BYP 5-2 COMPARATIVE ANALYSIS PROBLEM
(
a
)
Tootsie Roll Hershey Company
(1) Profit margin
$43,938
$532,505
= 8.3%
$628,962
$6,080,788 = 10.3%
(b) Hershey’s higher profit margin suggests that it was better at turning
sales dollars into net income. Its gross profit rate suggests that
Hershey can command a higher markup on its goods or that it is better
at controlling its cost of goods sold. Tootsie Roll’s operating income
BYP 5-3 RESEARCH CASE
(a) Wal-Mart experienced an increase in sales during the year. However, to
get this increase in sales the company had to aggressively reduce its
price. Such deep discounting reduced the amount of gross profit, the
amount by which the selling price exceeded cost. This resulted in a
lower gross profit rate.
(c) Macy’s attributed the decline in its gross profit rate to a free-shipping
promotion and markdowns on cold-weather gear. In this chapter the
cost of shipping goods to customers is treated as a selling expense
called freight-out which is included in operating expenses. That is,
freight-out is subtracted out in the section of the income statement
BYP 5-4 INTERPRETING FINANCIAL STATEMENTS
(a)
Carrefour
(Euros)
Wal-Mart
(Dollars)
(b) Profit margin ratio €1,738 ÷ €70,486 = 2.5% $9,054 ÷ $256,329 = 3.5%
(c) Current ratio
€
14,521 ÷ €13,660 = 1.06:1 $34,421 ÷ $37,418 = .92:1
€
BYP 5-4 (Continued)
(d) Ratios improve our ability to compare these two companies that report
financial information using different currencies. However, other factors
can still reduce our ability to compare them. Different accounting stan-
BYP 5-5 REAL-WORLD FOCUS
Answers will vary depending on the company and article chosen by the
student.
BYP 5-6 DECISION MAKING ACROSS THE ORGANIZATION
(a) (1) MEGA MART DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2015
Net sales [$700,000 + ($700,000 X 4%)] ….. $728,000
Cost of goods sold ($728,000 X 75%)* …… 546,000
(2) MEGA MART DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2015
Net sales ……………………………………………… $700,000
Cost of goods sold ……………………………….. 560,000
(b) Sue’s proposed changes will increase net income by $42,000. Jeremy’s
proposed changes will reduce operating expenses by $32,000 and result
in a corresponding increase in net income. Thus, if the choice is between
BYP 5-6 (Continued)
(c) MEGA MART DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2015
Net sales ……………………………………………………. $728,000
Cost of goods sold ……………………………………… 546,000
Gross profit ………………………………………………… 182,000
Operating expenses
(d) A variety of factors might be presented by the student. For example,
increasing the quantity of inventory purchased will increase warehousing
and other costs of inventory. It will also increase the risk of holding
BYP 5-7 COMMUNICATION ACTIVITY
(a), (b)
President
Surfing USA Co.
Dear Sir:
As you know, the financial statements for Surfing USA Co. are prepared in
accordance with generally accepted accounting principles. One of these
principles is the revenue recognition principle, which provides that revenues
should be recognized when the performance obligation is satisfied.
BYP 5-8 ETHICS CASE
(a) Andrea Tabares, as a new employee, is placed in a position of respon-
sibility and is pressured by her supervisor to continue an unethical
practice previously performed by him. The unethical practice is taking
(b) The stakeholders (affected parties) are:
Andrea Tabares, the assistant treasurer.
William Parks, the treasurer.
(c) Andrea’s alternatives:
1. Tell the treasurer (her boss) that she will attempt to take every
allowable cash discount by preparing and mailing checks within
2. Join the team and continue the unethical practice of taking unde-
served cash discounts.
3. Go over her boss’s head and take the chance of receiving just and
reasonable treatment from an officer superior to William. The
company may not condone this practice. Andrea definitely has a
choice, but probably not without consequence. To continue the
BYP 5-9 ALL ABOUT YOU ACTIVITY
In order for revenue to be recognized the performance obligation must be
satisfied. In this case Midwest has an obligation to provide goods with a
BYP 5-10 FASB CODIFICATION ACTIVITY
(a) 1. Inventory is the aggregate of those items of tangible personal
property that have any of the following characteristics:
a. Held for sale in the ordinary course of business
The term inventory embraces goods awaiting sale (the merchandise
of a trading concern and the finished goods of a manufacturer),
goods in the course of production (work in process), and goods to
be consumed directly or indirectly in production (raw materials and
supplies). This definition of inventories excludes long-term assets
2. A customer is a reseller or a consumer, either an individual or a
business that purchases a vendor’s products or services for end use
rather than for resale. This definition is consistent with paragraph
280-10-50-42, which states that a group of entities known to a report-
BYP 5-10 (Continued)
(b) 330-10-35-15 Only in exceptional cases may inventories properly be
stated above cost. For example, precious metals having a fixed
IFRS CONCEPTS AND APPLICATION
IFRS5-1
Expenses may be classified by “nature” or by “function”. The “nature-of-
expense” classification organizes expenses by type of expense, such as
salaries, depreciation, rent, or supplies. The “function-of-expense” classifica-
tion presents expenses by type of business activity. Examples would include
cost of goods sold, selling, administrative, operating, and non-operating.
IFRS5-2
By function Cost of goods sold
By nature Depreciation expense
IFRS5-3
REINSCH COMPANY
Comprehensive Income Statement
For the Year Ended 2014
(in thousands of euros)
Net income ……………………………………………………………………. €150
Unrealized gain related to revaluation of buildings ………….. € 10
IFRS5-4 INTERNATIONAL FINANCIAL REPORTING PROBLEM
(a) Zetar uses a multiple step format. The income statement isolates gross
profit, operating profit, and profit from continuing operations before
(b) Zetar uses Finance Costs rather than Interest Expense on its income
statement.
(d) Zetar’s income statement shows Adjusted results, Adjusting items, and
Total amounts for revenue and expense items. Note 3.23 indicates that
Zetar considers the adjusted results and adjusted EPS to provide
