Chapter 5, Problem 5.7P

Determining and Interpreting the Effects of Transactions on Income Statement Categories and Return on Assets (AP5-A)

Creative Technology, a computer hardware company based in Singapore, developed the mortem standard for computer sound cards in the early 1990s. Recently. Creative has released a line of portable audio products to directly compete with Apple's popular iPod. Presented here is a recent income statement (dollars in millions).

Net sales	$ 231
Costs and expenses
Cost of sales	182
Research and development	66
Selling, general, and administrative	62
Operating income (loss)	(79)
Interest and other income (expenses), net	27
Income (loss) before provision (benefit) for income taxes	(52)
Provision (benefit) for income taxes	(5)
Net income (loss)	S (47)

The company’s beginning and ending assets were $403 and $342, respectively.

Required:

Listed here are hypothetical additional transactions. Assuming that they also occurred during the fiscal year, complete the following tabulation, indicating the sign of the effect of each additional transaction (+ tor increase, − for decrease, and NE tor no effect). Consider each item independently and ignore taxes. (Hint: Construct the journal entry for each transaction before evaluating its effect.)

1. a. Recorded sales on account of $400 and related cost of goods sold of $300.
2. b. Incurred additional research and development expense of $100, which was paid in cash.
3. c. Issued additional shares of common stock for $260 cash.
4. d. Declared and paid dividends of $90.

Transaction	Gross Profit	Operating Income	Return on Assets
a.
b.
c.
d.