Chapter 2, Problem 3ATC

a.

To determine

Determine the company’s net income and retained earnings for the year 2012 and 2013.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Net income: Net income is the excess amount of revenue after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Retained earnings: Retained earnings are the portion of earnings kept by the business for the purpose of reinvestments, payment of debts, or for future growth.

Determine the amount of net income.

Company CB
Statement of income
For the year ended December 31, 2012 and 2013
Particulars	Amount
	2012	2013
Total revenues	$2,434,435	$2,644,630
Less: Total expenses	($2,331,354)	($2,527,365)
Net income (loss)	$103,081	$117,265

Table (1)

Hence, the amount of net income of Company CB for 2012 and 2013 is $103,081 and $117,265.

Determine the amount of retained earnings.

Company CB
Statement of retained earnings
For the year ended December 31, 2012 and 2013
Particulars	Amount
	2012	2013
Beginning Retained earnings	$298,757	$374,932
Add/Less: Net Income (Loss)	$103,081	$117,265
Less: Dividends	($26,915)	($53,515)
Ending Retained Earnings	$374,932	$438,673

Table (2)

Hence, the amount of net income of Company CB for 2012 and 2013 is $374,932 and $438,673.

b.

To determine

Compute the percentage change in revenue or net income and indicate which is increased or decreased by the greatest percentage.

Explanation of Solution

Net income: Net income is the excess amount of revenue after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Determine the percentage change in revenues.

$\begin{array}{c}\begin{array}{l}\text{Percentage change in }\\ \text{revenues }\end{array}\}=\frac{\left(\begin{array}{l}\text{Revenues generated }\\ \text{in 2013}\end{array}\right)-\left(\begin{array}{l}\text{Revenues generated }\\ \text{in 2012}\end{array}\right)}{\text{Revenues generated in 2012}}\times 100\\ =\frac{\$2,644,630-\$2,434,435}{\$2,434,435}\times 100\\ =\frac{\$210,195}{\$2,434,435}\times 100\\ =8.63\%\end{array}$

Hence, the percentage in revenues is 8.63%.

Determine the percentage change in revenues.

$\begin{array}{c}\begin{array}{l}\text{Percentage change in }\\ \text{net income }\end{array}\}=\frac{\left(\begin{array}{l}\text{Net income }\\ \text{earned in 2013}\end{array}\right)-\left(\begin{array}{l}\text{Net income }\\ \text{earned in 2012}\end{array}\right)}{\text{Net income earned in 2012}}\times 100\\ =\frac{\$117,265-\$103,081}{\$103,081}\times 100\\ =\frac{\$14,184}{\$103,081}\times 100\\ =13.76\%\end{array}$

Hence, the percentage in net income is 13.76%.

Therefore, the percentage change in net income is higher than the revenues.

c.

To determine

Compute the net income as a percentage of revenues for each year.

Explanation of Solution

Net income: Net income is the excess amount of revenue after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.

Determine the net income as a percentage of revenues for Year 2012.

$\begin{array}{c}\text{Net margin}=\frac{\text{Net income}}{\text{Net revenues}}\times 100\\ =\frac{\$103,081}{\$2,434,435}\times 100\\ =4.23\%\end{array}$

Hence, the net income as percentage of revenues is 4.23%.

Determine the net income as percentage of revenues for Year 2013.

$\begin{array}{c}\text{Net margin}=\frac{\text{Net income}}{\text{Net revenues}}\times 100\\ =\frac{\$117,265}{\$2,644,630}\times 100\\ =4.43\%\end{array}$

Hence, the net income as percentage of revenues is 4.43%.

d.

To determine

Explain the performance of Company CB in 2012 or 2013.

Explanation of Solution

The revenues and net income of Company CB have increased in 2013. The percentage of net income as percentage of revenues was higher in 2013. Thus, the performance of Company CB in 2013 is better than 2012.