Chapter7Revenues,Expenses,andProfit

MultipleChoiceQuestions

1.C2.D3.A4.A5.C6.D7.C8.C9.C10.D11.A12.B

13.C14.B15.D16.C17.B18.D19.A20.C

DiscussionQuestions

1.Distinguishbetweencapitalexpenditureandrevenueexpenditure.Giveexamplesforeachofthem.

Theexpenditurethatwillbenefitseveralaccountingperiodsisconsideredacapitalexpenditure.Accountsoftenusetheverb“capitalize”tomeancharginganexpendituretoanassetaccountratherthananexpenseaccount.Forexample,purchaseofacomputersystemisacapitalexpenditure.

Anyexpenditurethatwillbenefitonlythecurrentperiodorthatisnotmaterialinamountistreatedasrevenueexpenditureandisrecordedinexpenseaccounts.Charginganexpendituredirectlytoanexpenseaccountisoftencalled“expensing”theitem.Forexample,expendituresforordinaryrepairs,maintenance,fuel,andotheritemsnecessarytotheownershipanduseofplantandequipmentaretreatedasrevenueexpenditures.

Abusinessmaypurchasemanysmallitemsthatwillbenefitseveralaccountingperiodsbuthaverelativelylowcosts.Forthereasonsofconvenienceandeconomy,expendituresthatarenotmaterialinamountaretreatedinaccountingperiodsasexpensesofthecurrentperiod.

2.TheIncomeStatementofamerchandisingcompanyincludesamajortypeofcostthatdoesnotappearintheIncomeStatementofaservicecompany.Identifythiscostandexplainwhatitrepresents.

CostofGoodsSoldisthecostincurredbythesellertoacquirethemerchandiseinventoryitsellstocustomers.Companiesdeductcostofgoodssoldfromsalesrevenuetodeterminegrossprofit;oftenreferredtoasgrossmargin.

Inessence,costofgoodssoldisanexpense.However,inmanycases,itisacompany’slargestexpenseandhasasignificanteffectonthefinancialstatementsubtotalsandratiosusedtoevaluatetheliquidityandperformanceofthebusiness.Therefore,itisshownseparatelyfromotherexpensesinthecompany’sIncomeStatement.

3.Ingeneralterms,whatarerevenuesandexpenses?Howaretheyrelatedinthedeterminationofacompany’snetprofitornetloss?

Revenueisthevalueofgoodsandservicesrenderedduringagivenaccountingperiod.Earningrevenuecausesowners’equitytoincrease.Whenabusinessrendersservicesorsellsmerchandisetoitscustomers,itusuallyreceivescashoracquiresanaccountreceivablefromthecustomers.Theinflowofcashandreceivablesfromcustomersincreasesthetotalassetsofthecompany;ontheothersideoftheaccountingequation,owners’equityincreasestomatchtheincreaseintotalassets.Thus,revenueisthegrossincreaseinowners’equityresultingfromoperationsofthebusiness.

Expensesarenon-productrelatedexpendituresofthegoodsandservicesusedupintheprocessofearningrevenue.Expensesareoftencalledthe“costsofdoingbusiness”,thatis,thecostofthevariousactivitiesnecessarytocarryonabusiness.Thesecostsarenecessarytoattractandservecustomersandtherebyearnrevenuebutnoneofthemaredirectlyrelatedtothemanufacturingoftheproducts.Anexpensealwayscausesadecreaseinowners’equity.

4.Whatisthepurposeoftherealizationprinciple?Howisitusedtorecordsalesofmerchandise?

Theprimaryissuerelatedtorevenuerecognitioniswhentorecognizetherevenue.Therealizationprincipleindicatesthatrevenueshouldberecognizedatthetimegoodsaresoldorservicesarerendered.Atthispoint,thebusinesshasessentiallycompletedtheearningprocess,andthesalesvalueofthegoodsorservicescanbemeasuredobjectively.Atanytimepriortothesale,theultimatevalueofthegoodsorservicessoldcanonlybeestimated.Afterthesale,theonlystepthatremainsistocollectfromthecustomer,whichisusuallyarelativelycertainevent.

