PROBLEM 14-9
GOWER CORPORATION
Income Statement
For the Year Ended December 31, 2014
Net sales ……………………………………………………. $1,600,000
Cost of goods sold …………………………………….. 1,100,000
Gross profit ……………………………………………….. 500,000
Selling and administrative expenses …………… 160,000
Income from operations ……………………………… 340,000
Other revenues and gains …………………………... $22,000
BYP 14-1 FINANCIAL REPORTING PROBLEM
(a) PEPSICO, INC.
For the Five Years Ended 2010
Base Period 2006—(in millions)
2010
2008
2007
2006
(1)
Net sales
Trend
$57,838
165%
$43,251
123%
$39,474
112%
$35,137
100%
(2)
Net income
Trend
6,320
112%
5,142
91%
5,658
100%
5,642
100%
(b) (dollar amounts in millions)
(1) Profit Margin
(2) Asset Turnover
(3) Return on Assets
BYP 14-1 (Continued)
(4) Return on Common Stockholders’ Equity
2010: $6,320 ÷ [($21,273 + $16,908) ÷ 2] = 33.1%
(c) (dollar amounts in millions)
(1) Debt to Total Assets
(2) Times Interest Earned
Although creditors are providing more than 50% of PepsiCo’s total assets,
its long-term solvency is not in jeopardy. PepsiCo has the ability to pay
(d) Substantial amounts of important information about a company are not
in its financial statements. Events involving such things as industry
changes, management changes, competitors’ actions, technological
developments, governmental actions, and union activities are often
BYP 14-2 COMPARATIVE ANALYSIS PROBLEM
(a)
PepsiCo
Coca-Cola Company
(1)
(i)
Percentage increase
in net sales
$57,838 $43,232
= 33.8%
$35,119 $30,990
= 13.3%
$43,232
$30,990
(ii)
Percentage increase
(decrease) in net
income
$6,320 $5,946
= 6.3%
$11,809 $6,824
= 73.1%
$5,946
$6,824
(2)
(i)
Percentage increase
(decrease) in total
assets
$68,153 $39,848
= 71%
$72,921 $48,671
= 49.8%
$39,848
$48,671
(ii)
Percentage increase
(decrease) in total
common
stockholders’ equity
$21,273 $16,908
= 25.8%
$31,003 $24,799
= 25%
$16,908
$24,799
(3)
Basic earnings per share
$3.97*
$5.12*
Price-earnings ratio
$65.69
= 16.5 times
$65.77
= 12.8 times
$3.97
$5.12
*Given on income statement
(b) PepsiCo’s net sales increased by 33.8 while Coca–Cola’s increased by
13.3%. PepsiCo’s net income increased 6.3% while Coca–Cola’s net
PepsiCo increased stockholders’ equity by 25.8% while Coca–Cola’s
stockholders’ equity increased 25.0%. The absolute amounts of earnings
BYP 14-3 DECISION-MAKING ACROSS THE ORGANIZATION
The current ratio increase is a favorable indication as to liquidity, but
alone tells little about the going-concern prospects of the client. From
The acid-test ratio decrease is an unfavorable indication as to liquidity,
especially when the current-ratio increase is also considered. This decline
The change in asset turnover cannot alone tell anything about either
solvency or going–concern prospects. There is no way to know the amount
The increase in net income is a favorable indicator for both solvency
and going-concern prospects, although much depends on the quality of
receivables generated from sales and how quickly they can be converted
into cash. If there has been a decline in sales, a significant factor is that
The 32-percent increase in earnings per share, which is identical to the
percentage increase in net income, is an indication that there has probably
been no change in the number of shares of common stock outstanding.
BYP 14-3 (Continued)
The collective implications of these data alone are that the client entity
is about as solvent and as viable a going concern at the end of the current
BYP 14-4 REAL-WORLD FOCUS
(a) Optional elements include:
Financial highlights
Letter to stockholders
(b) SEC-required elements include:
Auditors’ report
Management discussion
(c) Management discussion. This series of short, detailed reports discusses and
(d) Auditors’ report. This summary of the findings of an independent firm
of certified public accountants shows whether the financial statements
(e) Selected financial data. This information summarizes a company’s financial
condition and performance over five years or longer. Data for making
comparisons over time may include revenue (sales), gross profit, net
BYP 14-5 COMMUNICATION ACTIVITY
To: Kyle Benson
From: Accounting Major
Subject: Financial Statement Analysis
There are two fundamental considerations in financial statement analysis:
1. Bases of comparison. The bases of comparison are:
b. Industry averages—This basis compares an item or financial rela-
competing companies.
2. Factors affecting quality of earnings are:
a. Alternative accounting methods—Variations among companies in
c. Improper recognition—Because some managers have felt pressure
BYP 14-6 ETHICS CASE
(a) The stakeholders in this case are:
Robert Turnbull, president of Turnbull Industries.
Perry Jarvis, public relations director.
You, as controller of Turnbull Industries.
extent his actions are unethical.
(c) As controller you should at least inform Perry, the public relations
director, about the biased content of the release. He should be aware
that the information he is about to release, while factually accurate, is
BYP 14-7 ALL ABOUT YOU
vehicles.