r THE MULTI-STEP INCOME STATEMENT ACTIVITY 24

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THE MULTI-STEP INCOME STATEMENT
ACTIVITY 24
.
.
Purpose:
ldentify the types of accounts presented on the income statement.
Understand the organization of the multi-step income statement.
When amounts ore requested, refer to the income stotement of Apple, lnc. on the next page'
Revenues are inflows from a company's primary operations. Expenses are the costs of bringing in
revenues. Cost of Goods Sold (COGS), also referred to as Cost of Sales, is the cost of purchasing or
manufacturing the actual products sold. lt is an operating expense.
Q1
from the sale of Mac computers, iPods, iPhones, iPads, iTunes, and other
related products and services totals $ (iltÇ4,l( million I can't tell) and the cost o/ those
Soles revenue earned
products totals
($3?rl4l
milllon
/
can't tell).
,
Operating expenses include all costs of generating sales besides COGS. Nonoperating revenues and
expenses affect income, but have little relevance to operations. These typically include financing
expenses, investment income, and gains and losses on the sale of assets other than inventory.
Q2
(213 I @operotins expense accounts othe r than COGS) that total
by a little b¡t), which ¡s
operat¡ng expenses) is(are) g
Apple's inco
$
manufacturing firm
Q3
revenues and
Nonoperating revenues ond expenses refer to (operating / investing
/ investing /
nses. /nterest expense reflects the firm's cost of borrowing and is a(
cost that is classified on the income statement as a(n) (operating
It from Apple's primary busine
, â11 d
expense. lnvestment income (does / oes
revenue. When retailers and
therefore, should be classified as (operating /
and when they sell property,
n(
manufactures sell inventory
gain
plant, and equipment revenue
million
expenses total S
reported. For Apple, nonoperating revenues ond
(
Provision for income tax is income tax expense based on the amount reported for income before income
tox. Nonrecurring items are gains and losses which accountants deem unusual and infrequent. They
include (D)iscontinued operations, and (E)xtraordinary items.
Q4
e5
Apple's overoge income tox rotewas (7%
I nN €+"ù.
Nonrecurring items are items that o..rr@twice / continuously) within the life of a company.
ldentify each of the following as either a (D)iscontinued or (E)xtraordinary type of nonrecurring
item.
@tn
(D()
PepsiCo sells off Pizza Hut, Taco Bell, and KFC.
Due to global warming the tundra melts in Barrow, Alaska, resulting in flooding
an entire factory and closing it indefinitely
IFRS
items and has a narrower definition
orô t
E)items.
income statement reports the results of operations (as of a certain date
Q6
Q7
does not allow (D
lncome
re
nt accounts are listed in (alph
activíty no particular order). Th
e top an d (operating revenues
over a period
rder
nonrecurring ite
nonrecurring items) are
reported at the bottom of
the income statement,
lncome Statement
È-
Page 78
Chapter 3
e1
the ínformation betow for J.C. Penney qnd lntel to onswer the following questions.
use
FYE 20L0 ($
f.C. Penney
in millions)
$
Sales revenue
Corp
17,759
Intel
$
(A)
Expense
$
Net income
389
o/o
ROS
A"
ì?,S?0
X= l+?,613
/
calculate the values for (A) and (X). Revenue for INTC is more tha
a
I reater than
(2 times
/
1O
revenue
for
JCP, whereas
net incope for
ter than net income for
times
10 times)
approximately
I
JCP
Examine the relationship between sales Revenue and Net lncome
b.
t.
2.
3.
4.
rporation
(JcP
is
generating the most net income from each dollar of revenue.
This relations hip is measured by
the(ñõð)
Asset Turnover
Calculate ROS and record in the space provid ed above.
/
ROn) ratio'
.-tø
oVol'
has a greater
clearly much higher, revealing that (JCP
of (JcP / @s
ability to translate revenue into profits; keep expenses under control But does the
(Yes
higher Ros mean that one company is better than the other company?
RoS
(are the same
e these companies are from different industries, and ROS averages
industries
Q2
chart
Let's examine three companies within the Personal Computer Systems industry' Use the
below to answer the following questions. Stock symbols are shown in parentheses.
Return on Sales ROSI
72.1o/o
Asset Turnover (Asset
1,00
Return on Assets [ROA)
Gross Profit Margin [G
24.2o/o
37.3o/o
w
r¡
7.6to/o\
25.75o/o
9.07o/o ,a
7.84o/ot¡
39.30o/o
18.840/o 1¡
22.3o/o
0.87
5.670/o
q
*"r" l0 ,70
a
f
cents of each revenue dollar, while
each revenue dollar were used to pay for the costs of running the business.
b.
One measure of sales volume is the ROS
c.
Compa nies invest in assets
For AAPL, profits
Turnover
1.03
1.60
A
'T[
cents of
/ RoA) ratio.
to generate additional revenue, to increase net iricome. AAPL
assets' ls a company with a
ea rned q,ffu cent(s) in profit from each dollar invested in
rofits than a companY with a
assets more efficientlY to ge n
greater ROA ratio
is not) comparable among
lower ROA ratio? Yes / No I can't tell), because
ind ustries.
lncome Statement
Page 86
Chapter 3
d.
a large volume of sales
gene rati
lt was shown in Activity 8 that wal-Mart makes profits by
Asset
for Wal-Mart is rela
on items with low Profitabi
ratio),
can't tell). RoS x Asset Tlo = ¡
Turnover is relativelY (low
profitability
most) comprehensive measure of
th
which is considered
e.
During 2010, it cost AAPL
ff,,Al
cents of each revenue dollar
to prod uce Mac comPuters,
40,S?
products and services leaving
iPods, iPhones, iPads, iTunes, and other related
nonoPerating
revenue dollar to cover all remaining operating expe nses,
cents
of each
tn"@
second
expenses, and profits. The Gross Profit Margin (GP%) is
n for bot
of profitability shown on the income statement' The informatio
denominator of the GP% ratio come from
statement of cash flows)'
f
the (balance
/
last) indication
and
ncome statement
sheet
low) ratio indicates greater profitability and an increasing
For profitabilitY ratios
unfavorable)
trend is conside
among t he three comPanies in the
On the previous page, for each ratio, circle the strongest
Personal Computer Systems industry. - \oe f'f
c.
h
norms because success may
Meaning is added to a rat¡o by comparing that ratio to industry
is weaker than the Personal
vary by industry. on the previous page, cross out each ratio that
Computer Systems industry average.
ratios that were crossed out
Review the ratios that were circled as the strongest and those
questions'
for being lower than the industry average to answer the following
j..
2.
which company has the greatest markup on products
which ratio reveals this information?
sold? @orrl/jlF\
(Ros
profitable?
Which ratio reveals this
5.
(Ros
information?
(AIJPIDELL/
HPQ)
I RoA I
GP%\
Asset To
sales revenue?
compa
DEIL
(Ros
/
Asset TO
Which comPanY has the stiongest P rofitabi
DErr
/
HPQI Why?
øvrvto
+ {AVê\úe..
ûo&.
%
Which company has the weokest profitability? (AAPL
%
4 vuunw
Page 87
{t
/H
/
Which ratio reveals this information?
l,n
lncome Statement
/
,z\
(!9yl
Which company has the lowest product costs
d6¡
'0
6.
KW
is the
According to the most comprehensive measure of profitab¡litY,)4,\company
most
4.
RoA
a greater
Which company appears to sell at a low markup to generate
Which two ratios reveal this information?
3.
/ AssetTo I
PQ\
Vu"e lo,oô
WhY?
.
Chapter 3
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