Companiesrecordsalesrevenueincompliancewiththerevenuerealizationprinciple.Typically,companiesearnsalesrevenuewhenthegoodsaretransferredfromthesellertothebuyer.Atthispoint,thesalestransactioniscompletedandthesalespriceisestablished.

5.Ifthepurchaserisnotsatisfiedwiththegoodsreceived,theymayreturnthegoodstotheseller.Howwillthesellerrecordthereturnedgoods?

Ifthepurchaserisnotsatisfiedwiththegoodshereceived,hemayreturnthegoodstotheseller.Thatis,theselleracceptsgoodsbackfromapurchaser(areturn).ThesellerusestheaccountentitledSalesReturnsandAllowancetorecordthesetransactions.

Theentriestorecordcreditforreturnedgoodsinvolved(1)anincreaseinSalesReturnsandAllowanceandadecreaseinAccountsReceivable,and(2)anincreaseinMerchandiseInventoryandadecreaseinCostofGoodsSold.

6.Distinguishbetweensalesallowancesandsalesdiscounts.Howtoprepareentriesforeachofthem?

Ifthepurchaserisnotsatisfiedwiththegoodshereceived,hemayaskforasalesallowance.Thatis,thesellergrantsareductioninthepurchaseprice(anallowance)sothatthebuyerwillkeepthegoods.Thesellergivesthebuyerareductionintheamountthebuyerowes,duetotheproductthatlackstheagreed-uponquality,butisstillusablebythebuyer.Becausenoproductwasreturned,thereisonlyonesetofjournalentriestomake,thatis,anincreaseinSalesReturnsandAllowanceandadecreaseinAccountsReceivable.NoneofwhichpertaintoinventoryorCostofGoodsSold.

Toencouragecustomerstomakeearlypaymentsforpurchasesonaccount,sellersoftenoffercashdiscounts,suchas2/20,n/30.Thisiscalledbythesellerasalesdiscount.Asalesdiscountisbasedonthegross(full)invoicepricelessreturnsandallowance,ifany.Ifthecustomermadepaymentbeforethediscountperiodexpired,thesellerwouldreceivethecashdeductingsalesdiscountfromgross(full)invoicepricelessreturnsandallowance,ifany.

7.XiaoLibelievesthatrevenuesfromcreditsalesmaybeearnedbeforetheyarecollectedincash.Doyouagree?Explain.

Iagree.Revenueshouldberecognizedatthetimegoodsaresoldorservicesarerendered.Atthispoint,thebusinesshasessentiallycompletedtheearningprocess,andthesalesvalueofthegoodsorservicescanbemeasuredobjectively.Afterthesale,theonlystepthatremainsistocollectfromthecustomer.

8.Whatareextraordinaryitems?Whyareextraordinaryitemsnecessarytoshowtoinvestors?

Extraordinaryitemsareeventsandtransactionsthataredistinguishedbytheirusualnatureandbytheinfrequencyoftheiroccurrence.

Theextraordinaryitemsareusedtoshowinvestorswhatthenetincomewouldhavebeeniftheotherrevenue/expenseandgain/losshadnothappened.Therefore,investorsmustcarefullyexaminethefinancialstatementsforafirm’snon-operatingactivities.

9.Whatareretainedearnings?Howisprofitrelatedtoretainedearnings?

Retainedearningsarecomposedofnetincomeacompanyretainsinthebusiness,representinganincreaseinowners’equitythathasaccumulatedovertheyearsfromprofitableoperations.Thebalanceofretainedearningsisapartofthestockholders’claimonthetotalassetsofthecorporation.

ThebalanceoftheRetainedEarningsaccountrepresentsthetotalnetincomeofthecorporationovertheentirelifetimeofthebusiness,lessallofthedividendsgiventoitsstockholders.

Acompanymayretainthenetincomeearnedinthebusiness,oritmaydistributeittostockholdersthroughpaymentofcashdividends.Anetincomeincreasesretainedearningsandanetlossdecreasesretainedearnings.Bothcashandstockdividendsdecreaseretainedearnings.

