Exam 17: Understanding Corporate Annual Reports: Basic Financial Statements

A comparison of the average price of a group of goods and services at one date with the average price of a similar group at another date

Goodwill can be recognized only when one company is acquired by another company.

The following information pertains to Barnum Company: Balance Sheet At D ecember $31,20 \times 2$ Current assets \ 18,700 Current liabilities \ 7,600 Long-term assets Long- term liabilities 13,250 Stockholders' eauity 27,550 Total assets \ 8400 Total liabilities and s.e. \ 48,400 Barnum Company Income Statement For the Year Ended December 31, 20X2 Sales \ 106,950 Less: Cost of goods sold (61,800) Gross profit \ 45,150 Less: Operating expenses Operatingincome \ 13,450 Less other expenses: interest (1,300) Income before taxes \ 12,150 Less: Income tax expense Net income \ 7,300 There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2. Dividends declared and paid was $5 per share. The return on sales for 20X2 is:

When prices of resources do not change, financial capital maintenance and physical capital maintenance give identical measures of income.

Below is a comparative income statement for Samson Company: Sams on Comp any Income Statement For the Y ears Ended D ecember 31, 20X6 and 20X5 20X6 20X5 Sales \ 1,744 \ 1,562 Less: Cost of goods sold 992 806 Gross profit \ 752 \ 756 Less operating expenses: W age expens e \ 172 \ 160 Depreciation expense 28 26 Rent expense 36 36 Miscellaneous expens e 40 Total operating expenses \ 276 \ 292 Operating income \ 476 \ 464 Less other expenses: Interest Income before tax \ 456 \ 404 Less: Income tax expense Net income \ 274 \ 242 Sales \ \ 1,744 \ 1,562 Less: Cost of goods sold 992 \ 06 Gross profit \ 752 \ 756 If a common=size income statement were prepared, would be attributable to the 20X6 income tax expense of Samson Company.

The following information pertains to Barnum Company: Balance Sheet At December $31,20 \times 2$ Current assets \ 18,700 Current liabilities \ 7,600 Long-term assets Long-term liabilities 13,250 Stockholders' equity Total assets \ 48,400 Total liabilities and s.e. \ 48,400 Barnum Company Income Statement For the Year Ended December 31, 20X2 Sales \ 106,950 Less: Cost of goods sold Gross profit \ 45,150 Less: Operating expenses Operating income \ 13,450 Less other expenses: interest (1,300) Income before taxes \ 12,150 Less: Inc ome tax expense Net income \ 7,300 There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2. Dividends declared and paid was $5 per share. The price- earnings ratio for 20X2 is:

Goodwill is not considered to have a perpetual life.

Below is a comparative income statement for Samson Company: Sams on Comp any Income Statement For the Years Ended December 31, 20X6 and 20X5 20X6 20X5 Sales \ 1,744 \ 1,562 Less: Cost of goods sold Gross profit \ 752 \ 756 Less op erating expenses: Wage expense \ 172 \ 160 Depreciation expense 28 26 Rent expens 36 36 Miscellaneous expense Total operating expenses \ 276 \ 292 Operating income \4 76 \4 64 Less other expenses: Interest Income before tax \ 456 \ 404 Less: Income tax expense Net income \ 274 \ 242 Identify the issue that would be of most concern or source of optimism, on behalf of financial analysts of Samson Company.

Nominal dollars that are restated in terms of current purchasing power

The following information pertains to Barnum Company: Balance Sheet At D ecember $31,20 \times 2$ Current assets \ 18,700 Current liabilities \ 7,600 Long-term assets Long- term liabilities 13,250 Stockholders' eauity 27,550 Total assets \ 8400 Total liabilities and s.e. \ 48,400 Barnum Company Income Statement For the Year Ended December 31, 20X2 Sales \ 106,950 Less: Cost of goods sold (61,800) Gross profit \ 45,150 Less: Operating expenses Operatingincome \ 13,450 Less other expenses: interest (1,300) Income before taxes \ 12,150 Less: Income tax expense Net income \ 7,300 There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2. Dividends declared and paid was $5 per share. The gross profit rate for 20X2 is:

Provided below are the comparative income statement and balance sheet for Aloha Company at, and for the years ended, December 31, 20X6 and 20X5. 20X6 20X5 Sales (all on account) \ 1,70 \ 1,606 Cost of goods sold Gross profit \ 576 \ 584 Operating expenses 280 Operating income \ 258 \ 304 Interest expense 72 68 Income before taxes \ 186 94 Income tax expense 74 94 Net income \1 12 \1 42 Determine the following ratios for 20X6 given the above information: 1. the current ratio 2. the average collection period in days 3. the return on stockholders' equity 4. the price- earnings ratio 5. the dividend yield

is reported on the financial statements of publicly held companies in the United States.

Traditional accounting uses .

An efficient capital market is one in which an order to trade can be placed and executed in a relatively short period of time.

Analysis and presentation of financial statements in percentage form to aid comparability, frequently used when companies differ in size

Julia Company acquired 80% of the outstanding shares of Roberts Company for $190 in cash. Roberts Company's total assets and liabilities were $550 and $400, respectively. The balance of the investment in Roberts Company stock on the consolidated balance sheet immediately after the acquisition of Roberts Company's stock is:

Comparison of a company's financial ratios with its own historical ratios

There is general agreement among most accountants that restatements in constant dollars would overcome the disadvantages of using an unstable measuring unit.

The following information pertains to Barnum Company: Balance Sheet At D ecember $31,20 \times 2$ Current assets \ 18,700 Current liabilities \ 7,600 Long-term assets Long- term liabilities 13,250 Stockholders' eauity 27,550 Total assets \ 8400 Total liabilities and s.e. \ 48,400 Barnum Company Income Statement For the Year Ended December 31, 20X2 Sales \ 106,950 Less: Cost of goods sold (61,800) Gross profit \ 45,150 Less: Operating expenses Operatingincome \ 13,450 Less other expenses: interest (1,300) Income before taxes \ 12,150 Less: Income tax expense Net income \ 7,300 There were 1,000 shares of common stock outstanding with a market value of $75 as of December 31, 20X2. Dividends declared and paid was $5 per share. The current- debt- to- equity ratio for 20X2 is:

Rock Company acquired 40% of the voting stock of Hudson Company for $40 million. In year 1, Hudson Company reports net income of $15 million and pays cash dividends of $5 million. At the end of the year the market value of Rock Company's investment in Hudson Company is $44 million. The should be used to account for the investment.