Chapter 3
3.1 The multiple-step format provides several intermediate profit measures:
3.2 A common size income statement is created by dividing each of the line
3.3 Sales will increase or decrease if the amount of units sold increases or
3.4 Gross profit margin can increase or decrease as a result of a change in sales
prices, a change in cost of goods sold, or in the case of capital intensive industries,
3.5 A decreasing gross profit margin could occur if the sales prices or volume in
a capital intensive company decreased or the cost of goods sold increased.
3.6 The beverage and athletic shoes industries are examples of industries that
must advertise regularly or risk losing market share.
3.7
Investment Income
Investment Account
(a) Cost method
$12,000
*
$500,000
(b) Equity method
$30,000
**
$518,000
***
3.8 The four items included in comprehensive income include:
Foreign currency translation effects which are adjustments to the equity section of
the balance sheet resulting from the translation of foreign financial statements.
Unrealized gains and losses on investments in debt and equity securities classified
as available-for-sale are reported in comprehensive income.
3.9 The statement of stockholders’ equity summarizes the changes in all of the
equity accounts, including the retained earnings account.
3.10 The net income figure is based on accounting choices and estimates. The
inventory valuation and depreciation methods chosen can vary significantly and
2015 to 2016
2014 to 2015
12.2%
30.7%
2016
2015
2014
Cost of goods sold
76.8
%
75.0
%
72.0
%
Gross profit margin
23.2
25.0
28.0
Operating profit margin
11.4
12.2
14.7
Average tax rate
31.2
31.3
Net profit margin
8.4
10.0
3.12
Jackrabbit, Inc.
Income Statement for the Year
Net sales
$1,840,000
Cost of goods sold
1,072,000
Gross profit
768,000
Selling expenses
270,000
General and administrative expenses
155,000
Depreciation expense
Operating profit
319,000
Other Income (expense)
Gain on sale of equipment
Equity losses
Interest income
Interest expense
(16,000)
Pre-tax income
Income tax expense
Net income
3.13
Yarrick Company
Common Size Income Statement (in percent)
For the Years Ended December 31, 2016, 2015, and 2014
2016
2015
2014
Net sales
100.0
100.0
100.0
Cost of goods sold
58.2
54.2
53.7
Gross profit margin
41.8
45.8
46.3
Selling, gen. & admin.
17.7
29.1
Research & develop.
16.0
40.3
Income tax expense
(8.2)
Net profit margin
Sales have increased 15.7 percent from 2014 to 2015 and 52.9 percent from
2015 to 2016 for Yarrick Company. This increase is the result of volume or price
increases. The gross profit margin has declined each year. Yarrick has either
lowered selling prices or costs of goods sold have risen and the company has not
passed on those increases to their customers.
Operating profit margin has surprisingly increased despite the decline in gross
profit margin. This has been achieved by significant reductions in selling, general,
and administrative and research and development expenses in 2015. In dollars
Net profit has increased from a loss of $20 million to a profit of $12 million from
2014 to 2016 due to the above mentioned changes in operating expenses. Tax
expense has not had a significant impact on the net profit of the firm.
3.14 (a)
Gross profit margin:
2016
2015
2014
Tickets
45.1%
48.0%
Concessions
91.2%
90.0%
Total
59.5%
60.4%
(b) The overall gross profit margin of LA Theaters is declining. The cause of
this decline is the result of tickets rather than concessions. If the cost of acquiring
films is increasing, then ticket prices have not been raised proportionately,
otherwise ticket prices have been reduced without a corresponding decrease in cost
of films. Concessions gross profit margin is increasing each year which has
3.15 Compare the following paragraphs, one more descriptive and the other more
analytical. Have students assess their own writing as to the extent to which they
have analyzed rather than described Elf Corporation’s profit performance.
Descriptive Paragraph
Net income for Elf Corporation increased by $15 million in 2016 and 2015.