10.Duringthecurrentyear,companyAearnedagrossprofitof$890,000,whereascompanyBearnedagrossprofitofonly$650,000.Bothcompanieshadnetsalesof$1,300,000.DoesthismeanthatcompanyAismoreprofitablethancompanyB?Explain.

No,itdoesnotmeanthatcompanyAismoreprofitablethancompanyB.ForanIncomeStatement,profitcanbedividedintofourlevels:(1)grossprofit(oftencalledgrossmargin),(2)incomefromoperations,(3)incomebeforetaxes,and(4)netincome.Grossprofitistheresultofsubtractingcostofgoodssoldfromsalesrevenue.Incomefromoperationsistheresultofsubtractingoperatingexpensesfromgrossprofit.Basedonincomefromoperations,incomebeforetaxesisobtainedbybeingadjustedbyotherrevenuesandexpenses,andgainsandlosses.Onceincometaxispaid,theremainderisnetincome.Thatis,

Netincome=grossprofit(netsalesminuscostofgoodssold)–operatingexpenses+/-gainsorlosses-incometax

Netincomeisawidelyappliedfinancialratiotomeasureprofitability.Inthissample,bothcompanieshadnetsalesof$1300000,butwedonotknowtheoperatingexpenses,gainsand/orlossesofthetwocompanies,wecannotknowthenetincomesofthetwocompanies.Therefore,wecannottellwhichcompanyismoreprofitable.

Problems

Problems7-1

InMarch2019,thefollowingtransactionswerecarriedoutbycompanyA:

1.OnMarch2,companyAsold$6,500ofgoodstocompanyBonaccountintermsof2/15,n/30.Thecostofthegoodsis$4800.

Mar.2

AccountsReceivable

6,500

Sales

6,500

TorecordcreditsaletoCompanyB.

Mar.2

CostofGoodsSold

4,800

MerchandiseInventory

4,800

ToRecordcostofmerchandisesoldonMar.2.

2.OnMarch10,companyAreceivedreturnedgoodsof$2,500,thecostis$1800.

Mar.10

SalesReturnsandAllowance

2,500

AccountsReceivable

2,500

TorecordcreditgrantedtoCompanyBforreturnedgoods.

Mar.10

MerchandiseInventory

1,800

CostofGoodsSold

1,800

TorestoreMerchandiseInventoryaccountwiththecost

ofmerchandisereturnedbycompanyB.

3.OnMarch15,companyBmadethepayment.

Mar.15

Cash

SalesDiscount

3,920

80

AccountsReceivable

4,000

Collecteda$4,000accountsreceivablefromcompanyB

whotooka2%discountforearlypayment:adecreaseinearningsof$80.

Problems7-2

OnMay1,companyA’sboardofdirectorsdeclaredacashdividendof$0.12percommonshareanda10%sharedividendtoshareholdersofrecordonMay15.OnMarch1,therewere98000sharesoutstandingandnoadditionalshareswereissuedduringMay,thesharepricewas$7pershare.OnMarch28,companyApaidthecashdividends.

1.Prepareforthenecessaryentryfortheabovetransactionswithdebitandcredit.

Mar.1

CashDividends

11,760

DividendsPayable

11,760

Torecordthedeclarationofacashdividendof

$0.12pershareonthe98000sharesofcommon

stockoutstanding.

Mar.15

Noentrynecessary

Mar.28

DividendsPayable

11,760

Cash

11,760

Torecordpaymentof$0.12persharedividenddeclared

onMarch1tostockholdersofrecordonMarch15.

2.WhatistheimpactofstockdividendsoncompanyA’sowners’equity?

AstockdividendcausesnochangeincompanyA’sowners’equity,however,itchangesthecompositionofowners’equity,asitdecreasesretainedearningsandincreasesthepaid-incapital.

Inthiscase,companyAdeclaresa10%stockdividendonits$1parcommonstockwhen98000sharesareoutstanding.Themarketpricewas$7pershare.Therefore,totalpaid-incapitalincreasedby$68,600(98000shares×10%×$7pershare),andretainedearningsdecreasedbythesameamount,thus,totalowners’equityremainsunchanged.

