net of tax …
$ 36
Foreign-currency translation gain, net of tax …………..
350
Total other comprehensive income …………………………...
386
Comprehensive income ……………………………………………
$2,124
(20-25 min.) E 11-26B
Req. 1
Berkstrom Book Company
Income Statement
Year Ended December 31, 2014
Thousands
Sales revenue
$125,000
Other revenues
1,500
Total revenue
126,500
Total operating expenses
106,200
Income tax expense
5,920
Net income
$ 14,380
Earnings per share (EPS):
Net income ($14,380 / 800)
$17.98
Req. 2
The company’s quality of earnings would be considered to be good,
Req. 3
Investment
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–25
(10-15 min.) E 11-27B
Estimated
EPS for
value of
=
continuing operations
one share of
Investment
Beta, Inc. stock
capitalization rate
$79.41
=
$6.75
i
i
=
$6.75
=
8.5%
$79.41
(10-15 min.) E 11-28B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
May
9
Inventory …………………………………………………..
2,730
Accounts Payable (350,000 yen × $.0078) ..
2,730
June
18
Accounts Payable ……………………………………..
2,730
Cash (350,000 yen × $.0073) …………………..
2,555
Foreign-Currency Transaction Gain ………..
175
22
Accounts Receivable (25,000 euros × $1.17) .
29,250
Sales Revenue ………………………………………
29,250
28
Cash (25,000 euros × $1.15) ……………………….
28,750
Foreign-Currency Transaction Loss ……………
500
Accounts Receivable ……………………………..
29,250
Req. 2
On May 10, Big Buy Stores wanted the dollar to strengthen in order
to pay Toyita with yen that cost fewer dollars. That was what happened,
(10-15 min.) E 11–29B
Req. 1
Income Tax Expense ($417,000 × .30) ………….
125,100
Income Tax Payable ($320,000 × .30) ……….
96,000
Deferred Tax Liability ……………………………..
29,100
Req. 2
(10 min.) E 11-31B
(Amounts in millions, except per-share amounts)
Earnings per share of common stock (670* shares
outstanding):
Income from continuing operations ($733 / 670) ……………….
$ 1.09
Loss from discontinued operations, net of tax savings
($57 / 670)…………………………………………………………………….
(0.09)
Income before extraordinary gain ($676 / 670) ……………………..
1.00
Extraordinary gain, net of tax ($4 / 670) …………………………...
.01
Net income ($680 / 670) …………………………………………………..
$ 1.01
(10 min.) E 11-32B
Bright House, Inc.
Statement of Retained Earnings
Year Ended December 31, 2014
(Millions)
Retained earnings balance, December 31, 2013,
as originally reported ……………………………………………………
$418
Prior-period adjustment …………………………………………………….
(13)
Retained earnings balance, December 31, 2013,
as adjusted …………………………………………………………………..
405
Net income for 2014 ………………………………………………………….
88
Subtotal
493
Dividends declared for 2014 ………………………………………………
(41)
Retained earnings balance, December 31, 2014 ………………….
$452
The prior-period adjustment does not affect net income for 2014.
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–29
(20-30 min.) E 11-33B
Req. 1
Longman International Corporation
Statement of Comprehensive Income
Year Ended December 31, 2014
Net income ……………………………………………………….
$6,500,000
Other comprehensive income (loss):
Net unrealized losses on available-for-sale
securities, net of tax ………………………………………….
$(100,000)
Foreign currency translation losses, net of tax ……
(150,000)
Other comprehensive income (loss) …………………..
(250,000)
Comprehensive income …………………………………….
$6,250,000
Req. 2
a. Net income is added to retained earnings.
b. Net unrealized losses from available-for-sale securities are
(20-25 min.) E 11-34B
Req. 1
Req. 2
Emerging Markets segment appears to be growing the fastest (about a
Req. 3
The most profitable segments reporting the highest dollars of profits
Req. 4
Analyzing segment information helps the investor gain a better
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–31
Quiz
Q11–35
a
Q11–36
c
Q11–37
b ($40,000 / 0.08 = $500,000)
Q11–38
c (¥140,000 × $0.0091 = $1,274)
Q11–39
a
Q11–40
d
Q11–41
b
Q11–42
d
Q11–43
c
Q11–44
a
Q11–45
b
Q11–46
d
Q11–47
a
Problems
(20-30 min.) P 11-48A
Req. 1
Ryder Cosmetics, Inc.
Income Statement
Year Ended December 31, 2014
Revenues and gains:
Sales revenue ………………………………………………
$603,000
Dividend revenue …………………………………………
13,000
Gain on lawsuit settlement …………………………...
8,100
Total revenues and gains …………………………..
624,100
Expenses and losses:
Cost of goods sold ………………………………………
$294,000
Selling expenses ………………………………………….
82,000
General expenses ………………………………………..
71,900
Interest expense …………………………………………..
23,000
Loss on sale of plant assets …………………………
11,000
Income tax expense ……………………………………..
40,300
Total expenses and losses …………………………
522,200
Income from continuing operations …………………
101,900
Income from discontinued operations,
$14,000, less income tax, $4,600 ……………………
9,400
Income before extraordinary items …………………..
111,300
Extraordinary loss, $29,000, less
income tax savings of $8,570 ………………………..
(20,430)
Net income ……………………………………………………..
