Chapter 2 Homework
Problems
2-1.
Solution:
Frantic Fast Foods
a. Year 2006
Earnings per share 

Earnings after taxe s
Shares outstandin g
$390,000
 $1.30
300,000
b. Year 2007
Earnings after taxe s  $390,000  1.20  $468,000
Shares outstandin g  300,000  25,000  325,000
Earnings per share 
$468,000
 $1.44
325,000
2-7.
Solution:
Censored Books, Inc.
Income Statement
For the Year Ending December 31, 2007
Sales (1,400 books at $160 each) ....................................... $224,000
Cost of goods sold (11,400 books at $125 each)................ 175,000
Gross profit .................................................................. 49,000
Selling expense ...................................................................
8,000
Depreciation expense .......................................................... 12,000
Operating profit ............................................................ $ 29,000
Interest expense ($90,000 x 10%) .....................................
9,000
Earnings before taxes ................................................... $ 20,000
Taxes @ 30% ......................................................................
6,000
Earnings after taxes ...................................................... $ 14,000
2-8.
Solution:
Lemon Auto Wholesales
Income Statement
a. Sales............................................................. $700,000
Cost of goods sold (70% of sales)............... $490,000
Gross Profit ............................................................$
210,000
Selling and administrative expense
(12% of sales) ......................................... $ 84,000
Depreciation ................................................ $ 10,000
Operating profit ...................................... $ 116,000
Interest expense ........................................... $ 8,000
Earnings before taxes.............................. $ 108,000
Taxes @ 30% .............................................. $ 32,400
Earnings after taxes ................................ $ 75,600
2-8.
Solution (Continued):
b. Sales............................................................. $ 750,000
Cost of goods sold (66% of sales)............... $ 495,000
Gross Profit ............................................. $ 255,000
Selling and administrative expense
(14% of sales) ......................................... $ 105,000
Depreciation ................................................ $ 10,000
Operating profit ...................................... $ 140,000
Interest expense ........................................... $ 15,000
Earnings before taxes.............................. $ 125,000
Taxes @ 30% .............................................. $ 37,500
Earnings after taxes ................................ $ 87,500
Ms. Carr's idea will increase profitability.
2-12.
Solution:
Botox Facial Care
a. EPS (2006) 
$280,000
 $1.40
200,000
P/E ratio (2006)  Price/EPS 
b. EPS (2007) 
$30.80
 22 x
$1.40
$320,000
 $1.60
200,000
P/E ratio (2007)  Price/EPS 
$40.00
 25x
$1.60
c. The stock price increased by 29.9% while EPS only increased by
14.3%.
2-14.
Solution:
Okra Snack Delights, Inc.
a. Operating profit (EBIT) .............................. $ 210,000
Interest expense ...................................... 30,000
Earnings before taxes (EBT) ....................... $ 180,000
Taxes ....................................................... 59,300
Earnings after taxes (EAT) ........................................ $
120,700
Preferred dividends .................................
Available to common stockholders ............. $
Common dividends .................................
Increase in retained earnings ....................... $
24,700
96,000
36,000
60,000
Earnings Available to
Common Stockholde rs
Earnings per Share 
Number of Shares of
Com. Stock Outstandin g
 $96,000 / 16,000 shares
 $6.00 per share
Dividends per Share  $36,000 / 16,000 shares
 $2.25 per share
b. Increase in retained earnings = $60,000
2-17.
Solution:
Fill in the table with the following symbols
1.
2.
3.
4.
5.
6.
7.
Balance sheet (BS)
Income statement (IS)
Current assets (CA)
Fixed assets (FA)
Current liabilities (CL)
Long-term liabilities (LL)
Stockholders’ equity (SE)
2-17. (Continued)
Indicate
Whether the
item is on
Income
Statement or
Balance
Sheet
BS
IS
BS
BS
BS
BS
BS
IS
IS
BS
BS
BS
BS
IS
IS
BS
BS
IS
BS
If the Item
is on
Balance
Sheet,
Designate
Which
Category
SE
CA
SE
SE
LL
CL
CA
CL
CA
FA
CA
CL
CL
Item
Retained Earnings
Income Tax Expense
Accounts Receivable
Common Stock
Capital in excess of par value
Bonds payable maturity 2005
Notes Payable (6 months)
Net income (Earnings after taxes)
Selling and Adm. Exp.
Inventories
Accrued expenses
Cash
Plant & equipment
Sales
Operating expenses
Marketable securities
Accounts payable
Interest expense
Income tax payable
2-23.
Solution:
Baxter Corporation
2007 Income Statement
a. Sales .............................................................
Cost of good sold (60%) .............................
$220,000
132,000
Gross profit ............................................................
$ 88,000
Selling and administrative expense .............
Depreciation expense (8%) .........................
Operating profit (EBIT) ..........................
Interest expense ...........................................
Earnings before taxes ..............................
Taxes (20%) ................................................
Earnings after taxes (EAT) .....................
Preferred stock dividends ............................
Earnings available to common stockholder
Shares outstanding.......................................
Earnings per share .......................................
22,000
20,0001
$ 46,000
8,0002
$ 38,000
7,600
$ 30,400
2,000
$ 28,400
10,000
$ 2.84
b.
1
2
2007 Statement of Retained Earnings
Retained earnings balance, January 1, 2007 $ 80,000
Add: Earnings available to common
stockholders, 2007
28,400
Deduct: Cash dividend declared in 2007
8,400
Retained earnings balance,
December 31, 2007
$100,000
8% x $250,000 = $20,000
(10% x $20,000) + (12% x $50,000) = $8,000
2-23. (Continued)
c.
Current Assets
Cash ........................
2007 Balance Sheet
Liabilities
$10,000
Accounts payable ......
Accounts
receivable ........
Inventory ...........
16,500 Notes payable .....
26,000
27,500 Bonds payable ....
40,000
Prepaid
expenses
12,000
_______
$66,000
$81,000
Fixed Assets
Stockholders' Equity
Preferred stock..........
Common stock ..........
$ 20,000
$ 55,000
Accumulated
Paid in capital in
3
depr.................. (70,000) excess of par .......
Net plant ............ 215,000 Retained earnings
25,000
100,000
Gross plant..............
$285,000
Total assets ........ $281,000 Total Liability &
Equity................
3
$15,000
$50,000 + $20,000 = $70,000
$281,000