FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Computation:
*15,000 shares issued − 5,000 treasury shares = 10,000 shares outstanding
Req. 2
Net income 180,600$
Other comprehensive income:
Northern Foods, Inc.
Statement of Comprehensive Income
Year Ended June 30, 2016
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
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Unrealized loss on investments in AFSS, $13,000,
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P11-61B
(25-35 min.)
Requirements
Solution:
Req. 1
Pretax accounting income of 2016 200,000$
+ Additional taxable income for income
earned in 2017 that is taxed in 2016 17,000
1. Compute Consolidated’s taxable income for 2016.
2. Journalize the corporation’s income taxes for 2016.
3. Prepare the corporation’s single-step income statement for 2016.
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
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Req. 2
DATE DEBIT CREDIT
Req. 3
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P11-62
(20 min.)
Requirement
Solution:
Req. 1
Beg. Bal. $ 655,000 $ 680,000 $ 510,000
a.* NE NE NE NE
b. + 70,000 + 70,000 + 52,500 +
c. NE NE NE NE
1. Assume that the following transactions were inadvertently omitted at the end of the
year. Using the categories in the table, indicate the effect of each of the transactions on
each category; use 1 for increase, 2 for decrease, and NE for no effect. Provide dollar
amounts for each column except Earnings per Share.
2. Determine the amount of Operating Income, Income Before Tax, Net Income, and
Earnings Per Share after recording these transactions. Assume transactions (e) and (i)
occurred on January 1.
Transaction
Operating
Income
Income
before Tax
Net Income
Earnings
per Share
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
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Req. 2
Transaction
Income
Net Income
Earnings
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Decision Case 1
(15-20 min.)
Requirement
Solution:
EPS to use for predicting future profits:
Unaudited EPS 1.19$
Include:
Gain on sale of building
0.05
1. What EPS number will you use to predict Prudhoe Bay’s future profits? Show your
work, and explain your reasoning for each item.
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
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Restructuring expenses
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Decision Case 2
(15-20 min.)
Requirement
Solution:
Magid’s earnings are of higher quality than those of Bay Area. Magid follows more
conservative (and more realistic) accounting policies than Bay Area. Here are some
examples:
SALES REVENUE
Magid records sales revenue when it receives an installment sale contract and a cash
down payment from a customer. In contrast, Bay Area records revenue when it
receives an installment sale contract regardless of whether Bay Area receives a
Suppose you have decided to invest in an auto dealership, and you’ve narrowed your
choices to Magid and Bay Area. Which company’s earnings are of higher quality?
Why? Will their accounting policies affect your investment decision? If so, how?
Mention specific accounts in the financial statements that will differ between the two
companies. (Challenge)
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 59 of 68
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Ethical Issue
Requirements
Solution:
Req. 1
Req. 2 and Req. 3
1. Identify the ethical issue in this situation.
2. Who are the stakeholders?
3. Evaluate the issue from the standpoint of (a) economic, (b) legal or regulatory, and
(c) ethical dimensions. What are the possible effects on all stakeholders you identified?
4. Put yourself in the position of the controller of the bank. Your boss, the CEO, tries to
pressure you to make the disclosure that violates IFRS. What would you do? What are
the potential consequences?
The ethical issue: Does it matter how a company reports its operating results as long
as the totals are accurate? May all items of income and loss be combined or should
items from recurring and non-recurring sources be reported separately?
The stakeholders in this case include the bank, its officers and directors, shareholders,
prospective shareholders, its creditors, and stock analysts.
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
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FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 61 of 68
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Apple, Inc.
(30-45 min.)
Requirements
Solution:
Req. 1
1. Apple Inc.’s consolidated statements of operations do not mention income from
continuing operations. Why not? Focus your attention on the company’s Consolidated
Statements of Operations for the three years ended September 27, 2014, as well as
the footnotes to financial statements and other materials. What clues do you find that
help you evaluate the quality of Apple Inc.’s earnings?