$ 90,870
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–33
(continued) P 11–48A
Req. 1 (continued)
Earnings per share:
Income from continuing operations
[($101,900 – $7,200*) / 23,000**] ………………………………………
$4.12
Income from discontinued operations, net of tax ………………..
($9,400 / 23,000 ……………………………………………………………..
.41
Income before extraordinary gain
[($111,300 − $7,200) / 23,000] ………………………………………….
4.53
Extraordinary loss, net of tax ($20,430 / 23,000) ………………….
(.89)
Net income [($90,870 − $7,200) / 23,000] …………………………….
$3.64
Req. 2
The company hoped to earn income from continuing operations equal
(10-15 min.) P 11-49A
Ryder Cosmetics, Inc.
Statement of Retained Earnings
Year Ended December 31, 2014
Retained earnings balance, December 31, 2013,
as originally reported …………………………………………………
$201,000
Prior-period adjustment (debit) ………………………………………..
(8,400)
Retained earnings balance, December 31, 2013,
as adjusted ………………………………………………………………..
192,600
Net income for 2014 ………………………………………………………..
90,870
Subtotal
283,470
Dividends declared for 2014 …………………………………………….
(45,200)*
Retained earnings balance, December 31, 2014 ………………..
$238,270
* Dividends for 2014: $38,000 + ($90,000 x 8%) = $45,200
(10-15 min. — after working P 11-48A) P 11-50A
Estimated value
of Ryder
common stock
Estimated annual
Income from continuing
=
income in the future
=
operations ($101,900)
=
$1,019,000
Investment
.10
capitalization rate
(30-40 min.) P 11-51A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
May
1
Accounts Receivable (€75,000 × $1.35) ……..
101,250
Sales Revenue ……………………………………
101,250
10
Supplies………………………………………………….
34,960
Accounts Payable (C$46,000 × $.76) …….
34,960
17
Accounts Receivable (₤139,000 × $1.91) ……
265,490
Sales Revenue ……………………………………
265,490
22
Cash (€75,000 × $1.38) ……………………………..
103,500
Accounts Receivable ………………………….
101,250
Foreign-Currency Transaction Gain……..
2,250
June
18
Accounts Payable ……………………………………
34,960
Cash (C$46,000 × $.75) ………………………..
34,500
Foreign-Currency Transaction Gain……..
460
24
Cash (₤139,000 × $1.88) …………………………...
261,320
Foreign-Currency Transaction Loss …………
4,170
Accounts Receivable ………………………….
265,490
Income statement (partial):
Other loss and expense:
Foreign-currency transaction (loss), net
($2,250 + $460 − $4,170) …………………………………………..
$(1,460)
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–37
(continued) P 11-51A
Req. 2
This problem demonstrates that the final amount of a cash receipt or
cash payment on an international transaction may differ from the initial
(25-35 min.) P 11-52A
Req. 1
Earnings per share:
Income from continuing operations
[($485,000 − $63,000*) / 235,000] ………………………………….
$1.80
Loss on discontinued operations ($89,000 / 235,000) ………..
(.38)
Income before extraordinary items
[($396,000 − $63,000) / 235,000] …………………………………..
1.42
Extraordinary gain ($94,000 / 235,000) ……………………………..
.40
Net income [($490,000 − $63,000) / 235,000] ……………………..
$1.82
Req. 2
Investment Capitalization Rates
9%
11%
13%
Estimated value
of CEL
common stock
=
$ 1.80
$ 1.80
$ 1.80
.09
.11
.13
=
$20.00
$16.36
$13.85
Chapter 11 Evaluating Performance: Earnings Quality, the Income Statement, & the Statement of Comprehensive Income
11–39
(30-40 min.) P 11–53A
Req. 1
Greene Harvest Foods, Inc.
Income Statement
Year Ended June 30, 2014
Revenues:
Sales revenue …………………………………………..
$983,000
Less: Sales returns ………………………………
$20,000
Sales discounts ………………………….
14,000
(34,000)
Net sales revenue …………………………………………
949,000
Expenses:
Cost of goods sold ……………………………………
$464,000
Selling expenses ………………………………………
51,000
General expenses ……………………………………..
92,000
Income tax expense ………………………………….
102,600
Total expenses …………………………..
709,600
Income from continuing operations ……………….
239,400
Loss on discontinued operations, $25,000,
less income tax savings of $7,500 ……………..
(17,500)
Income before extraordinary item ………………….
221,900
Extraordinary gain, $36,000, less
income tax of $10,800 ……………………………….
25,200
Net income ………………………………………………….
$247,100
Earnings per share:
Income from continuing operations ($239,400 / 20,000*) …..
$11.97
Loss on discontinued operations ($17,500 / 20,000) …………
(0.87)
Income before extraordinary item ($221,900 / 20,000) ……….
11.10
Extraordinary gain ($25,200 / 20,000) ……………………………….
1.26
Net income ($247,100 / 20,000) ………………………………………..
$12.36
_____
Computation of common shares outstanding:
*27,000 shares issued − 7,000 treasury shares = 20,000 shares outstanding
(continued) P 11-53A
Req. 2
Greene Harvest Foods, Inc.
Statement of Comprehensive Income
Year Ended June 30, 2014
Net income ……………………………………………………………………
$247,100
Other comprehensive income:
Unrealized loss on investments in AFSS, $10,000, less
income tax savings of $3,000 ………………………………….
(7,000)
Comprehensive income …………………………………………………
$240,100