Analytical Paragraph
Net income for Elf Corporation increased in 2015 and 2016, but at a
decreasing rate. Sales also improved both years, but at a decreasing rate. Elf
Corporation maintained a 50% gross profit margin, reflecting the firm’s ability to
control the cost of products sold or to pass along price increases to customers. The
3.16 Students answers will differ unless specific companies are assigned by the
instructor.
3.17 There is no solution presented here since the list of technical projects on the
FASB agenda is ever-changing.
Case 3.1
(a)
INTEL
Common Size Income Statement
2013
2012
2011
Sales
100.0
%
100.0
%
100.0
%
Cost of Sales
40.2
37.9
37.5
Gross Profit
59.8
%
62.1
%
62.5
%
Research and development
20.1
19.0
15.5
Marketing, general and administrative
15.3
15.1
14.2
Restructuring and asset impairment
0.6
0.5
Operating income
23.3
%
27.4
%
32.3
%
Gains (losses) on equity investments,
net
0.9
0.3
0.2
Interest and other, net
(0.3
)
0.2
0.4
Income before taxes
23.9
%
27.9
%
32.9
%
Provision for taxes
5.7
7.3
9.0
Net Income
18.2
%
20.6
%
23.9
%
Effective tax rate
23.7
%
26.0
%
27.2
%
Growth rates
2012 – 2013
2011– 2012
Net revenues
(1.2)
%
(1.2)
%
Operating costs
%
%
Operating costs + COGS
%
%
Analysis of Income Statement
Revenues for Intel decreased in both 2013 and 2012 by 1.2%. Operating costs
increased in both years resulting in decreasing operating profit. Intel has four
segments for reporting purposes: the PC Client Group (PCCG), the Data Center
Group (DCG), the Other Intel Architecture segment (OIA) and the Software and
Services segment (SSG).
The decrease in revenues in 2012 was partially due to the fact that 2012 was a 52
week year and 2011 was a 53 week year. In addition, volume was decreasing due
to the shift away from PCs to consumer demand for tablets. Desktop platform
selling prices increased, however, to somewhat offset the decline in unit sales.
Notebook platform sales increased, but the average selling price decreased. Net
revenue for the OIA segment decreased by 13% in 2012. The decrease was
Operating profit has decreased significantly from 2011 to 2013 due to the decline
in revenues and gross profit margin combined with increases in all other operating
expenses.
Marketing, general and administrative expenses barely increased in 2013, and have
only increased about 1% since 2011 as a result of acquisition expenses of McAfee
and higher compensation expenses. (pg. 37 of Form 10-K)
Restructuring and asset impairment charges were incurred in 2013, as Intel
responded to the changing business environment by reducing the workforce and
exiting certain businesses and facilities such as the 200mm wafer fabrication
facility in Massachusetts, which will cease production by the end of 2014. (pg. 38
of Form 10-K)
taken out to repurchase the firm’s common stock. (See Note 22, pg. 94 of the Form
10-K for detail of this account.)
Net profit margin followed the downward trend of operating profit margin. To
continue to be successful, Intel must maintain good control of expenses, while
continuing to develop cutting edge products. In addition, Intel must be prepared to
transition quickly when changes in the technology market occur. With PCs and
older technology becoming obsolete, Intel, who has relied on PC sales, must be
competitive in newer markets. The increase in investments in R&D is warranted at
this point. Intel has been successful in controlling marketing, general and
administrative costs and plans for restructuring are also positive moves by the
Accumulated other comprehensive income has varied each year as a result of
changes in pension liabilities, investment related items, and foreign currency
translation.
According to the chairman of Intel the purpose of the repurchase of Intel’s
common stock is to increase stockholder value. Intel’s stock price ranged from a
high of $29.18 in the second quarter of 2012 to a low of $19.36 in the fourth
quarter of 2012. While the stock peaked at a high of $25.70 per share in 2013, one
must consider if the large amount of cash used to repurchase common stock would
have been more valuable if used elsewhere.