Accounting Exercises - Balance Sheet and Income Statement

Accounting Exercises – Balance Sheet and Income Statement
1. Your company sells $15,000.00 of beer to a commercial customer on account. Show

your journal entry:
Dr. Accounts receivable (A/R)

$15,000.00
Cr. Sales
$15,000.00
2. Your company has a balance of $900,000 in accounts receivable. You estimate that 5%
of this will not be collectable. Show the journal entry.
Dr. Bad debt expense

$ 45,000.00
Cr. Allowance for bad debts
$ 45,000.00
(This is an offset – or valuation – account to “accounts receivable”)
3. Your company bought a machine for $50,000 on 1/1/98. You estimate it has a useful life
of 5 years, and you depreciate it linearly. What is your journal entry on 12/31/98?
Dr. Depreciation expense

$ 5,000.00
Cr. Accumulated depreciation
$ 5,000.00
(This is an offset account to “property, plant and equipment”)
4. On 1/1/98, your company signed a contract to rent a building for 1 year at $2000 per
month, payable in advance.
a) Show your journal entry on 1/1/98.
Dr. Prepaid rent

$ 24,000.00
Cr. Cash
$ 24,000.00
(Prepaid rent is a current asset)
b) Show your journal entry on 1/31/98.
Dr. Rental expense

$ 2,000.00
Cr. Prepaid rent
$ 2,000.00
5. On 1/1/98, your retail store had a beginning inventory of $150,000. During the year, it
purchased goods for $700,000. On 12/31/98, you conducted an inventory, and calculated
it to be $50,000. What were your cost of goods sold for the year?
1
Beginning inventory $ 150,000
+ Purchases 700,000
- Ending inventory 50,000
Cost of goods sold $ 800,000
6. You have a manufacturing company in Germany. In your income statement you have
Labor DM 550,000; Material DM 400,000; Increase in finished goods inventory of
DM 100,000. How would you show this under GAAP?
Cost of goods sold $ 850,000
+ Labor 550,000
+ Material 400,000
- Increase in inventory 100,000 (a decrease in inventory is added)
= Cost of goods sold $ 850,000
7. This year, your company spent $1,500,000 to develop a new, low calorie beer. You
believe it will be very profitable. What is your journal entry?
Dr. Expenses
$ 1,500,000
Cr. Cash
$ 1,500,000
(The entry itself is not important. What is important is that these expenses cannot be
capitalized)
8. Your company buys the patent for a new, low calorie beer from the Whalepise brewery.
What is your journal entry?
Dr. Patents
$ 1,500,000
Cr. Cash
$ 1,500,000
(Here, it can be capitalized)
9. Your company buys Gabby Telecom for $1 billion. Gabby Telecom’s assets are $300
million and its liabilities $100 million. What is its book value, and what is your journal
entry?
Book value: $300 million - $100 million = $200 million
Dr. Assets $
300,000,000
Dr. Goodwill $
800,000,000
Cr. Liabilities
$ 100,000,000
2
Cr. Cash
$ 1,000,000,000
10. Your company buys $50,000 of parts from a supplier on account. What is your journal
entry?
Dr. Parts inventory

$ 50,000
Cr. Accounts payable (A/P)
$ 50,000
(Note: if this is a manufacturing company, and the parts are included in the final product,
it would be called “raw materials inventory”)
11. It is 11/30/98. Your wage expense for November is estimated at $150,000, but you only
paid out $100,000. Show the entry.
Dr. Wage expense

$ 150,000
Cr. Accrued wages
$ 50,000
Cr. Cash (or Wages payable)
$ 100,000
12. On 1/1/98, you rent out a building to another company for 1 year at $3000 per month.
You demanded and received payment for the full year in advance.
a) What is your journal entry on 1/1/98?
Dr. Cash
$ 36,000
Cr. Rent received in advance
$ 36,000
(Note: this is a liability)
b) What is your journal entry on 1/31/98?
Dr. Rent received in advance $

3,000
Cr. Rental income
$ 3,000
13. Your company had net income of $350,000 in 1998, and paid out dividends of $300,000.
Retained earnings were $400,000 on 1/1/98. What are they on 12/31/98 after all closing
entries?
Retained earnings 1/1/98 $ 400,000

+ Net income 1998 350,000
- Dividends paid 300,000
Retained earnings 12/31/98 $ 450,000
3
14. Your new company, Stealemblind Inc., issued 1500 shares of stock with a par value of
$100. Total receipts from the issue were $250,000. What is your journal entry?
Dr. Cash $
250,000
Cr. Capital stock (1500 shares at $100) $
150,000
Cr. Additional paid-in capital
$ 100,000
15. Your company makes computers. Classify the following as revenue, expense, gain, loss,
and give the amount.
a) You sell computers on account for $50,000. You have not received the money yet,
but are confident you will get it. revenue
b) You sell a Picasso painting for $3,000,000 which you are carrying on your books at
$1,300,000. gain
c) You accrue wages for November of $200,000. expense
d) You sell a building, which has a book value of $500,000, for $300,000. loss
16. You have a machine which you carry on your books for $5000. It breaks down. You
estimate it would cost more to fix it than to buy a new one.
a) Does the machine meet the definition of an asset? No. No future benefit
b) What should you do to adjust your books?
Write it off
Dr. Expense
$ 5,000
Cr. Machinery
$ 5,000
17. Miss Germany calls you up and asks for $1,500,000 for her favorite charity (herself). Is
this a liability?
No. There is neither a legal nor a moral obligation to pay.
18. How would you classify the following assets?