Chapter8FinancialStatementsandFinancialStatementAnalysis

MultipleChoiceQuestions

1.A2.C3.B4.B5.D6.C7.B8.D9.A10.B11.A12.C13.D14.A15.A16.A17.B18.B19.B20.D

DiscussionQuestions

1.Isthemeasurementofnetincomeabsolutelyaccurate?Whyorwhynot?

Themeasurementofnetincomeisnotabsolutelyaccurateduetotheassumptionsandestimatesintheaccountingprocess.AnIncomeStatementhascertainlimitations.Forexample,theamountsshownfordepreciationexpensearebaseduponestimatesoftheusefullivesofthecompany’stool,equipment,andbuilding.Inaddition,theIncomeStatementincludesonlythoseeventsthathavebeenevidencedbyactualbusinesstransactions.Perhapsduringtheyear,thecompany’sadvertisinghascaughttheattentionofmanypotentialcustomers,whomaybethesourcesoffutureincome.However,theIncomeStatementcannotreflecttheunrealizedrevenue.Onlyaftertherealtransactionstakeplace,canthesalesrevenuesberecognized.

2.Whatarethethreetypesofbusinessactivities?Giveexamplesofeachtypeofactivity.

Thethreetypesofbusinessactivitiesincludeoperating,investing,andfinancingactivities.Operatingactivitiesincludethecasheffectsoftransactionsthatcreaterevenuesandexpensesinnormalcourseofbusiness.Thiscategoryisthemostimportant.Itshowsthecashprovidedbycompanyoperations,whichisgenerallyconsideredtobethebestmeasureofacompany’sabilitytogeneratesufficientcashtocontinueasagoingconcern.Theyincludesalesofgoodsandservices,paymentstosuppliesofmerchandiseandservices.

Investingactivitiesincludethecasheffectsoftransactionsinvolvingplantassets,intangibleassets,andinvestments.Theyincludepurchaseofproperty,plant,andequipment,investmentsindebtorequitysecuritiesofotherentities.

Financingactivitiesinvolveliabilityandowners’equityitems.Theyinclude:(1)obtainingresourcesfromownersandprovidingthemwithareturnontheirinvestments,and(2)borrowingmoneyfromcreditorsandrepayingtheamountsborrowed.

3.Whattypesofinformationarepresentedinthenotestothefinancialstatements?

Asetoffinancialstatementsisnormallyaccompaniedbyseveralnotes.Notestothefinancialstatementsarethemeansofexplainingtheitemspresentedinthemainbodyoffinancialstatements.Notesdiscloseinformationusefulininterpretingthestatementsandareanintegralpartofthefinancialstatements.

Manyitemsaredisclosedinnotesaccompanyingthefinancialstatements.Amongthemostusefularethefollowings:

(1)Accountingpoliciesandmethods;

(2)Unusedlinesofcredit;

(3)Significantcommitmentsandlosscontingencies;

(4)Dividendsinarrears;

(5)Assetspledgedtosecurespecificliabilities;

(6)Changesinaccountingpoliciesandmethods.

4.Distinguishbetweentrendchangeanalysisandcomponentpercentageanalysis.Whichwillbebettersuitedforanalyzingthechangesinsalesoverseveralyears?

Trendchangesarethechangesinfinancialstatementitemsfromabaseyeartothefollowingorprecedingyears.Tocomputetrendchange,abaseyearisfirstlyselectedandeachiteminthefinancialstatementsforthebaseyearisgivenaweightof100percent.Then,eachiteminthefinancialstatementsforthefollowingorprecedingyearsisexpressedasapercentageofthebase-yearamount.

Componentpercentageanalysisistheproportionalexpressionofeachfinancialstatementiteminagivenperiodtoabaseamountwithinthefinancialstatement.

Trendchangeanalysisisbetterforanalyzingthechangesinsalesoverseveralyears.

5.Explaintheratiosusedtoevaluateprofitability.Explainbrieflyhoweachiscomputed.