2. Assume the role of an investor. Suppose you are determining the price to pay for a
share of Apple Inc. stock. Assume you are considering three investment capitalization
rates that depend on the risk of an investment in Apple Inc.: 5%, 6%, and 7%. Compute
your estimated value of a share of Apple Inc., stock, using each of the three
capitalization rates. For the sake of simplicity for this activity, use net income for the
fiscal year ending September 27, 2014 as the estimated annual income in the future.
Which estimated value would you base your investment strategy on if you rate Apple
Inc. risky? If you consider Apple Inc. a safe investment?
3. Go to Apple Inc.’s website and compare your computed estimates to its actual stock
price. Which of your prices is most realistic? (Challenge)
Apple Inc.’s income statement does not mention income from continuing operations
because there are no special items of income, such as discontinued operations. All of
Apple, Inc.’s net income results from continuing operations. To evaluate quality of
earnings, we reviewed Apple’s revenue and expense recognition principles. According
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 62 of 68
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Measures of Quality
of Earnings
Cost of goods sold to
sales ratio
2014
2013
2012
$112,258/$182,795
= 0.61
$106,606/$170,910
= 0.62
$87,846/$156,508
= 0.56
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 63 of 68
Gross margin to sales
ratio
= 0.38
$68,662/$156,508
= 0.44
Operating income to
sales ratio
= 0.29
$55,241/$156,508
= 0.35
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Net Income per outstanding share: $39,510,000,000 / 6,085,572 = $6.49.
Investment Capitalization Rates
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 64 of 68
Req. 3
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Under Armour, Inc.
(30 min.)
Requirements
Solution:
Req. 1
1. Focus on the company’s Consolidated Statements of Income for the three years
ended
December 31, 2014, as well as Note 2 summarizing the company’s significant accounting
policies. What is your evaluation of the quality of Under Armour, Inc.’s, earnings? Explain
how you formed your opinion.
2. Refer to Note 16 to the Consolidated Financial Statements. How does Under Armour,
Inc.’s, management define its operating regions? Which financial statement information
does the company report by operating region? Which region appears to be the largest?
What does this tell you about the international nature of Under Armour, Inc.’s, business?
3. At the end of 2014, how much would you have been willing to pay for one share of
Under Armour, Inc.’s, stock if you had rated the investment as high risk? As low risk? Use
evennumbered investment capitalization rates in the range of 4%–10% for your analysis,
and use basic earnings per share for continuing operations.
4. Go to Under Armour, Inc.’s, website and get the current price of a share of its common
stock. Which value that you estimated in requirement 3 is closest to the company’s actual
stock price? (Challenge)
Measures of
Quality of
Earnings
2014
2013
2012
Cost of
goods sold
$1,572/$3,084
= 0.51
$1,195/$2,332
= 0.51
$956/$1,835
= 0.52
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
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$1,512/$3,084
= 0.49
$1,137/$2,332
= 0.49
$879/$1,835
= 0.48
$1,158/$3,084
= 0.38
= 0.37
= 0.37
$209/$1,835
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
This table examines four ratios that investigate earnings quality. Cost of goods sold to
revenues have been stable over 2013 and 2014, which is a favorable sign. The same
comment applies to gross margin to revenues and operating income to revenues ratio.
The only unfavorable measure is a slight increase (1%) in operating expenses to
revenues in 2014. Overall, the ratios examined reveal favorable trends in 2012 through
2014, and reveal that Under Armour has favorable quality of earnings.
The notes about revenue and expense recognition are also in line with generally
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
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FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 4
Student answers will vary depending on when this problem is assigned. If a student used
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
Page 67 of 68
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Group Project
(1-2 hours)
Requirements
Solution:
Student responses on this problem will vary.
1. Based on your group’s analysis, come to class prepared to instruct the class on
six interesting facts about the company that can be found in its financial statements
and the related notes. Your group can mention only the obvious, such as net sales
or total revenue, net income, total assets, total liabilities, total stockholders’ equity,
and dividends, in conjunction with other terms. Once you use an obvious item, you
may not use that item again.
2. The group should write a paper discussing the facts that it has uncovered. Limit
the paper to two double-spaced word-processed pages.
Chapter 11: Evaluating Performance: Earnings Quality,
the Income Statement, the Statement of Comprehensive Income
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