Chapter 05 – Communicating and Interpreting Accounting Information
5-21
P5–3.
Req. 1
EXQUISITE JEWELERS
Balance Sheet
December 31, 2012
Store equipment ………………………………………………… 67,000
Less accumulated depreciation ………………………… 19,000
Total fixed assets ……………………………………….. 48,000
Other Assets
Used store equipment held for disposal …………………. 9,000
Total assets ……………………………………………….. $377,500
Liabilities
Current Liabilities
Total liabilities …………………………………………….. 103,500
Stockholders’ Equity
Contributed Capital
Common stock, par $1 per share, 100,000 shares ….. 100,000
Additional paid-in capital ……………………………………… 10,000
Total contributed capital ………………………………. 110,000
Retained Earnings ……………………………………………………. 164,000
Chapter 05 – Communicating and Interpreting Accounting Information
P5-3. (continued)
Req. 2
P5-4.
Req. 1
BARNARD CORPORATION
Balance Sheet (Partial)
December 31, 2012
Stockholders’ Equity
Contributed capital:
Common stock par $15 per share, 7,000 shares outstanding
(7,000 x $15) ……………………………………………………… $105,000
Req. 2
Cash (1,000 shares x $25) (+A) ……………………………. 25,000
Chapter 05 – Communicating and Interpreting Accounting Information
5-23
P5–5.
AEROPOSTALE, Inc.
Consolidated Statement of Income
For Year Ended March 31, Current Year
(In Thousands Except Per Share Amounts)
Net revenue
$1,885,531
Cost of goods sold
1,231,349
Gross profit
654,182
Other selling, general and administrative expenses
405,883
Total operating expenses
405,883
Interest income
Income before income taxes
248,809
Provision for income taxes
Net income
Earnings per share:
Basic earnings per share
Weighted average shares outstanding
Chapter 05 – Communicating and Interpreting Accounting Information
P5–6.
(a) JORDAN SALES COMPANY
Income Statement
For the Year Ended March 31, 2013
Sales revenue …………………………………………………………. $99,000
Cost of goods sold ……………………………………………… 33,000
Gross profit ……………………………………………………….…….. 66,000
Chapter 05 – Communicating and Interpreting Accounting Information
5-25
P5-6. (continued)
(b) JORDAN SALES COMPANY
Balance Sheet
March 31, 2013
Assets
Current Assets:
Cash ………………………………………………………………… $58,000
Accounts receivable ……………………………………………. 49,000
Liabilities
Current Liabilities:
Accounts payable ………………………………………………. $22,000
Income taxes payable …………………………………………. 9,500
Stockholders’ Equity
Contributed capital:
Capital stock (33,000 shares, par $1) ……………………. 33,000
Paid-in capital ……………………………………………………. 5,000
Chapter 05 – Communicating and Interpreting Accounting Information
5-26
P5–7.
Req. 1.
Transaction
Gross Profit
Operating Income
(Loss)
Return on Assets
a.
+
+
+
a.* Accounts receivable (+A) ………………………………………………… 500
Sales revenue (+R) ………………………………………………. 500
Cost of goods sold (+E) ………………………………………………….. 475
Inventory (–A) ……………………………………………………… 475
*Note that net income goes up by $25 as does ending assets. As a consequence,
average assets ((beginning + ending)/2) increases by only one-half of that amount or
$12.5.
b. Research and development expense (+E) ………………………… 100
b.
d.
+
Chapter 05 – Communicating and Interpreting Accounting Information
5-27
P5–8.
NEWELL RUBBERMAID
Consolidated Statement of Operations
For the Year Ended December 31, 2008
(dollars in thousands)
Net Sales ………………………………………………………………..
$ 6,470.6
Cost of Products Sold ……………………………………….
4,347.4
Gross Profit ……………………………………………………………..
2,123.2
Operating Expenses:
Selling, General, and Administrative Expenses ……..
Other Expense …………………………………………………
1,922.4
Operating Income (loss) ……………………………………………
200.8
Interest and Other Non-Operating Expense ………….
199.0
Income before Income Taxes …………………………………….
1.8
Income Tax Expense ……………………………………….
