4-19 Solutions
4.25 (Cemex S.A.B.; income statement formats.)
The missing items appear in boldface type below:
CEMEX S.A.B.
IFRS Income Statements
December 31, 2007 and 2006
December 31,
2007 2006
Income (Expense) from Financial Instru-
ments ………………………………………………….. 2,387 (161)
Other Financial Income (Expense) ………………. 6,647 4,905
Solutions 4-20
4.26 (GoodLuck Brands; income statement formats.)
GoodLuck Brands
Income Statements
For 2008, 2007, and 2006
2008 2007 2006
Net Sales ……………………………………. $ 8,769.0 $ 7,061.2 $ 6,145.2
Cost of Products Sold …………………… 4,618.9 3,843.0 3,342.1
Income from Continuing Opera-
4.27 (Broyo Corporation; correcting errors in income statement transactions.)
(Amounts in Millions of Pounds)
a. Broyo should not have recognized revenue on this transaction because it
has yet to perform on the contract. Revenues are overstated by 200 and
4-21 Solutions
Solutions 4-22
4.27 continued.
e. Broyo had performed all of its obligations with the customer, so on
f. The sale of a plant is not a recurring part of Broyo’s business. Therefore,
it should not be included as part of Revenues and Cost of Goods Sold,
4.28 (Dragon Group International Limited; correcting errors in income statement
transactions.)
a. In 2007, Dragon Group’s revenues are overstated by $1,000. These
d. Because the firm should have capitalized the development costs,
expenses for 2007 are overstated by $1,232.
4-23 Solutions
Solutions 4-24
4.29 (Standard Denim and Blue Label Jeans; interpreting common-size income
statements.)
a. The decreasing cost of goods sold to sales percentages for both firms
suggest a common explanation. One possibility is that the economy was
b. Blue Label Jeans relies more heavily on in-store promotions, which tend to
c. The increasing selling and administrative expenses to sales percentages
d. The explanation in Part
b
. applies here as well. Standard Denim includes
e. The interest expense to sales percentage decreased for Standard Denim
and increased for Blue Label Jeans. One possible explanation is
4-25 Solutions
Solutions 4-26
4.29 continued.
f. Both firms experienced increased net income relative to sales. Both firms
income tax expense to income before income taxes. The latter is the base
on which governments impose income taxes. Consider the following:
The income tax expense to income before income taxes percentages for
Standard Denim continually increased while those of Blue Label Jeans
4.30 (Lyle’s Lemonade Company and CitraPop; interpreting common-size income
statements.)
a. The creation, manufacture, and distribution of beverages involve six
principal activities:
4-27 Solutions
Lyle’s Lemonade primarily engages in the first three activities and its
Solutions 4-28
4.30 a. continued.
sales percentage for Lyle’s Lemonade might suggest that the market
b. The beverage industry, particularly for cola beverages, is relatively mature.
The increasing selling and administrative expense to sales percentages
c. One possibility is that both firms reduced their levels of interest-bearing
debt, which reduced interest expense. Another possibility is that declining
interest rates permitted both firms to borrow at lower rates.
d. Lyle’s Lemonade Company CitraPop
4-29 Solutions
Solutions 4-30
4.31 (Ericsson; interpreting common-size income statements.)
Ericsson’s profit margin declined from 16.0% in 2005, to 14.7% in 2006, to
4.32 (Thales Group; interpreting common-size income statements.)
The principal reason for the increasing profit margin was the increase in 2007
4.33 (Identifying industries using common-size income statement percentages.)
Exhibit 4.11 indicates that two firms have relatively low profit margins, two
firms have medium profit margins, and two firms have relatively large profit
require relatively little space, since its employees work on the customers’
premises. Thus, Firm (1) is Kroger Stores and Firm (2) is Kelly Services.
4-31 Solutions
Solutions 4-32
4.33 continued.
This leaves Hewlett-Packard and Delta Airlines with medium profit
margins. Hewlett-Packard offers products that are somewhat differentiated
and with some brand name appeal. However, competition in the computer
4.34 (SeaBreeze, Inc.; classification and interpretation of income statements.)
a. The ¥10,000 in Gains on Sales of Assets should not have been included
b. Net Financial Income of ¥13,800 should have been reported below the
c. The firm included a ¥6,000 writedown of inventory in Selling, General and
d. The firm included research and development expenditures of ¥34,000 in
Cost of Sales. None of the expenditures related to proven technologies
4-33 Solutions
e. The results of discontinued operations should be shown separately on the
Solutions 4-34
4.34 continued.
A summary of the effects of reclassifying the items on gross profit and net
income is provided below:
Gross Profit Net Income
4.35 (Dyreng Plc.; classification and interpretation of income statements.)
a. Dyreng should not have recognized any revenues (nor any costs) of this
b. 2008 Revenues are overstated by 700. The revenues and associated
c. The sale of the office building was not a normal part of Dyreng’s
d. Other Operating Income is overstated by 45. Gross Profit is correctly
4-35 Solutions
f. The sale of the advertising space is not a normal part of Dyreng’s
Solutions 4-36
4.35 continued.
A summary of the effects of reclassifying the items on gross profit and net
income is provided below:
Gross Profit Pre-tax Profit
4.36 (Calculation of tax rates.)
a. 2007: $7,712/$87,548 = 8.8%; 2008: $8,093/$88,396 = 9.2%.