POA11e05 - CHAPTER 5Solutions FINANCIAL REPORTING AND...

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Ch5 SE1 to SE3 CHAPTER 5—Solutions FINANCIAL REPORTING AND ANALYSIS Chapter 5, SE 1. 1. O 2. Q 3. O 4. Q 5. O Chapter 5, SE 2. 1. Full disclosure 2. Materiality 3. Cost-benefit 4. Conservatism 5. Consistency Chapter 5, SE 3. 1. Property, plant, and equipment 2. Current liability 3. Current liability 4. Not on balance sheet 5. Owner's equity 6. Current asset 7. Intangible asset 8. Current asset 9. Investment
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Ch5 SE4 Chapter 5, SE 4. Balance Sheet May 31, 2011 Assets Current assets Cash $ 200 Accounts receivable 1,100 Merchandise inventory 600 Total current assets $1,900 Investments 500 Property, plant, and equipment Equipment $3,000 Less accumulated depreciation 700 Total property, plant, and equipment 2,300 Intangible assets Franchise 200 Total assets $4,900 Liabilities Current liabilities Accounts payable $ 800 Wages payable 100 Total current liabilities $ 900 Long-term liabilities Notes payable 400 Total liabilities $1,300 Owner's Equity Owner's capital $3,600 Total owner's equity 3,600 Total liabilities and owner's equity $4,900 *Balancing amount ( $4,900 $1,300 ) * +
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Ch5 SE5 to SE6 Chapter 5, SE 5. 1. Operating expenses 2. Other revenues and expenses 3. Not on income statement 4. Net sales 5. Cost of goods sold 6. Operating expenses 7. Other revenues and expenses 8. Not on income statement Chapter 5, SE 6. Income Statement For the Year Ended May 31, 2011 Revenues Net sales $2,400 Interest income 90 Total revenues $2,490 Costs and expenses Cost of goods sold $840 Selling expenses 555 General expenses 450 Interest expense 210 Total costs and expenses 2,055 Net income $ 435
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Ch5 SE7 Chapter 5, SE 7. Income Statement For the Year Ended May 31, 2011 Net sales $2,400 Cost of goods sold 840 Gross margin $1,560 Operating expenses Selling expenses $555 General expenses 450 Total operating expenses 1,005 Income from operations $ 555 Other revenues and expenses Interest income $ 90 Less interest expense 210 Excess of other expenses over other revenues 120 Net income $ 435
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Ch5 SE8 to SE9 Chapter 5, SE 8. Key ratios computed Current Assets = $4,000 + $2,000 + $10,000 + $12,000 = $28,000 Working Capital = Current Assets Current Liabilities $21,000 = $28,000 $7,000 Current Ratio = Current Assets = $28,000 = 4.0 Current Liabilities $7,000 Chapter 5, SE 9. Key ratios computed 1. Profit Margin = Net Income = $40,000 = 15.4% Net Sales $260,000 * $260,000 $140,000 $80,000 = $40,000 2. Asset Turnover = Net Sales = $260,000 = 1.2times Average Total Assets $220,000 * ( $240,000 + $200,000 ) ÷ 2 = $220,000 3. Return on Assets = Net Income = $40,000 = 18.2% Average Total Assets $220,000 4. = Total Liabilities = $60,000 = 33.3% Owner's Equity $180,000 5. Return on Equity = Net Income = $40,000 = 25.0% Average Owner's Equity $160,000 * ( $180,000 + $140,000 ) ÷ 2 = $160,000 Debt to Equity Ratio * + * + * +
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Ch5 SE10 to E1 Chapter 5, SE 10. Profit Margin x Asset Turnover = Return on Assets 6.0% x 3.2times = 19.2% If the debt to equity ratio equals 50 percent, then owner's equity is two-thirds of total assets. Return on Assets ÷ 2 / 3 = Return on Equity 19.2% ÷ 2 / 3 = 28.8% Chapter 5, E 1. 1. The balance sheet provides information about a company's resources (assets) and claims to those resources (liabilities and owner's equity). The income statement, statement of cash flows, and statement of owner's equity provide information about changes in resources and claims to them.
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