a) Investments in XYZ Company stock, which you intend to hold for a long time.
Long-term investments
b) Investments in Ford Motor Company bonds, which you plan to sell within the next
few months. Marketable securities (a current asset)
c) Your factory. Property, plant, and equipment
d) A production machine. Property, plant, and equipment
e) Finished goods inventories. Current asset
f) Accounts receivable. Current asset
4
Accounting Exercises – Cost of Goods Sold – Answers
1. The accountant at Wiserbud Retail Stores Inc. gave you the following information
concerning the only product it sells, Wiserbud Beer:
1/1/1999 Inventory (count) 2,000 cases @ $10.00 per case

1999 Purchases 10,000 cases @ $10.00 per case
What is cost of goods sold? Assuming the inventory account on 1/1/1999 had a
balance of $20,000, and the purchases account on 12/31/1999 had a balance of
$100,000, what journal entry do you make to close out the books?
Units Value
Beginning inventory: 2,000 $20,000
+ Purchases 10,000 100,000
- Ending inventory 3,000 30,000
= Cost of goods sold 9,000 90,000
Dr. Inventory 10,000

Dr. Cost of goods sold 90,000
Cr. Purchases 100,000

12/31/1999 Inventory (count) 3,000 cases
What is cost of goods sold and ending inventory under:

a. FIFO
b. LIFO
c. Weighted average
Using FIFO, assuming the inventory account on 1/1/1999 had a balance of $20,000,
and the purchases account on 12/31/1999 had a balance of $150,000, what journal
entry do you make to close out the books?
a. FIFO
CGS 9,000 cases: 2,000 at $10.00 = 20,000 + 7,000 at 15.00 =

105,000; Total = $125,000
EI 3000 cases at $15.00 = $45,000
5
b. LIFO
CGS 9,000 cases: 9,000 at $15.00 = $135,000;

EI 3000 cases: 2000 at $10.00 = 20,000; 1000 at $15.00 = 15,000
Total = $35,000
c. weighted average
available for sale: 12,000 cases; 20,000 + 150,000 = $170,000

average: $14.1666667
CGS 9,000 cases at $14.1666667 = $127,500
EI 3000 cases at $14.1666667 = $ 42,500

12/31/1999 Inventory (count) 2,000 cases
What is cost of goods sold and ending inventory under:

a. FIFO
b. LIFO
c. Weighted average
Using FIFO, assuming the inventory account on 1/1/1999 had a balance of $20,000,
and the purchases account on 12/31/1999 had a balance of $150,000, what journal
entry do you make to close out the books?
a. FIFO
CGS 11,000 cases: 3,000 at $10.00 = 30,000 + 8,000 at 15.00 =

120,000; Total = $150,000
EI 2000 cases at $15.00 = $30,000
b. LIFO
CGS 11,000 cases: 1,000 at $10.00 = 10,000 + 10,000 at 15.00 =

150,000; Total = $160,000
EI 2000 cases at $10.00 = $20,000
6
c. weighted average
available for sale: 13,000 cases; 30,000 + 150,000 = $180,000

average: $13.846153846
CGS 11,000 cases at $13.846153846 = $152,308
EI 2,000 cases at $13.846153846 = $ 27,692
4. Determine unit costs:
a. 1999 production = 100,000 cases
Account Costs in Unit costs

1999
Direct materials $150,000 $1.50
Direct labor 200,000 $2.00
Variable overhead 250,000 $2.50
Fixed overhead 300,000 $3.00
900,000 $9.00
b. 1999 production = 150,000 cases

1999
Direct labor 300,000 2.00
Variable overhead 375,000 2.50
Fixed overhead 300,000 2.00
1,200,000 $9.00
5. The accountant at Wiserbud Manufacturing Inc. gave you the following information
concerning its product, Wiserbud Beer:
1999 production = 100,000 cases

1999
900,000 9.00
Beginning inventory (1/1/99): 20,000 cases @ $9.00 each

Ending inventory (12/31/99): 10,000 cases
7
5. cont’d
Assume Wiserbud Manufacturing Inc. uses the FIFO inventory valuation method.
a. Show the journal entries to close out the account.
b. In this case, would it matter if Wiserbud used LIFO? Weighted average? Explain.
CGS = BI+P-EI = 20,000 + 100,000 - 10,000 = 110,000 cases x $9.00 = $990,000

EI = 10,000 x $9.00 = $90,000
BI = 20,000 x $9.00 = $180,000 Change = - $90,000
a. Journal entries
Dr. CGS $990,000
Cr. Direct materials $ 150,000
Cr. Direct labor 200,000
Cr. Variable overhead 250,000
Cr. Fixed overhead 300,000
Cr. Inventory 90,000
b. No, because the unit costs are unchanged.
6. The accountant at Wiserbud Manufacturing Inc. gave you the following information
concerning its product, Wiserbud Beer:
1999 production = 100,000 cases

1999
900,000 9.00
Beginning inventory (1/1/99): 20,000 cases @ $8.00 each

Ending inventory (12/31/99): 30,000 cases
Assume Wiserbud Manufacturing Inc. uses the FIFO inventory valuation method.
a. Show the journal entries to close out the account.
b. What would be the journal entries if Wiserbud used LIFO? Weighted average?
a. FIFO
CGS = BI+P-EI = 20,000 + 100,000 - 30,000 = 90,000 cases
20,000 x $8.00 + 70,000 x $9.00 = $790,000
EI = 30,000 x $9.00 = $270,000
BI = 20,000 x $8.00 = $160,000 Change = $110,000
8
a. Journal entries
Dr. CGS $790,000
b. LIFO
CGS = BI+P-EI = 20,000 + 100,000 - 30,000 = 90,000 cases

