Session 7 – exercises – Basis for intepreting financial statements

14-11 Financial Acct_Stice&Stice

Comparative Common-Size Income Statements
Using the following data, prepare comparative common-size income statements for years 1 and 2
and comment.
Year 2 Year 1
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $100,000 $80,000
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . 70,000 50,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,000 $30,000
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 20,000
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . $ 5,000 $10,000
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 2,000
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000 $ 8,000
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200 2,400
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . $ 1,800 $ 5,600
E14-37 Common-Size statement of financial position
The following data are taken from the comparative balance sheet prepared for Warren Road
Company: 2020 2019
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,000 $ 25,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,000 40,000
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68,000 30,000
Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . 91,000 55,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $236,000 $150,000
Sales for 2020 were $1,000,000. Sales for 2019 were $800,000.
1. Prepare the asset section of a common-size statement of financial position for Warren Road
Company for 2020 and 2019.
2. Overall, Warren Road is less efficient at using its assets to generate sales in 2020 than in
2019. What asset or assets are responsible for this decreased efficiency?
E14-39 Common-Size Income Statement
Comparative income statements for Callister Company for 2020 and 2019 are given below.
2020 2019
Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,600,000 $900,000
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,020,000 480,000
Gross profi t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 580,000 $420,000
Selling and administrative expenses. . . . . . . . . . . . . . . . . . . . . . . . . . 200,000 160,000
Operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 380,000 $260,000
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000 60,000
Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 300,000 $200,000
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000 60,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 210,000 $140,000
1. Prepare common-size income statements for Callister Company for 2020 and 2019.
2. The profit margin for Callister is lower in 2020 than in 2019. What expense or expenses
are causing this lower profitability?

1
Session 7 – exercises – Basis for intepreting financial statements

P14-59 Common-Size Financial Statements

Below are financial statement data for Wong Shek Company for the years 2011 and 2012.
Wong Shek Company
Financial Statements
For 2019 and 2020
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14 $ 10
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 27
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230 153
Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221 190
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..$ 500 $380
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106 $ 74
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217 217
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 323 $ 291
Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 113 $ 50
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 39
Total liabilities and equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 500 $ 380

Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000 $ 700

Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (700) (500)
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . … . $ 300 $ 200
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (240) (160)
Operating profi t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60 $ 40
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (22) (22)
Income before taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38 $ 18
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13) (6)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …… . . . . . . . . . . . . . $ 25 $ 12
Required:
1. Prepare common-size financial statements for Wong Shek for 2019 and 2020.
2. Did Wong Shek do better or worse in 2020 compared with 2019? Explain your answer.
Gibson