Professional Documents
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Chapter 1 2 3
Chapter 1 2 3
1. How did the recession of 20072009 compare with other recessions since the
Great Depression in terms of length? (LO3).
The recession of 2007-2009 was the longest recession since the Great Depression.
1. Frantic Fast Foods had earnings after taxes of $390,000 in the year 2009 with
300,000 shares outstanding. On January 1, 2010, the firm issued 25,000 new
shares. Because of the proceeds from these new shares and other operating
improvements, earnings after taxes increased by 20 percent.
Income statement (LO1)
4. A-Rod Fishing Supplies had sales of $2,000,000 and cost of goods sold of
$1,250,000. Selling and administrative expenses represented 8 percent of sales.
Depreciation was 5 percent of the total assets of $4,000,000. What was the firms
operating profit? Operating Profit (LO1)
Sales $2,000,000
Cost of goods sold 1,250,000
Gross Profit 750,000
Selling & administrative expense 160,000
8% x $2,000,000 = $160,000
Depreciation expense 200,000
5% x $4,000,000 = $200,000
Operating profit $ 390,000
6. Given the following information prepare in good form an income statement for
the Dental Drilling Company.
Sales $470,000
Cost of goods sold 140,000
Gross Profit 330,000
Selling & administrative expense 60,000
Depreciation expense 70,000
Operating profit 200,000
Interest Expense 40,000
Earnings before taxes 160,000
Taxes 45,000
Earnings after taxes 115,000
7. Given the following information, prepare in good form an income statement for
Jonas Brothers Cough Drops.
Selling and administrative expense ............................................................ $ 250,000
Depreciation expense ........................................................................................ 190,000
Sales .......................................................................................................................... 1,600,000
Interest expense .................................................................................................. 120,000
Cost of goods sold ............................................................................................... 480,000
Taxes ........................................................................................................................ 165,000
Sales $1,600,000
Cost of goods sold 480,000
Gross Profit 1,120,000
Selling & administrative expense 250,000
Depreciation expense 190,000
Operating profit 680,000
Interest Expense 120,000
Earnings before taxes 560,000
Taxes 165,000
Earnings after taxes 395,000
4. Billys Chrystal Stores, Inc., has assets of $5,000,000 and turns over its assets 1.2
times per year. Return on assets is 8 percent. What is the firms profit margin
(return on sales)? Profitability ratios (LO2)
b . Assume in 2011, sales increase by 10 percent and cost of goods sold increases
by 20 percent. The firm is able to keep all other expenses the same. Once again,
assume a tax rate of 30 percent on income before taxes. What are income after taxes
and the profit margin for 2011?
21. Jim Shorts Company makes clothing for schools. Sales in 2010 were
$4,000,000. Assets were as follows: Turnover ratios (LO2)
2. Inventory turnover
b . In 2011, sales increased to $5,000,000 and the assets for that year were as
follows:
2. Inventory turnover