90,000 x $9.00 = $810,000
EI = 20,000 x $8.00 + 10,000 x $9.00 = $250,000
BI = 20,000 x $8.00 = $160,000 Change = $90,000
Dr. CGS $810,000

Weighted average
Available for sale: BI = 20,000 x $8.00 = $160,000

P = 100,000 x $9.00 = $900,000
$1,060,000 = $8.83333333333333
120,000 units
CGS = BI+P-EI = 20,000 + 100,000 - 30,000 = 90,000 cases

90,000 x $8.833333333333333 = $795,000
EI = 30,000 x $8.833333333333333 = $265,000
BI = 20,000 x $8.00 = $160,000 Change = $105,000
Dr. CGS $795,000

9
1. All else equal, what would you rather have: a 10% increase in sales price with no change
in volume, or a 10% increase in sales volume with no change in sales price? Include the
effects of each on revenue and profit, and which would have a greater increase or
decrease on cash flows. Explain why.
An increase in the sales price, since it causes a much larger increase in profits
even though revenue remains the same. Reason: sales volume increase would
also increase cost of goods sold and other variable expenses, while a sales price
increase only causes the REVENUE-driven variable expenses to increase.
2. All else equal, what would you rather have: a 10% decrease in sales price with no change
in volume, or a 10% decrease in sales volume with no change in sales price? Include the
effects of each on revenue and profit, and which would have a greater increase or
decrease on cash flows. Explain why.
Do this yourself!
3. If sales price stays the same, but costs increase by 10% due to inflation, will net income
decrease by 10%, more than 10%, or less than 10%? Explain.
Do this yourself!
4. What is operating leverage, as described by Tracy?
An increase (decrease) of sales of X% causes profit to increase (decrease) by

far more than X% due to fixed costs.
5. Explain the following terms:

fixed expense An expense that does not change with revenue or volume
variable expense An expense that changes with revenue or volume
contribution margin Gross margin minus variable expenses. This is the
amount available to cover fixed expenses, interest, and taxes, and also provide a
profit
6. What is the difference between sales-volume-driven and revenue-driven variable

expenses? Give at least one example of each.
Sales-volume-driven variable expenses go up with units, but not sales price.

Example: cost of goods sold
Revenue-driven variable expenses go up with sales price. The way Tracy uses
them, they do not increase with volume (which is rather sloppy English, since an
increase in volume increases revenue also). Example of a revenue-driven but
not volume-driven expense: credit card charges
10
Use this financial statement for the following questions:
Merchandising Co.
Volume: 500,000
Income Statement Per unit Totals
Sales revenue 10.00 5,000,000.00

Cost of goods sold 6.00 3,000,000.00
Gross margin 4.00 2,000,000.00
Less: variable operating

expenses
Sales-volume driven 0.50 250,000.00
Contribution margin 3.50 1,750,000.00
Less fixed costs:

Operating expenses 550,000.00
Depreciation expense 100,000.00
Operating earnings 1,100,000.00
Interest expense 75,000.00
Earnings before taxes 1,025,000.00
7. What is the breakeven volume?
Operating profit breakeven: (550,000 + 100,000) / 3,50 = 185,715

Breakeven after interest expense: (550,000 + 100,000 + 75,000) / 3,50 =
207,143
8. What are earnings before taxes if sales price increases by 10% and sales volume stays the
same?
1,025,000 + 500,000 = 1,525,000
9. What are earnings before taxes if sales volume increases by 10% and sales price stays the
same?
1,025,000 + 500,000 (revenue) - 300,000 (CGS) – 25,000 (var. exp) =
1,200,000
11
10. What are earnings before taxes if costs increase by 10% and everything else stays the
same?
1,025,000 - 300,000 (CGS) – 25,000 (var. exp) – 55,000 (fixed operating

expenses) – 7,500 (interest) = 637,500
11. What are earnings before taxes if sales volume increases by 10% and sales price falls by
10%?
Change in revenue: 550,000 * 9.00 = 4,950,000 – 5,000,000 = - 50,000

1,025,000 - 50,000 (revenue) - 300,000 (CGS) – 25,000 (var. exp) = 650,000
12. What are earnings before taxes if sales price increases by 10% and sales volume falls by
10%?
New contribution margin: 4.50 450,000* 4.50 = 2,025,000

