BUA108 Fraser CH03 Group 80 points
Chapter 3
Short Answer/Problem
1. Discuss the usefulness of the multiple-step income statement to an analyst. Be
sure to explain the differences between the intermediate profit measures.
4. a. Explain the possible reasons for gross profit margin to increase.
b. Explain the possible reasons for net profit margin to decrease if operating profit
margin is stable.
5. Explain how a firm should account for an investment in another firm's common
stock if the amount owned is:
a. 1 percent.
b. 35 percent.
c. 60 percent.
7. Prepare a multiple-step income statement for ABC Company from the
following data:
Cost of goods sold
$450
Interest expense
30
Depreciation expense
120
Net sales
990
Interest income
80
Income tax expense
70
Advertising expense
100
General and administrative expenses 150
8. Prepare an income statement using the following information:
Gross profit margin
Cost of goods sold
Tax rate
Operating profit
42%
$5,800
30%
$600
1
BUA108 Fraser CH03 Group 80 points
9. Using the following information prepare a common size income statement:
Net sales
Cost of goods sold
Gross profit
General and administrative expenses
Selling expenses
Operating profit
Income tax expense
Net profit
$1,000
600
$ 400
250
120
$ 30
10
$ 20
11. Use the following information to analyze the BJ Company. Calculate any
profit measures deemed necessary in order to discuss the profitability of the
company .
BJ Company
Income Statements
For the Years Ended Dec. 31, 2009 and 2008
Net sales
COGS
Gross profit
General and administrative expenses
Operating profit
Interest expense
Earnings before taxes
Income taxes
Net income
2
2009
$174,000
114,000
$ 60,000
54,000
$ 6,000
(1,000)
$ 5,000
2,000
$ 3,000
2008
$167,000
115,000
$ 52,000
46,000
$ 6,000
(1,000)
$ 5,000
2,000
$ 3,000
BUA108 Fraser CH03 Group 80 points
13. Bright Company purchased 20% of the voting common stock of Bulb
Company on January 1 and paid $400,000 for the investment. Bulb Company
reported earnings of $300,000 for the fiscal year ended December 31. Cash
dividends were paid during the year in the amount of $20,000.
a. Calculate the investment income and the ending balance in the investment
account on the balance sheet for Bright Company on December 31 using the cost
method.
b. Calculate the investment income and the ending balance in the investment
account on the balance sheet for Bright Company on December 31 using the equity
method.
14. Analyze the common size income statements below for Toby Company:
Net sales
COGS
Gross margin
Research and development
Selling, general and administrative
Restructuring, asset impairments and other charges
Income/(loss) from operations
Interest expense
Income/(loss) before taxes
Provision for/(benefit from) income taxes
Net income/(loss)
Sales growth
Operating cost growth
80%
31%
3
2010 2009
100% 100%
54
63
46% 37%
14
20
5
9
1
8
26%
0%
(1)
(2)
25% (2%)
8
0
17% (2)%