Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
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Chapter 5, Problem 4AP
1.
To determine
Complete the tabulation by indicating (+ for increase, -for decrease and NE for no effect), for the effect of the transactions on operating income, net income, and return on assets.
1.
Expert Solution
Answer to Problem 4AP
Preparation of table showing the effects of transaction on gross profit, operating income and return on assets as given below:
| Effects of transaction on gross profit, operating income and return on assets | |||
| Transaction | Operating income (loss) | Net income | Return on assets |
| a. Recorded and received additional interest income of $7. | NE | Increase | Increase |
| b. Purchased $80 of additional inventory on open account. | NE | NE | Decrease |
| c. Recorded and paid additional advertising expense of $16. | Decrease | Decrease | Decrease |
| d. Issued additional shares of common stock for $40 cash. | NE | NE | Decrease |
Table (1)
Explanation of Solution
Operating income: Operating income refers to the income generated from the operation of business, or the revenue generated from the services offered by the company. Operating income is also known as Income before tax.
Net income: Net income is the excess amount of revenue which arises after deducting all the expenses of a company. In simple terms, it is the difference between total revenue and total expenses of the company.
Return on assets: Return on assets is the financial ratio which determines the amount of net income earned by the business with the use of total assets owned by it. It indicates the magnitude of the company’s earnings relative to its total assets. The formula is stated below:
The effects on the transaction can be explained as follows:
a. Recorded and received additional interest income of $7.
| Date | Account title / Explanation | Post ref. | Debit | Credit |
| Amount | Amount | |||
| Cash (+A) | $7 | |||
| Interest income (+R) | $7 | |||
| ( To record the receipt of interest income) |
Table (2)
- Cash is a current asset. Receipt of interest income increases the balance of cash. Thus, it is debited with $7.
- Interest income is a component of
stockholders’ equity . Interest income increases the stockholders’ equity by $7. Thus, it is credited with $7.
b. Purchased $80 of additional inventory on open account.
| Date | Account title / Explanation | Post ref. | Debit | Credit |
| Amount | Amount | |||
| Inventory (+A) | $80 | |||
| Accounts payable (+L) | $80 | |||
| ( To record the purchase of inventory on account) |
Table (3)
- Inventory is a current asset. Purchase of inventory increases the asset account by $80. Thus, it is credited with $80.
- Accounts payable is a current liability. Purchase of inventory on account increases the liability account. Hence, it is credited with $80.
c. Recorded and paid additional advertising expense of $16.
| Date | Account title / Explanation | Post ref. | Debit | Credit |
| Amount | Amount | |||
| Advertising expense (+E, −SE) | $16 | |||
| Cash (−A) | $16 | |||
| ( To record the payment of rent expense for the current month) |
Table (4)
- Advertising expense is a component of income statement that decreases the net income by $16. Thus, rent expense is debited with $16.
- Cash is a current asset. Payment of advertisement expense decreases the balance of cash account. Hence, it is credited with $16.
d. Issued additional shares of common stock for $40 cash.
| Date | Account title / Explanation | Post ref. | Debit | Credit |
| Amount | Amount | |||
| Cash (+A) | $40 | |||
| Common stock and additional paid-in capital (+SE) | $40 | |||
| ( To record the issuance of additional shares of common stock ) |
Table (5)
- Cash is a current asset. There is an increase in the balance of cash and hence, it is debited with $40.
- Common stock and additional paid-in capital is a component of stockholders’ equity. Issue of common stock and additional paid-in capital increases the balance of stockholders’ equity. Hence, it is credited $40.
2.
To determine
Explain the reasons if total assets increase by 5 percent, whether Incorporation A’s ROA of the next period be higher, lower, or the same as in the current period assuming that in the next period, Incorporation A does not pay any dividends, does not issue or retire stock, and earns 20 percent more than during the current period.
2.
Expert Solution
Answer to Problem 4AP
Preparation of table comparing the ROA of current year and next year as shown below:
| Return on assets | Current Period | Future Period |
Table (6)
Working Note:
Determine the average total assets for the current period.
Determine the net income for the current period when the net income increases by 20%.
Determine the ending total assets for the next period when the total assets increase by 5%.
Determine the average total assets for the future period.
Explanation of Solution
Return on assets: Return on assets is the financial ratio which determines the amount of net income earned by the business with the use of total assets owned by it. It indicates the magnitude of the company’s earnings relative to its total assets. The formula is stated below:
From Table (6), Incorporation A’s ROA would increase over the ROA that has earned in the current period because both the numerator and denominator would be increased by 20% and 5% respectively. In this situation, the net income is increasing at a higher rate than average total assets which results higher ROA in the next period.