Old contribution margin: 1,750,000 Change: 275,000
EBT = 1,025,000 + 275,000 = 1,300,000
12
1. On July 1, 2001, Greg’s Beer Emporium Inc. buys 1000 shares of Wiserbud Beer at $60
per share. They are classified as trading securities. By September 30, the price of
Wiserbud Beer has dropped to $50. The shares have not been sold, and GBE issues
quarterly financial statements.
a. What are GBE’s journal entries on July 1 and September 30?
July 1:
Dr. Marketable securities $60,000
Cr. Cash $60,000
September 30:
Dr. Unrealized loss on marketable $10,000
securities
Cr. Marketable securities $10,000
b. What is the effect on pretax income for the third quarter of 2001? What is the balance in
the marketable securities account on September 30, 2001? (Assume it consists solely of
Wiserbud Beer stock.)
Pretax income for the quarter has fallen by $10,000. The balance in marketable securities is
now $50,000.
c. If GBE used the lower-of-cost-or-market principle (which is not allowed under GAAP
for marketable securities) with recognition of unrealized gains and losses, what would be
GBE’s journal entry on July 1 and September 30? What would be the effect on pretax
income? What would be the balance in the marketable securities account on September
30, 2001?
Same as above (b). In other words, marketable securities would be written down to the new
market value of $50,000.
2. Continued from question 1. GBE Inc. holds on to its Wiserbud stock. By December 31,
the stock has risen to $80 per share.
a. What is the journal entry on December 31?
December 31:
Cr. Unrealized gain on marketable $30,000
securities
b. What is the effect on pretax income for the fourth quarter of 2001? What is the balance in
the marketable securities account on December 31, 2001? What is the effect on pretax
income for the year?
Pretax income for the fourth quarter of 2001 rises $30,000. The balance in the marketable
securities account is now $80,000. Pretax income for the entire year goes up $20,000.
13
GBE’s journal entry on December 31? What would be the effect on pretax income for the
fourth quarter? For the entire year? What would be the balance in the marketable
securities account on December 31, 2001?
December 31:
securities
Pretax income for the fourth quarter would rise $10,000. Income for the entire year would be
unchanged. The balance in the marketable securities account would be $60,000.
3. On July 1, 2001, Greg’s Beer Emporium Inc. buys 1000 shares of Wiserbud Beer at $60
per share. They are classified as trading securities. By September 30, the price of
Wiserbud Beer has risen to $90. The shares have not been sold, and GBE issues quarterly
financial statements.
a. What are GBE’s journal entries on July 1 and September 30?
July 1:
Cr. Cash $60,000
September 30:
securities
b. What is the effect on pretax income for the third quarter of 2001? What is the balance in
the marketable securities account on September 30, 2001?
Pretax income for the quarter has risen $30,000. The balance in marketable securities is now
$90,000.
GBE’s journal entry on September 30? What would be the effect on pretax income?
What would be the balance in the marketable securities account on September 30, 2001?
No journal entry. In other words, marketable securities would not be written up, and there
would be no unrealized gain. The balance in marketable securities is $60,000.
4. Continued from question 3. GBE Inc. holds on to its Wiserbud stock. By December 31,
the stock has fallen to $50 per share.
a. What is the journal entry on December 31?
On December 31:
14
securities
b. What is the effect on pretax income for the fourth quarter of 2001? What is the balance in
the marketable securities account on December 31, 2001? What is the effect on pretax
income for the year?
Pretax income for the fourth quarter of 2001 drops $40,000. The balance in the marketable
securities account is now $50,000. Pretax income for the entire year falls $10,000.
GBE’s journal entry on December 31? What would be the effect on pretax income for the
fourth quarter? For the entire year? What would be the balance in the marketable
securities account on December 31, 2001?
On December 31:
securities
Pretax income for the fourth quarter and the entire year would fall $10,000. The balance in
the marketable securities would be $50,000.
5. GBE issues quarterly financial statements. On July 1, 2001, Greg’s Beer Emporium Inc.
buys 1000 shares of Wiserbud Beer at $100 per share. They are classified as trading
securities. By September 30, the price of Wiserbud Beer rose to $120. By December 31,
the shares have fallen to $90. The shares have not been sold.
Assuming GBE made the appropriate journal entries on July 1 and September 30, what
would be the journal entry on December 31? What would be the balance in the
marketable securities account on December 31? What would be the effect on pretax
profit for the third quarter? For the fourth quarter? For the entire year?
December 31:
securities
On December 31, the balance in the marketable securities account is $90,000. The effect on
pretax profit for the third quarter is +$20,000, for the fourth quarter -$30,000, for the
year -$10,000.
15
6. GBE issues quarterly financial statements. On July 1, 2001, Greg’s Beer Emporium Inc.
buys 1000 shares of Wiserbud Beer at $100 per share. They are classified as trading
securities. By September 30, the price of Wiserbud Beer dropped to $80. By December
31, the shares have risen to $120. The shares have not been sold.
Assuming GBE made the appropriate journal entries on July 1 and September 30, what
would be the journal entry on December 31? What would be the balance in the
marketable securities account on December 31? What would be the effect on pretax
profit for the third quarter? For the fourth quarter? For the entire year?
December 31:
securities
On December 31, the balance in the marketable securities account is $120,000. The effect on
pretax profit for the third quarter is -$20,000, for the fourth quarter +$40,000, for the year
+$20,000.
16
Airlines Exercise
2010
EasyJet EasyJet € RyanAir Lufthansa EasyJet

Total assets 4.002,5 4.600,6 7.563,4 29.320,0 3.673,0

Equity 1.500,7 1.724,9 2.848,6 8.340,0 1.307,3

Debt 1.212,0 1.393,1 2.956,2 7.184,0 1.120,6

Total revenue 2.973,1 3.417,4 2.988,1 27.324,0 2.666,8

CGS 2.707,3 3.111,8 2.441,2 23.546,0 2.526,2

SGA 92,2 106,0 144,8 2.538,0 80,5

EBITDA 252,3 290,0 637,5 2.922,0 119,9

Operating income 173,6 199,5 402,1 1.240,0 60,1

Net income 121,3 139,4 305,3 1.143,0 71,2

Debt/equity 0,8076 1,0378 0,8614

Op inc./revenue 0,0584 0,1346 0,0454

ROE 0,0808 0,1072 0,1371

Core ratios:

Asset turnover: sales/assets 0,7428 0,3951 0,9319

Asset leverage: assets/equity 2,6671 2,6551 3,5156

ROS: /Net income/revenue 0,0408 0,1022 0,0418

Check: = ROE? 0,0808 0,1072 0,1371

Is off-‐balance sheet financing significant?

