
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
- a. Recorded sales on account of $400 and related cost of goods sold of $300.
- b. Incurred additional research and development expense of $100, which was paid in cash.
- c. Issued additional shares of common stock for $260 cash.
- d. Declared and paid dividends of $90.
Transaction | Gross Profit | Operating Income |
Return on Assets |
a. | |||
b. | |||
c. | |||
d. |

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Chapter 5 Solutions
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