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Assume Sunland Company has the following reported amounts: Sales revenue $1,000,000, Sales returns and allowances $29,000,
Cost of goods sold $649.599, and Operating expenses $215,600.
(a) Compute net sales.
Net sales $
(b) Compute gross profit.
Gross profit S
(c) Compute income from operations.
Common-Sized Income Statement
Revenue and expense data for the current calendar year for Sorenson Electronics Company and for the electronics industry are as follows. Sorenson Electronics Company data are expressed in dollars. The electronics industry averages are expressed in percentages.
SorensonElectronicsCompany
ElectronicsIndustryAverage
Sales
$1,940,000
100
%
Cost of goods sold
(1,358,000)
(76)
Gross profit
$582,000
24
%
Selling expenses
$(329,800)
(9)
%
Administrative expenses
(116,400)
(9)
Total operating expenses
$(446,200)
(18)
%
Operating income
$135,800
6
%
Other revenue and expense:
Other revenue
38,800
4
Other expense
(19,400)
(3)
Income before income tax
$155,200
7
%
Income tax expense
(58,200)
(5)
Net income
$97,000
2
%
a. Prepare a common-sized income statement comparing the results of operations for Sorenson Electronics Company with the industry average. If…
Please give all required answer with calculation
Chapter 5 Solutions
Financial Accounting, 8th Edition
Ch. 5 - Prob. 1QCh. 5 - Prob. 2QCh. 5 - Prob. 3QCh. 5 - Explain what a material amount is.Ch. 5 - What basis of accounting (cash or accrual) does...Ch. 5 - Prob. 6QCh. 5 - Prob. 7QCh. 5 - Prob. 8QCh. 5 - Prob. 9QCh. 5 - For property, plant, and equipment, as reported on...
Ch. 5 - Briefly explain the major classifications of...Ch. 5 - Prob. 12QCh. 5 - Prob. 13QCh. 5 - Prob. 14QCh. 5 - If average total assets increase, but net income,...Ch. 5 - Prob. 2MCQCh. 5 - Prob. 3MCQCh. 5 - Prob. 4MCQCh. 5 - Prob. 5MCQCh. 5 - Prob. 6MCQCh. 5 - Prob. 7MCQCh. 5 - Prob. 8MCQCh. 5 - Prob. 9MCQCh. 5 - Prob. 10MCQCh. 5 - Prob. 1MECh. 5 - Prob. 2MECh. 5 - Prob. 3MECh. 5 - Prob. 4MECh. 5 - Determining Financial Statement Effects of Sales...Ch. 5 - Prob. 6MECh. 5 - Prob. 7MECh. 5 - Matching Players in the Accounting Communication...Ch. 5 - Prob. 2ECh. 5 - Finding Financial Information: Matching...Ch. 5 - Prob. 4ECh. 5 - Preparing a Classified Balance Sheet Campbell Soup...Ch. 5 - Prob. 6ECh. 5 - Prob. 7ECh. 5 - Prob. 8ECh. 5 - Prob. 9ECh. 5 - Prob. 10ECh. 5 - Prob. 11ECh. 5 - Stock Issuances and the Statement of Stockholders...Ch. 5 - Prob. 13ECh. 5 - Prob. 14ECh. 5 - Prob. 15ECh. 5 - Prob. 16ECh. 5 - Prob. 17ECh. 5 - Prob. 18ECh. 5 - Prob. 19ECh. 5 - Prob. 1PCh. 5 - Matching Definitions with Balance Sheet-Related...Ch. 5 - Prob. 3PCh. 5 - Prob. 4PCh. 5 - Preparing a Classified (Multiple-Step) Income...Ch. 5 - Prob. 6PCh. 5 - Determining and Interpreting the Effects of...Ch. 5 - Determining the Effects of Transactions on Ratios...Ch. 5 - Prob. 9PCh. 5 - Prob. 1APCh. 5 - Prob. 2APCh. 5 - Prob. 3APCh. 5 - Prob. 4APCh. 5 - Prob. 1CPCh. 5 - Prob. 2CPCh. 5 - Prob. 3CPCh. 5 - Prob. 4CPCh. 5 - Prob. 5CPCh. 5 - Prob. 6CPCh. 5 - Prob. 7CPCh. 5 - Evaluating the Impact of Transactions on Statement...Ch. 5 - Prob. 2CC
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