Operating lease aircraft 99,4 86,5 95,5 227

Op lease aircraft/revenue 0,0253 0,0320 0,0083
CGS/Sales 0,9106 0,8170 0,8617
SGA/Sales 0,0310 0,0485 0,0929
1EUR = 0,87 GBP

17
Automotove Exercise -‐ Automotive Only
2010
GM Ford Daimler VW GM Fo

Automotive assets 127.966,0 64.606,0 67.959,0 136.295,0

Automotive liabilities 94.380,0 74.904,0 34.871,0 107.340,0

Automotive Debt 4.630,0 19.077,0 -‐1.358,0 15.783,0

Automotive sales 135.142,0 119.280,0 84.973,0 121.697,0 104.116,0

CGS 118.792,0 104.451,0 63.912,0 103.013,0 112.195,0

SGA 11.446,0 11.909,0 14.634,0 15.500,0 12.167,0

EBITDA 11.827,0 7.499,0 9.791,0 13.273,0 -‐8.862,0

Operating income 4.904,0 2.920,0 6.427,0 3.184,0 -‐20.246,0

CGS/sales 0,879 0,876 0,752 0,846 1,078

SGA/sales 0,085 0,100 0,172 0,127 0,117

Op inc./sales 0,036 0,024 0,076 0,026 -‐0,194

Asset turnover sales/assets 1,056 1,846 1,250 0,764

ROE

Core ratios:

Asset turnover: sales/assets

Asset leverage: assets/equity

ROS: /Net income/revenue

Check: = ROE?


18
Automotove Exercise -‐ Consolidated
2010
GM $000 Ford $000 Daimler €000 VW €000 GM $000 For

Total assets 138.898 164.687 135.830 199.393 136.295

Equity 37.159 -‐642 37.953 48.712 21.957

Debt 4.630 103.988 53.682 77.011 15.783

Total revenue 135.592 128.954 97.761 126.875 104.589

CGS 118.792 104.451 74.988 105.431 112.195

SGA 11.716 11.909 15.499 14.303 13.417

EBITDA 12.007 18.178 10.638 17.230 -‐9.639

Operating income 5.084 12.594 7.274 7.141 -‐21.023

Net income 4.668 6.561 4.498 7.226 -‐23.465

Debt/equity 0,1246 -‐161,9751 1,4144 1,5809 0,7188

Op inc./revenue 0,0375 0,0977 0,0744 0,0563 -‐0,2010

ROE 0,1256 -‐10,2196 0,1185 0,1483 -‐1,0687

Core ratios:

Asset turnover: sales/assets 0,9762 0,7830 0,7197 0,6363 0,7674

Asset leverage: assets/equity 3,7379 -‐256,5218 3,5789 4,0933 6,2074

ROS: /Net income/revenue 0,0344 0,0509 0,0460 0,0570 -‐0,2244

Check: = ROE? 0,1256 -‐10,2196 0,1185 0,1483 -‐1,0687

Operating lease payments 604 600 491 630 624
Capitalize (1/3, 6%) 3355,6 3333,3 2727,8 3500,0 3466,7
Revised debt 7985,6 107321,3 56409,8 80511,0 19249,7
Revised debt/equity 0,2149 -‐167,1672 1,4863 1,6528 0,8767
CGS/Sales 0,8761 0,8100 0,7671 0,8310 1,0727
SGA/Sales 0,0864 0,0924 0,1585 0,1127 0,1283
Op inc./Sales 0,0375 0,0977 0,0744 0,0563 -‐0,2010

19
1. On 12/31/99, your bookkeeper provided you the following information.
Greg’s Merchandising Company

12/3
Income Statement Assets
Cash ?
Sales revenue $1,500,000.00 Accounts receivable 125
Cost of goods sold 800,000.00 Inventory 250
Gross margin 700,000.00 Prepaid expenses 50
Operating expenses (exc. depreciation) 350,000.00 Property. plant and equipment 1,500
Depreciation expense 100,000.00 Accumulated depreciation 600
Operating earnings 250,000.00 Net of depreciation 900
Interest expense 75,000.00 Liabilities and owners' equity

Earnings before interest & taxes 175,000.00 Accounts payable 60
Accrued expenses 75
Income tax expense 50,000.00 Income tax payable 40
Short-term notes payable 425
Net income $ 125,000.00
Long term notes payable 500
Capital stock 50
Retained earnings 295
Refer to the income statement and balance sheet above.
1a. How much did your company pay out in dividends in 1999?
RE 1/1 200,000
+ net income 125,000
- dividends 30,000
RE 12/31 295,000
1b. What is your company’s cash balance
Cash 1/1 50,000

+ Cash inflow 35,000
Cash balance 85,000
1c. Using the indirect method, write your statement of cash flows for 1999.
Cash flow from operating activities:

Net income 125,000
20
+ depreciation 100,000
- increase in accounts receivable ( 25,000)
+ decrease in inventory 50,000
+ decrease in prepaid expenses 10,000
- decrease in accounts payable ( 30,000)
+ increase in accrued expenses 5,000
- decrease in income tax payable ( 5,000)
Cash inflow from operating activities 230,000
Cash flow from investing activities:

- increase in property, plant and equipment (250,000)
Cash outflow from investing activities (250,000)
Cash flow from financing activities:

