2011 2010
$262,966 100.0% $237,632 100.0%
117,474 44.7% 85,925 36.2%
$145,492 55.3% $151,707 63.8%
$ 33,213 12.6% $ 55,314 23.3% *
$ 900 0.3% * $ 425 0.2%
1,800 0.7% * 850 0.4%
$ 1.22 $ 2.03
%%
Less interest expense
Net sales
Cost of goods sold
Gross margin
Income from operations
Earnings per share
Chapter 4, P 2.
1. Multistep income statements prepared
Elm Nursery Corporation
Income Statements
For the Years Ended April 30, 2011 and 2010
Other revenues and expenses
Interest income
Income from operations decreased from 2010 to 2011. The primary reasons for this
2. User insight: Income from operations discussed
to 2011. This means that management took on additional debt to finance the busi-
3. User Insight: Income before income taxes discussed
Income before income taxes also decreased from 2010 to 2011. The primary reason
Chapter 4, P 2. (Continued)
ness operations.
214
$ 64,000
66,000
20,000
2,560
880
7,360
$1,015,600
8,000
$1,195,200
Sales supplies
Current assets
Short-term investments
Cash
Notes receivable
Chapter 4, P 3.
Assets
Bissel Hardware Corporation
Balance Sheet
Intangible assets
(continued)
June 30, 2011
Total current assets
Deposit for future advertising
Office supplies
Total assets
Trademark
Investments
215
$229,200
$ 44,000
authorized, issued, and outstanding
Current liabilities
Accounts payable
Stockholders’ Equity
Contributed capital
Chapter 4, P 3. (Continued)
Liabilities
Common stock, $1.10 par value, 40,000 shares
216
Chapter 4, P 3. (Continued)
A user of the classified balance sheet would want to know the debt to equity ratio
because it shows the proportion of the company financed by creditors in compari-
2. User Insight: Ratio discussed
1. Profitability measures computed
b.
Chapter 4, P 4.
Asset Turnover
c. =
Average Total Assets
=
Net Sales
Net Income
Average Total Assets
Return on Assets
Profit Margin
a.
$870,000
=Net Income
Net Sales
218
Cash Flows from Operating Activities
Net Income
16.3%
$82,500
$507,500
2011:
Chapter 4, P 4. (Continued)
Cash Flow Yield
e. =
=d.
Cash Return on Assets
Cash Flow from Operating Activities
Average Total Assets
=
219
( + ) ÷ 2
2. User Insight
Chapter 4, P 4. (Continued)
g. Return on Equity
There was an increase in both profit margin and asset turnover from 2010 to 2011,
which resulted in an increase in return on assets. Note that return on assets is more
$260,000
Net Income
$335,000
=
Average Stockholders’ Equity
2011: $75,000
220
$357,195
1,400
$358,595
$ 1.81
$141,585
Chapter 4, P 5.
Revenues
1a.
For the Year Ended December 31, 2011
Single-step income statement prepared
Total revenues
Income Statement
Interest income
Retained earnings, December 31, 2010
Surosa Corporation
Statement of Retained Earnings
For the Year Ended December 31, 2011
Statement of retained earnings prepared
Surosa Corporation
Net sales
Earnings per share
1b.
221
$14,200
19,800
52,400
$44,250
8,550 35,700
85,400
Classified balance sheet prepared
Current assets
Investment in U.S. government securities
Cash
1c.
Delivery equipment
Accounts receivable
Total property, plant, and equipment
Less accumulated depreciation
Chapter 4, P 5. (Continued)
Assets
Surosa Corporation
Balance Sheet
December 31, 2011
$ 25,000
$ 91,300
$ 5,000
Current liabilities
Notes payable
Contributed capital
Chapter 4, P 5. (Continued)
Liabilities
Stockholders’ Equity
authorized, issued, and outstanding
Common stock, $0.50 par value, 10,000 shares
223
=
2.
5.1%
Net Income
Net Sales
$18,065
$20,000 = 1.1
(a) Profit Margin
Profitability measures computed
=$357,195 =
$18,065
=
(c) Cash Flow Yield Net Income
Cash Flows from Operating Activities
=
224
Chapter 4, P 5. (Continued)
Cash Flows from Operating
Activities
(f) Cash Return
(g) Return on Equity Net Income
=
Average Stockholders’ Equity
225
3.
Chapter 4, P 5. (Continued)
2.3 percent, but its asset turnover ratio of 1.3 is much lower than the industry
The corporation’s profit margin of 5.1 percent exceeds the industry average of
User Insight: Financial ratios discussed
226
1.
2.
3.
4.
5. The failure to disclose the inventory method is a violation of the full disclosure
conservatism can be used only when two equally acceptable accounting meth-
This is an unacceptable application of the conservatism convention because
Chapter 4, P 6.
This is an unacceptable application of the materiality convention because illegal
ods if it complies with the convention of full disclosure by reporting the change
This is an acceptable application of the cost-benefit convention if management
The change in depreciation methods is a violation of the comparability and con-
sistency convention. However, management can change its accounting meth-
convention. To interpret the statements, users of financial statements must
User Insight: Accounting convention explained
in the notes to its financial statements.
2011 % 2010 %
$464,200 100.0% $388,466 100.0%
243,880 52.5% 198,788 51.2%
$220,320 47.5% $189,678 48.8%
$ 34,320 7.4% $ 84,748 21.8%
$ 1,420 0.3% $ 750 0.2%
5,600 1.2% 1,100 0.3%
$ 2.21 $ 6.31
2. User Insight: Income from operations discussed
Income from operations decreased from 2010 to 2011 in absolute amount by $50,428
($84,748 – $34,320) and decreased in percentage from 21.8 percent to 7.4 percent of
net sales despite an increase in net sales. There were two reasons for the decrease
Kaluza Hardware Corporation
Income Statements
For the Years Ended July 31, 2011 and 2010
Other revenues and expenses
Less interest expense
Interest income
Chapter 4, P 7.
1. Multistep income statements prepared
Net sales
Cost of goods sold
Gross margin
Earnings per share
*Rounded.
Income from operations
Chapter 4, P 7. (Continued)
for this decline was the decrease in operating income. However, the decrease in
3. User Insight: Income before income taxes discussed
Income before income taxes also decreased from 2010 to 2011. The primary reason
( + ) ÷ 2
Average Total Assets
$131,000
=
Asset Turnover
2011:
=
Chapter 4, P 8.
1. Profitability measures computed
times
$63,750
$72,500 $55,000
b.
$131,000
=
Net Sales
d.
=Debt to Equity Ratio
2.1
Total Liabilities
Total Stockholders’ Equity
$50,000
18.8%
15.0%
Chapter 4, P 8. (Continued)
f. =
Cash Return
on Assets
2011: =
=2010:
$63,750
$12,000
$7,500
Cash Flow from Operating Activities
Average Total Assets
231
2. User Insight
Both profit margin and asset turnover increased from 2010 to 2011, causing return
on assets to increase by 1.5 percent. Return on equity increased by 3.4 percent
Chapter 4, P 8. (Continued)