Chapter 5, Problem 5.2CON

1.

To determine

Prepare the classified income statement (with earnings per share) and balance sheet for the current year.

Explanation of Solution

Financial statement: Financial statements are condensed summary of transactions communicated in the form of reports for the purpose of decision making. The financial statement reports the financial status of the business. The financial statements consist of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.

Multi step income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations under different sub-totals, as net income or net loss for a particular time period is referred to as income statement.

Balance Sheet: Balance Sheet summarizes the assets, the liabilities, and the Shareholder’s equity of a company at a given date. It is also known as the statement of financial status of the business.

Prepare the Classified Statement of income of Incorporation PC for the year ended December 31 is given below:

Incorporation PC
Consolidated statement of income
For the year ended December 31
Particulars	Amount (in Thousands)	Amount (in Thousands)
Net sales		$1,793,318
Less: Cost of sales		($1,261,728)
Gross profit		$531,590
Less: Operating expense
Selling, general and administrative expense	$406,523
Total operating expenses		($406,523)
Operating income		$125,067
Less: Other income/(expense):
Interest expense	($7,755)
Other income/(expense), net		($7,755)
Income before income taxes		$117,312
Less: Provision for income tax		($45,319)
Net Income		$71,993
Earnings per share:
Basic earnings per share (1)		$1.49
Number of shares outstanding		48,158

Table (1)

Working Note:

Determine the earnings per share.

$\begin{array}{c}\text{Earning per share}=\frac{\text{Net income}}{\text{Weighted average shares outstanding}}\\ =\frac{\$71,993}{48,158\text{ shares}}\\ =\$1.49\text{ per share}\end{array}$ (1)

Hence, the net income of Incorporation PC for the year ended December 31 amounts to $71,993 and the earnings per share is $1.49.

Prepare the Consolidated Balance sheet of Incorporation PC as on December 31 is given below:

Incorporation PC
Consolidated Balance sheet
As on December 31
Assets	Amount (in Thousands)	Amount (in Thousands)
Current assets
Cash and cash equivalents	$17,487
Receivables, net	$110,555
Product inventories	$386,924
Prepaid expenses and other current assets	$23,035
Total current assets		$538,001
Non-current assets:
Property and equipment, net		$41,394
Intangible assets		$188,841
Other non-current assets, net		$30,386
Total assets		$798,622
Liabilities and Stockholder's Equity	Amount (in Thousands)	Amount (in Thousands)
Current liabilities:
Accounts Payables	$177,437
Accrued expenses and other current liabilities	$53,398
Current portion of long-term debt	$22
Total current liabilities		$230,857
Non-current liabilities:
Long term debt		$247,300
Other long term liabilities		$40,719
Total liabilities		$518,876
Stockholders’ Equity:
Common Stock, 48,158 shares outstanding	$47
Additional paid-in-capital	$173,180
Retained Earnings (2)	$106,519
Total Stockholder's Equity		$279,746
Total liabilities and stockholder's equity		$798,622

Table (2)

Working Note:

Determine the amount of retained earnings.

$\begin{array}{c}\text{Retained earnings}=\left(\begin{array}{l}\text{Balance at the }\\ \text{beginning}\end{array}\right)+\left(\begin{array}{l}\text{Net income earned}\\ \text{ during the year}\end{array}\right)\\ =\$34,526+\$71,993\left(\text{Refer Table (1)}\right)\\ =\$106,519\end{array}$ (2)

Hence, the total of assets and liabilities of Incorporation PC as on December 31 amounts to $798,622.

2.

To determine

Compute the gross profit percentage and return on assets.

Explanation of Solution

Gross Profit Percentage: Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by dividing gross profit and net sales.

Determine the gross profit percentage.

$\begin{array}{c}\text{Gross profit}=\frac{\text{Gross profit}}{\text{Net sales}}\times 100\\ =\frac{\$531,590}{\$1,793,318}\times 100\\ =29.64\%\end{array}$

Hence, the gross profit percentage of Incorporation PC is 29.64%.

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 with relative to its total assets. The formula is stated below:

$\text{Return on assets}=\frac{\text{Net income}}{\text{Average total assets}}$

Determine the return on assets.

$\begin{array}{c}\text{Return on assets}=\frac{\text{Net income}}{\text{Average total assets}}\times 100\\ =\frac{\text{\$71,933}}{\text{\$763,584}\left(3\right)}\times 100\\ =9.42\%\end{array}$

Determine the amount of average total assets.

$\begin{array}{c}\text{Average total assets}=\frac{\left(\text{Beginning total assets}\right)+\left(\text{Ending total assets}\right)}{\text{2}}\\ =\frac{\$728,545+\$798,622}{2}\\ =\frac{\$1,527,167}{2}\\ =\$763,584\end{array}$ (3)

Hence, the return on assets of Incorporation PC is 9.42%.