+ increase in short-term notes payable 50,000
+ increase in long-term notes payable 25,000
+ increase in capital stock 10,000
- dividends paid (30,000)
Cash inflow from financing activities 55,000
Net cash inflow 35,0002. On

12/31/01, your bookkeeper provided you the following information.
Greg’s Beer Emporium

12/3
Income Statement Assets
Cash ?
Sales revenue $1,550,000.00 Accounts receivable 75
Cost of goods sold 800,000.00 Inventory 350
Gross margin 750,000.00 Prepaid expenses 75
Operating expenses (exc. depreciation) 350,000.00 Investments in equity securities 150

Depreciation expense 150,000.00 Property. plant and equipment 1,250
Operating earnings 250,000.00 Accumulated depreciation 700
Net of depreciation 550
Interest expense 50,000.00
Earnings before interest & taxes 200,000.00 Liabilities and owners' equity
Accounts payable 120
Income tax expense 50,000.00 Accrued expenses 60
Income tax payable 55
Net income $ 150,000.00 Short-term notes payable 325
Long term notes payable 500
21
Capital stock 60
Retained earnings 300
Refer to the income statement and balance sheet above.
2a. How much did your company pay out in dividends in 1999?
RE 1/1 200,000
+ net income 150,000
- dividends 50,000
RE 12/31 300,000
2b. What is your company’s cash balance
Cash 1/1 35,000

+ Cash inflow 185,000
Cash balance 220,000
2c. Using the indirect method, write your statement of cash flows for 1999.
Cash flow from operating activities:

Net income 150,000
+ depreciation 150,000
+ decrease in accounts receivable 25,000
- increase in inventory ( 50,000)
- increase in prepaid expenses ( 15,000)
+ increase in accounts payable 30,000
- decrease in accrued expenses ( 10,000)
+ increase in income tax payable 10,000
Cash inflow from operating activities 290,000
Cash flow from investing activities:

- increase in investments ( 50,000)
Cash outflow from investing activities ( 50,000)
Cash flow from financing activities:

- decrease in short-term notes payable ( 50,000)
+ increase in long-term notes payable 25,000
+ increase in capital stock 20,000
- dividends paid ( 50,000)
Cash outflow from financing activities ( 55,000)
Net cash inflow 185,000
22
Nike
2001 % 2000 % 1999
Net sales 9488,8 100,00% 8995,1 100,00% 8776,9
Cost of goods sold 5784,9 60,97% 5403,8 60,07% 5493,5
Gross margin 3703,9 39,03% 3591,3 39,93% 3283,4
Selling, general and
administrative expense 2689,7 28,35% 2606,4 28,98% 2426,6
Operating profit 1014,2 10,69% 984,9 10,95% 856,8
Interest expense 58,7 0,62% 45,0 0,50% 44,1

Other expense/income 34,2 0,36% 23,2 0,26% 21,5
Restructuring charge -0,1 0,00% -2,5 -0,03% -45,1
Earnings before taxes 921,4 9,71% 919,2 10,22% 836,3

Income taxes 331,7 3,50% 340,1 3,78% 294,7
Net income 589,7 6,21% 579,1 6,44% 541,6
“
Ratio Analysis Exercise
Chapter 14 of the Ferrell & Hirt textbook give extracts from Nike's income statement
(p. 394 and below) and balance sheet (p. 398). Calculate the following ratios:
Nike ratios 2001 2000 1999
Profit margin 6,21% 6,44% 6,17%

Return on assets 10,13% 9,89% 8,60%
Return on equity 16,88% 18,47% 13,54%
Receivables turnover 5,85 5,73 5,70
Inventory turnover 6,66 6,22 7,50
Total asset turnover 1,63 1,54 1,67
Current ratio 2,03 1,68 2,26
Quick ratio 1,23 1,00 1,45
Debt to assets 22,28% 24,66% 15,36%
Times interest earned 17,28 21,89 19,43
EPS 2,16 2,07 1,57
Dividends per share 0,48 0,48 0,48
Debt 1296,6 1444,6 806,2
A common size income statement expresses the elements of the income statement
23
as a percentage of revenue. Complete the statement for 2000 and 2001.
2001 2000 1999
Net sales (revenues) 9488,8 100,0% 8995,1 100,0% 8776,9 100,0%

Cost of goods sold 5784,9 61,0% 5403,8 60,1% 5493,5 62,6%
Selling, general and admin. 2689,7 28,3% 2606,4 29,0% 2426,6 27,6%
Operating profit (EBIT) 1014,2 10,7% 984,9 10,9% 856,8 9,8%

Interest expense 58,7 0,6% 45 0,5% 44,1 0,5%
Other income 34,2 0,4% 23,2 0,3% 21,5 0,2%
Restructuring charge -0,1 0,0% -2,5 0,0% 45,1 0,5%
Earnings before taxes (EBT) 921,4 9,7% 919,2 10,2% 746,1 8,5%
Income taxes 331,7 3,5% 340,1 3,8% 294,7 3,4%
Net income 589,7 6,2% 579,1 6,4% 451,4 5,1%
Ratio Analysis Exercise p. 2
Questions:
1. Did Nike's profitability improve from 2000 to 2001? From 1999 to 2000?
2000 to 2001: Overall profits went up a bit, as did EPS. But profit margin went
down, as did ROE
1999 to 2000: Overall profits went up as did every measure of profitability.
2. Explain the development in profit margin from 2000 to 2001

CGS went up from 60.07% to 60.97%. This was partially offset by a reduction
in selling, general and administrative expense
3. What should management focus on to improve the profit margin?