Profitabilityratiosmeasurethedegreeofsuccessorfailureofacompanyinagivenyear.Usuallythekeyratiosincludegrossprofitratio,profitmarginonsales,returnonassets,returnonequity,earningspershare,price-earningsratio,andpayoutratio.

(1)Grossprofitratio.

Grossprofitratioiscomputedbydividinggrossprofitbynetsales.Grossprofit(alsoknownasgrossmargin)isthedifferencebetweennetsalesandthecostofgoodssold.

Grossprofit=Netsales-Costofgoodssold

Grossprofitratio=GrossprofitNetsales

(2)Profitmarginonsales.

Profitmarginonsalesiscomputedasdividingnetincomebynetsales.Netincomeisthedifferencebetweennetsalesandallexpenses(includingcostofgoodssold).Acompanycanimproveitsprofitmarginonsalesbyincreasingitsgrossprofitrateand/orbycontrollingitsoperatingexpenseandotherexpenses.

Profitmarginonsales=NetincomeNetsales

(3)Returnonassets(ROA).

ROAiscomputedbydividingnetincomebyaveragetotalassets.Averagetotalassetsarecomputedbyaddingthebeginningandendingvaluesoftotalassetsanddividingthetotalbytwo.

ROA=NetincomeAveragetotalassets

(4)Returnoncommonownersequity(ROE).

ROEequalsnetincomelesspreferreddividends,dividedbyaveragecommonowners’equity.Averagecommonowners’equityiscomputedbyaddingthebeginningandendingvaluesoftotalcommonowners’equityanddividingthetotalbytwo.

ROE=Netincome-PreferreddividendsAveragecommonowners’equity

(5)Earningspershare(EPS).

EPSequalsnetincomelesspreferreddividends,dividedbyweighted-averagenumberofsharesoutstandinginthesameyear.Theweighted-averagenumberofsharesoutstandingfortheyearisdeterminedbymultiplyingthenumberofsharesoutstandingbythefractionoftheyearinwhichthenumberofsharesoutstandingremainedunchanged.

EPS=Netincome-PreferreddividendsWeighted-averagenumberofsharesoutstanding

(6)Price-earningsratio(P/Eratio).

P/Eratioiscomputedbydividingthecurrentmarketpricepershareofacompany’sstockbyitsannualEPS.

P/Eratio=StockpricepershareEarningpershare

(7)Payoutratio.

Payoutratioequalscashdividendspaidtocommonstockholdersdividedbynetincome(lesspreferreddividends).

Payoutratio=CashdividendsNetincome-Preferreddividends

6.Whymightearningspersharebemoresignificanttoastockholderinalargecorporationthanthetotalamountofnetincome?

Earningspershareshowsthedollarsearnedbyeachshareofcommonstock.EPSequalsnetincomelesspreferreddividends,dividedbyweighted-averagenumberofsharesoutstandinginthesameyear.Thatis,astockholdercanknowthenetincomeheearnsontheshareofcommonstocksheowns.

However,basedonthetotalamountofnetincome,astockholdercannotknowhowmuchheearnsfromhisshares.

7.CompanyChasacurrentratioof3to1.CompanyDhasacurrentratioof2to1.DoesthismeanthatcompanyC’soperatingcycleislongerthancompanyD’s?Whyorwhynot?

No,thisdoesnotmeanthatcompanyC’soperatingcycleislongerthancompanyD’s.Acompany’soperatingcycleiscalculatedas”

Operatingcycle=daystocollectaccountsreceivable+daystosellinventory

Daystocollectaccountsreceivable=365Accountsreceivableturnoverrate

Daystosellinventory=365Inventoryturnoverrate

AlthoughCompanyChasahighercurrentratio,wecannotcalculatedaystoDaystocollectaccountsreceivableandDaystosellinventorybasedontheinformation.

8.Whichratioorratiosdoyouthinkshouldbeofthegreatestinterestto:

(1)Abankcontemplatingashort-termloan?

Abankcontemplatingashort-termloanshouldbeinterestedinsuchfinancialratiosasworkingcapital,currentratio,quickratio,andcurrentcashdebtcoverageratios.

(2)Aninvestorincommonstock?