53.6
Net (Loss) Income from Continuing Operations …………….
(51.8)
(0.5)
Net (Loss) Income …………………………………………………..
$ (52.3)
Chapter 05 – Communicating and Interpreting Accounting Information
ALTERNATE PROBLEMS
AP5-1.
Req. 1
TANGOCO
Balance Sheet
December 31, 2012
Assets
Current Assets
Cash ………………………………………………………………… $ 48,800
Accounts receivable ……………………………………………. 71,820
Store equipment ………………………………………………… 67,200
Less accumulated depreciation ………………………… 13,440
Total fixed assets ……………………………………….. 53,760
Other Assets
Used store equipment held for disposal …………………. 9,800
Total assets ……………………………………………….. $375,700
Liabilities
Current Liabilities
Accounts payable ………………………………………………. $ 58,800
Stockholders’ Equity
Contributed Capital
Common stock, par $1 per share, 100,000 shares ….. 100,000
Additional paid-in capital ……………………………………… 10,000
Chapter 05 – Communicating and Interpreting Accounting Information
5-29
AP5-1. (continued)
Req. 2
AP5-2.
Req. 1
MESA INDUSTRIES
Balance Sheet
December 31, 2012
Stockholders’ Equity
Common stock (par $15, 8,500 shares outstanding)
(8,500 x $15) ……………………………………………………… $127,500
Chapter 05 – Communicating and Interpreting Accounting Information
AP5-3.
(a) DYNAMITE SALES
Income Statement
For the Year Ended August 31, 2012
Sales revenue …………………………………………………………. $81,000
Cost of goods sold ……………………………………………… 27,000
Gross profit ……………………………………………………….…….. 54,000
Expenses:
Operating expenses ……………………………………………. $16,200
Depreciation expense …………………………………………. 4,950
Chapter 05 – Communicating and Interpreting Accounting Information
5-31
AP5-3. (continued)
(b) DYNAMITE SALES
Balance Sheet
August 31, 2012
Assets
Current Assets:
Cash ………………………………………………………………… $47,700
Accounts receivable ……………………………………………. 38,320
Liabilities
Current Liabilities:
Accounts payable ………………………………………………. $16,225
Income taxes payable …………………………………………. 9,180
Stockholders’ Equity
Contributed capital:
Capital stock (29,000 shares, par $1) ……………………. 29,000
Paid-in capital ……………………………………………………. 4,500
Chapter 05 – Communicating and Interpreting Accounting Information
5-32
AP5-4.
Req. 1.
Transaction
Operating Income
(Loss)
Net Income
Return on Assets
a.
NE
+
+
The effects of the transactions can be seen by making the related journal entries and
using A, L, SE, R, and E to denote asset, liability, shareholders’ equity, revenue, and
expense, respectively.
a. Cash (+A) ………………………………………………………………………. 7
Interest income (+R) …………………………………………….. 7
Req. 2.
Assuming that next period Avon’s total assets increase by 5%, but Avon earns 20%
more income as during the current period, Avon’s ROA will increase over that earned in
b.
NE
d.
NE
Chapter 05 – Communicating and Interpreting Accounting Information
CASES AND PROJECTS
ANNUAL REPORT CASES
CP5-1.
1. The Balance Sheet lists “Property and equipment”, “Goodwill”,
3. Unredeemed stored value cards and gift certificates were $ 42,299,000, or 10.5% of
current liabilities for the year. This is disclosed on the Balance Sheet.
5. Although the company had negative cash from financing and continued to make
considerable capital expenditures, the company also realized significant proceeds
6. The highest stock price was $23.45, in the 1st quarter of fiscal 2008. This
information is in Item 5 of the 10-K disclosed with the annual report.
7. ROA decreased from fiscal 2007 to 2008. This seems to be reflected in the share
price decreasing from a high of $23.94 in the 4th quarter of 2007 to a low of $7.11 in
the 4th quarter of 2008.
Fiscal 2008
Fiscal 2007
Chapter 05 – Communicating and Interpreting Accounting Information
CP5-2.