Lower CGS
4. What happened to ROE from 2000 to 2001? Why?

It declined, even though net income increased. Reason: higher equity,
due to retained earnings. In other words, income in 2001 did not keep pace
with equity.
24
Sensitivity Exercise
Volume: 100.000
Per unit Total %
Sales 10,00 1.000.000,00 100,00%
Cost of goods sold 6,00 600.000,00 60,00%
Gross margin 4,00 400.000,00 40,00%
Variable operating costs 1,50 150.000,00 15,00%

Contribution margin 2,50 250.000,00 25,00%
Fixed operating costs 100.000,00 10,00%

EBITDA 150.000,00 15,00%
Depreciation 30.000,00 3,00%

Operating earnings (EBIT) 120.000,00 12,00%
Questions:
1. Assume volume increases 10% with no change in price

a. What is the unit contribution margin? $2,50
b. What is the total contribution margin? $275.000
c. What are operating earnings? $145.000
d. Does EBIT go up by 10%? If not, by how much? 20,83%
2. Assume price increases 10% with no change in volume

a. What is the unit contribution margin? $3,50
b. What is the total contribution margin? $350.000
c. What are operating earnings? $220.000
d. Does EBIT go up by 10%? If not, by how much? 83,33%
3. What is the EBIT breakeven quantity (i.e. at what Q does EBIT = 0)

a. at the original price? 52.000
b. at the 10% higher price? 37.143
4. Compare revenue and EBIT for the 10% volume increase with those of the
10% price increase
Both increase 10% to $1,100,000
5. How much would volume have to increase to have the same EBIT as with a
10% price increase?
220,000 = $2.5X - 130,000 Increase 40,000 to 140,000 (40%)
10% volume increase

Volume: 110.000
Per unit Total
25
Sales 10,00 1.100.000,00
Cost of goods sold 6,00 660.000,00
Gross margin 4,00 440.000,00
Variable operating costs 1,50 165.000,00

Contribution margin 2,50 275.000,00
Fixed operating costs 100.000,00

EBITDA 175.000,00
Depreciation 30.000,00
Operating earnings (EBIT) 145.000,00 120000,00
10% price increase

Volume: 100.000
Per unit Total
Sales 11,00 1.100.000,00
Cost of goods sold 6,00 600.000,00
Gross margin 5,00 500.000,00
Variable operating costs 1,50 150.000,00

Contribution margin 3,50 350.000,00
Fixed operating costs 100.000,00

EBITDA 250.000,00
Depreciation 30.000,00
Operating earnings (EBIT) 220.000,00 120000,00
26
Sportswear Exercise
2010
Nike Nike EUR Adidas Puma Nike Nike E

Total assets 14.419,3 10.299,5 10.618,0 2.366,6 13.249,6

Equity 9.753,7 6.966,9 4.616,0 1.386,4 8.693,1

Debt 591,8 422,7 1.610,0 42,8 812,1

Total revenue 19.014,0 13.581,4 12.090,0 2.725,5 19.176,1

CGS 10.213,6 7.295,4 6.260,0 1.361,6 10.571,7

SGA 6.326,4 4.518,9 4.936,0 1.057,1 6.149,6

EBITDA 2.869,5 2.049,6 1.164,0 372,7 2.838,1

Operating income 2.474,0 1.767,1 894,0 306,8 2.454,8

Net income 1.906,7 1.361,9 568,0 202,2 1.486,7

Debt/equity 0,0607 0,3488 0,0309

Op inc./revenue 0,1301 0,0739 0,1126

ROS 0,1003 0,0470 0,0742

ROE 0,1955 0,1231 0,1458

Core ratios:

Asset turnover: sales/assets 1,3186 1,1386 1,1517

Asset leverage: assets/equity 1,4783 2,3003 1,7070

ROS: Net income/revenue 0,1003 0,0470 0,0742

Check: = ROE? 0,1955 0,1231 0,1458

Nike Adidas Puma Nike

CGS/Revenue 0,537162091 0,517783292 0,499578059 0,55
SGA/Revenue 0,332723257 0,408271299 0,387855439 0,3
0,130114652 0,073945409 0,112566502 0,12

27
12/31/2009 01.01.09
Cash 120.000,00 50.000,00

A/R 125.000,00 100.000,00 25.000,00
Invty 250.000,00 300.000,00 -50.000,00
Ppd exp 50.000,00 60.000,00 -10.000,00
PPE 1.500.000,00 1.250.000,00 250.000,00

Acc dep 600.000,00 500.000,00
Net 900.000,00 750.000,00
1.445.000,00 1.260.000,00
A/P 60.000,00 55.000,00 5.000,00

Acc exp 75.000,00 70.000,00 5.000,00
Inc tax pay 40.000,00 45.000,00 -5.000,00
STNP 425.000,00 375.000,00 50.000,00
LTNP 500.000,00 475.000,00 25.000,00
Cap stock 50.000,00 40.000,00 10.000,00

RE 295.000,00 200.000,00
1.445.000,00 1.260.000,00
Operating activities
Net income 125.000,00
Add Dep 100.000,00
Sub Inc A/R -25.000,00
Add Dec Inv 50.000,00
Add Dec PPD 10.000,00
Add Inc A/P 5.000,00
Add Inc Acc exp 5.000,00
Sub Dec Tax Pay -5.000,00
Cash flow from Ops 265.000,00
Investing activities
Sub Inc PPE -250.000,00
Financing activities Dividends: 265.000,00