Aninvestorincommonstockshouldbeinterestedinsuchfinancialratioasgrossprofitratio,profitmarginonsales,returnonassets,returnonequity,returnoninvestment,earningspershare,price-earningsratio,andpayoutratio.

9.Mr.Wang,thechiefmarketingofficer,wantstoreducethesellingpriceofhiscompany’sproductsby10%toincreasemarketshare.Hesays,“Iknowthiswillreduceourgrossprofitrate,buttheincreasednumberofunitssoldwillmakeupforthelostmargin.”Beforethisactionistaken,whatotherfactorsdoesthecompanyneedtoconsider?

Grossprofitrate=GrossprofitNetsales

Grossprofit=Netsales-Costofgoodssold

Fromtheabove,weknowthatgrossprofitrateisdeterminedbothbynetsalesandcostofgoodssold.Reducingthenetsalesdoesnotalwaysleadtoareducedgrossprofitrate.Ifcostofgoodssoldgreatlyreduces,itispossiblethatgrossprofitratioincreases.Ifcostofgoodssoldincreases,itispossiblethattheincreasednumberofunitssoldwillnotmakeupforthelostmargin.Therefore,beforethisactionistaken,thecompanyneedstoconsidercostofgoodssoldofhiscompany’sproducts.

10.Mr.Gao,thechiefexecutiveofficer(CEO),ispuzzled.Duringlastyear,hiscompanyexperiencedanetlossof$960,000,yetitscashincreasedby$540,000inthesameyear.ExplaintotheCEOhowthiscouldoccur.

Profitisthedifferencebetweenrevenuesandexpensesforaspecifiedperiodoftime.Ifexpensesaregreaterthanrevenues,thedifferenceisnetloss.Netincome/netlossismeasuredonanaccrualbasis,whilecashflowsaremeasuredonacashbasis.Underaccrualbasisofaccounting,companiesreportrevenuewhenearned,evenifcashhasnotbeenreceived,andtheyreportexpenseswhenincurred,evenifcashhasnotbeenpaid.Asaresult,netincome/netlossisnotthesameasnetcash.

Inthiscase,thenetlossof$960,000istheresultofrevenuesminusexpensesduringlastyear.Itismeasuredonanaccrualbasis.However,theincreasedcashof$540,000isthenetcashfromoperating,investing,andfinancingactivitiesduringlastyear.Itismeasuredonacashbasis.So,itisnotstrangethathiscompanyexperiencedanetlossof$960,000,anditscashincreasedby$540,000inthesameyear.

Problems

Problem8-1

AcondensedbalancesheetforCompanyEpreparedattheendoftheyearisasfollows:

Assets

LiabilitiesandOwners’equity

Cash

$90,000

Notespayable

$30,000

Accountsreceivable

168,000

Accountspayable

85,000

Inventory

350,000

Long-termliabilities

300,000

Prepaidexpenses

75,000

Capitalstock($3par)

330,000

Plantandequipment(net)

520,000

Retainedearnings

563,000

Otherassets

105,000

Total

$1,308,000

Total

$1,308,000

Duringtheyearthecompanyearnedagrossprofitof$1,550,000onsalesof$3,200,000.Accountsreceivables,inventory,andplantassetsremainedalmostconstantinamountthroughtheyear,soyear-endfiguresmaybeusedratherthantheaverage.Thiscompanyissuednopreferredstocks.(紅字標(biāo)黃色是更正信息)

Required

Computethefollowing:(Carrytotwodecimalplaces)