2. The cash flow statement indicates that operating activities provided $251,570,000 in
3. The company’s largest asset (net) is “Property and Equipment, net” of $505,407,000
reported on the balance sheet.
4. The company “capitalizes applicable costs incurred during the application and
6. Buildings are $96,205,000, which is 11% of the total balance of gross property and
equipment. This is disclosed in note 5.
Chapter 05 – Communicating and Interpreting Accounting Information
CP5-3.
Req. 1.
American Eagle Outfitters
Urban Outfitters
Net Income _
$179,061 _ = 0.093
$199,364 = 0.161
Req. 2.
ROA Analysis
American Eagle
Outfitters
Urban Outfitters
Net Income
Net Sales
179,061 = 0.06
2,988,866
199,364_ = 0.11
1,834,618
Net Sales
Average Total Assets
1,915,678
1,235,900
Return on Assets
Chapter 05 – Communicating and Interpreting Accounting Information
5-36
CP5-3. (continued)
Req. 3.
Industry Return on Assets (ROA) profit driver analysis:
ROA = Net Profit Margin Total Asset Turnover
ROA Analysis
Industry
Average
American Eagle
Outfitters
Urban Outfitters
Net Profit Margin
.038
.060
.109
Total Asset Turnover
Chapter 05 – Communicating and Interpreting Accounting Information
5-37
FINANCIAL REPORTING AND ANALYSIS CASES
CP5-4.
1. Gross margin on sales, $105,000.
Computation:
2. EPS, $1.00.
3. Pretax income, $13,333.
Computation (and proof):
4. Average sales price per share of stock, $11.60.
5. Beginning balance, $70,000.
Computation: (work backwards)
Beginning balance (?) ($80,000 – $10,000) ………… $70,000
Chapter 05 – Communicating and Interpreting Accounting Information
CRITICAL THINKING CASES
CP5-5.
Strategy
Change
Current
Period
ROA
Future
Periods’
ROA
Explanation
a.
+
–
The decrease in R&D investments would lead to lower expense in
the current year, increasing current period’s income and ROA.
CP5-6.
Net Income
Assets
Liabilities
Error
2010
2011
2010
2011
2010
2011
(1)
O
NE
O
O
NE
NE
$950
$950
$950
(2)
O
U
NE
NE
U
NE
500
$500
$500
(3)
U
O
U
NE
NE
NE
600
600
600
(4)
U
O
U
NE
NE
NE
200
200
200
(5)
O
U
NE
NE
U
NE
900
900
900
(6)
U
NE
U
U
NE
NE
300
300
300
(7)
NE
NE
U
NE
U
NE
8,000
8,000
Chapter 05 – Communicating and Interpreting Accounting Information
5-39
CP5-6. (continued)
Explanation of analysis if not corrected:
(1) Given in problem (example).
(2) Wage expense should be increased (debited) by $500 in 2010 because the wages
were incurred in that year. This increase in expense was not recorded; therefore,
(3) Revenues were understated by $600 in 2010, which caused 2010 income to be
understated by $600. Also accounts receivable was understated because the
(4) The $200 expense should be recorded as 2011 expense. It was recorded in 2010;
therefore, 2010 expense was overstated which would cause 2010 income to be
(5) The $900 revenue should be recorded as revenue in 2011 because it was earned in
2011. Therefore, if not corrected, 2010 revenue and income would be overstated by
(6) This transaction should have been recorded as a credit to revenue of $300 instead
of a credit to accounts receivable. Therefore, revenue, and hence income, was
(7) This transaction should have been recorded in 2010 as a debit to Land (an asset)
Chapter 05 – Communicating and Interpreting Accounting Information
5-40
CP5-7.
1. At the time this solution was prepared, three former top managers had pleaded
guilty to fraud charges and the chief marketing officer pleaded not guilty and was
2. In October 2004, the SEC chose not to impose a monetary fine on the company
because of its extensive cooperation with the investigation. The company promptly
3. Bonuses tied to performance measures such as accounting earnings tend to align
FINANCIAL REPORTING AND ANALYSIS PROJECT
CP5-8.
The solutions to this case will depend on the company and/or accounting period
selected for analysis.