Add Inc Cap Stk 10.000,00 30.000,00 -250.000,00
Add Inc STNP 50.000,00 55.000,00
Add Inc LTNP 25.000,00 70.000,00
Sub Dividends paid -30.000,00
55.000,00
Change in cash
BB 50.000,00
Plus increase 70.000,00
EB 120.000,00
12/31/2009 01.01.09
Cash 220.000,00 35.000,00
A/R 75.000,00 100.000,00 -25.000,00
Invty 350.000,00 300.000,00 50.000,00
Ppd exp 75.000,00 60.000,00 15.000,00
28
Inv Equ Sec 150.000,00 100.000,00 50.000,00
PPE 1.250.000,00 1.250.000,00 0,00
Acc dep 700.000,00 550.000,00
Net 550.000,00 700.000,00
1.420.000,00 1.295.000,00
A/P 120.000,00 90.000,00 30.000,00

Acc exp 60.000,00 70.000,00 -10.000,00
Inc tax pay 55.000,00 45.000,00 10.000,00
STNP 325.000,00 375.000,00 -50.000,00
LTNP 500.000,00 475.000,00 25.000,00
Cap stock 60.000,00 40.000,00 20.000,00

RE 300.000,00 200.000,00
1.420.000,00 1.295.000,00
Operating activities
Net income 150.000,00
Add Dep 150.000,00
Add Dec A/R 25.000,00
Sub Inc Inv -50.000,00
Sub Inc PPD -15.000,00
Add Inc A/P 30.000,00
Sub Dec Acc exp -10.000,00
Add Inc Tax Pay 10.000,00
Cash flow from Ops 290.000,00
Investing activities
Sub Inc Inv Equ Sec -50.000,00
Sub Inc PPE 0,00
Financing activities
Add Inc Cap Stk 20.000,00 Dividends: 50000
Sub Dec STNP -50.000,00
Add Inc LTNP 25.000,00 290.000,00
Sub Dividends paid -50.000,00 -50.000,00
-55.000,00 -55.000,00
185.000,00
Change in cash
BB 35.000,00
Plus increase 185.000,00
EB 220.000,00
29

Accounting Exercises - Balance Sheet and Income Statement

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Accounting Exercises - Balance Sheet and Income Statement

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Accounting Exercises – Balance Sheet and Income Statement

1. Your company sells $15,000.00 of beer to a commercial customer on account. Show

Dr. Accounts receivable (A/R)

Dr. Bad debt expense

(This is an offset – or valuation – account to “accounts receivable”)

Dr. Depreciation expense

(This is an offset account to “property, plant and equipment”)

Dr. Prepaid rent

b) Show your journal entry on 1/31/98.

Dr. Rental expense

Cost of goods sold $ 800,000

Accounting Exercises – Balance Sheet and Income Statement

Cost of goods sold $ 850,000

Book value: $300 million - $100 million = $200 million

Dr. Parts inventory

Dr. Wage expense

b) What is your journal entry on 1/31/98?

Dr. Rent received in advance $

Retained earnings 1/1/98 $ 400,000

18. How would you classify the following assets?

1/1/1999 Inventory (count) 2,000 cases @ $10.00 per case

Dr. Inventory 10,000

1/1/1999 Inventory (count) 2,000 cases @ $10.00 per case

What is cost of goods sold and ending inventory under:

CGS 9,000 cases: 2,000 at $10.00 = 20,000 + 7,000 at 15.00 =

CGS 9,000 cases: 9,000 at $15.00 = $135,000;

available for sale: 12,000 cases; 20,000 + 150,000 = $170,000

1/1/1999 Inventory (count) 3,000 cases @ $10.00 per case

What is cost of goods sold and ending inventory under:

CGS 11,000 cases: 3,000 at $10.00 = 30,000 + 8,000 at 15.00 =

CGS 11,000 cases: 1,000 at $10.00 = 10,000 + 10,000 at 15.00 =

available for sale: 13,000 cases; 30,000 + 150,000 = $180,000

4. Determine unit costs:

a. 1999 production = 100,000 cases

Account Costs in Unit costs

b. 1999 production = 150,000 cases

Account Costs in Unit costs

1999 production = 100,000 cases

Account Costs in Unit costs

Beginning inventory (1/1/99): 20,000 cases @ $9.00 each

CGS = BI+P-EI = 20,000 + 100,000 - 10,000 = 110,000 cases x $9.00 = $990,000

b. No, because the unit costs are unchanged.

1999 production = 100,000 cases

Account Costs in Unit costs

Beginning inventory (1/1/99): 20,000 cases @ $8.00 each

CGS = BI+P-EI = 20,000 + 100,000 - 30,000 = 90,000 cases

Dr. CGS $810,000

Available for sale: BI = 20,000 x $8.00 = $160,000

CGS = BI+P-EI = 20,000 + 100,000 - 30,000 = 90,000 cases

Dr. CGS $795,000

4. What is operating leverage, as described by Tracy?

An increase (decrease) of sales of X% causes profit to increase (decrease) by

5. Explain the following terms:

6. What is the difference between sales-volume-driven and revenue-driven variable

Sales-volume-driven variable expenses go up with units, but not sales price.

Sales revenue 10.00 5,000,000.00

Less: variable operating

Contribution margin 3.50 1,750,000.00

Less fixed costs:

Operating earnings 1,100,000.00

Interest expense 75,000.00

Earnings before taxes 1,025,000.00

7. What is the breakeven volume?