(1)Currentratio

Currentassets=cash+accountsreceivable+inventory+prepaidexpenses

=$90,000+$168,000+$350,000+$75,000

=$683,000

Currentliabilities=notespayable+accountspayable

=$30,000+$85,000

=$115,000

Currentratio=CurrentassetsCurrentliabilities=$683,000$115,000=5.94

(2)Quickratio

Quickassets=cash+accountsreceivable

=$90,000+$168,000

=$258,000

Currentliabilities=notespayable+accountspayable

=$30,000+$85,000

=$115,000

Quickratio=QuickassetsCurrentliabilities=$258,000$115,000=2.24

(3)Workingcapital

Currentassets=cash+accountsreceivable+inventory+prepaidexpenses

=$90,000+$168,000+$350,000+$75,000

=$683,000

Currentliabilities=notespayable+accountspayable

=$30,000+$85,000

=$115,000

Workingcapital=currentassets-currentliabilities

=$683,000-$115,000

=$568,000

(4)Debtratio

Totalassets=$1,308,000

Totalliabilities=notespayable+accountspayable+long-termliabilities

=$30,000+$85,000+$300,000

=$415,000

Debtratio=TotalliabilitiesTotalassets=$415,000$1,308,000=31.72%

(5)Accountsreceivableturnover(allsaleswereoncredit)

Netsales=$3,200,000

Averageaccountsreceivable=$168,000

Accountsreceivableturnoverrate=NetsalesAverage(net)accountsreceivable

=$3,200,000$168,000

=19.05timesperyear

(6)Inventoryturnover

Costofgoodssold=netsales–grossprofit

=$3,200,000-$1,550,000

=$1,650,000

Averageinventory=$350,000

Inventoryturnoverrate=CostofgoodssoldAverage(net)inventory

=$1,650,000$350,000

=4.71timesperyear

(7)Profitmarginonsales

Netsales=$3,200,000

Netincome=retainedearnings=$563,000

Profitmarginonsales=NetincomeNetsales=$563,000$3,200,000=17.59%

(8)Returnonassets

Netincome=retainedearnings=$563,000

Averagetotalassets=$1,308,000

ROA=NetincomeAveragetotalassets=$563,000$1,308,000=43.04%

(9)Returnonequity(thiscompanyissuednopreferredstocks)

Netincome=retainedearnings=$563,000

Averagecommonowners’equity=capitalstock+retainedearnings

=$330,000+$563,000

=$893,000

ROE=Netincome-PreferreddividendsAveragecommonowners’equity=$563,000$893,000=63.05%

(10)Earningspershare(thiscompanyissuednopreferredstocks)

Netincome=retainedearnings=$563,000

Weighted-averagenumberofsharesoutstanding=$330,000/$3=110,000shares

EPS=Netincome-PreferreddividendsWeighted-averagenumberofsharesoutstanding=$563,000110,000=$5.12pershare

Problem8-2

ThefollowingselecteddataarefromarecentannualreportofcompanyF.Dollaramountsarestatedinmillions.

Beginningoftheyear

Endoftheyear

Totalcurrentassets

$9,230

$9,378

Totalcurrentliabilities

4,836

5,902

Totalassets

31,125

33,561

Totalowners’equity

16,028

17,162

Operatingincome

4,280

Netincome

$3,735

Thecompanyhaslong-termliabilitiesthatbearinterestsatannualratefrom7percentto10percent.

Required

1.Computethecompany’scurrentratioat:(1)thebeginningoftheyearand,(2)theendoftheyear.(Carrytotwodecimalplaces)

(1)Currentratioatthebeginningoftheyear

Totalcurrentassets=$9,230

Totalcurrentliabilities=$4,836

Currentratio=CurrentassetsCurrentliabilities=$9,230$4,836=1.91

(2)Currentratioattheendoftheyear

Totalcurrentassets=$9,378

Totalcurrentliabilities=$5,902

Currentratio=CurrentassetsCurrentliabilities=$9,378$5,902=1.59

2.Computethecompany’sworkingcapitalat:(1)thebeginningoftheyearand,(2)theendoftheyear.(Expressdollaramountsinthousands)

(1)Workingcapitalatthebeginningoftheyear

Totalcurrentassets=$9,230

Totalcurrentliabilities=$4,836

Workingcapital=currentassets-currentliabilities

=$9,230-$4,836

=$4,394

(2)Workingcapitalattheendoftheyear

Totalcurrentassets=$9,378

Totalcurrentliabilities=$5,902

Workingcapital=currentassets-currentliabilities

=$9,378-$5,902

=$3,476

3.Isthecompany’sshort-term,debt-payingabilityimprovingorde