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    Classification and analysis of items on financial statements

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    E4-3
    For each of the items listed below, indicate the financial statement (or statements) for which the information is true. Use I to indicate income statement. B to indicate balance sheet, and SE to indicate statement of stockholder's equity. If the item below is not true for any of the three financial statements, indicate with a N.
    1. The statement provides information about resources consumed during an accounting period.
    2. The portion of profits that were distributed to owners of the firm is disclosed.
    3. The current market value of the firm's resources is reported.
    4. The statement is dated as of a specific point in time.
    5. The amounts that are owed to other organizations or individuals are reported.
    6. The total amount of capital that has been contributed to the organization is reported.
    7. The amount of capital that has been contributed to the organization during the accounting period just ended is reported.
    8. Information is reported regarding the rewards that have been earned from serving customers during the accounting period just ended.
    9. The statement is not as of a specific date, but covers a period of time.
    10. Reports information that has been developed on the accrual basis.
    11. The statement contains information about the financial sacrifices that were made to acquire resources.
    12. The statement contains information concerning contributed capital.
    13. The statement contains information concerning the results of operating activities.
    14. The amount of stock sold during the accounting period just ended is disclosed.
    15. The information provided links two other statements.

    E4-5
    Downhill Inc. sells, rents, and services ski equipment. Information about the company's financial performance for a recent fiscal period is provided below.
    Average shares outstanding 20,000
    Cost of goods sold $36,000
    Debt outstanding 65,000
    General and administrative expenses 12,000
    Income tax expense 20,000
    Interest expense 7,500
    Payments to owners 30,000
    Rental revenue 50,000
    Sales revenue 81,000
    Selling expense 28,000
    Service revenue 23,000
    From the information provided, compute the following amounts for the period: (please show work)
    a. Gross profit
    b. Operating expenses
    c. Income from operations
    d. Pretax income
    e. Net income
    f. Earnings per share

    E4-6
    Flowers by Freddie presented the income statement below for its most recent fiscal year. The items have been numbered for convenience in analysis.
    (1)Sales revenue $371,923
    (2)Cost of goods sold 201,668
    (3)Gross profit $170,255
    (4)Operating expenses 72,853
    (5)Operating income $ 97,402
    (6)Other revenues 538
    (7)Other expenses (13,227)
    (8)Pretax income $ 84,713
    (9)Income taxes 29,650
    (10)Net Income $ 55,063
    Answer the following questions. Be specific. Give examples to clarify.
    a. What is the difference between the revenue listed in item 1 and that listed in item 6?
    b. What does item 3 represent, and why is it important?
    c. What do items 2, 4, and 7 have in common?
    d. How are items 2, 4, and 7 different from one another?
    e. How is item 9 similar to items 2, 4, and 7?
    f. What do you think items 2,3, 7, and 9 are listed separately on an income statement rather than being lumped together as one item?

    E4-7
    Continental Airlines, Inc.
    Consolidated Statements of Operations
    Year Ended December 31, 2004
    (In millions, except per share data)
    Operating Revenue:
    Passenger $8,984
    Cargo, mail and other 760
    9,744
    Operating Expenses:
    Wages, salaries and related costs 2,819
    Aircraft fuel and related taxes 1,587
    ExpressJet capacity purchase, net 1,351
    Aircraft rentals 891
    Landing Fees and other rentals 646
    Commissions, booking fees, credit card fees
    And other distribution costs 552
    Maintenance, materials and repairs 414
    Depreciation and amortization 414
    Passenger servicing 306

    Special charges 121
    Other 872
    9,973
    Operating Income (loss) (229)
    Nonoperating Income (expense):
    Interest expense (389)
    Interest capitalized 14
    Interest Income 29
    Income from affiliates 118
    Other, net 17
    211
    Income (loss) before Income taxes and minority interest (440)
    Income tax benefit 77
    Net Income (loss) $(363)
    Note: Slight modifications have been made to the statement to simplify the presentation
    Use this income statement to answer the following questions
    a. What was Continental's primary source of revenue?
    b. What percentage of continental's revenue came from this source?
    c. What were its largest expenses?
    d. How much revenue did continental earn from transporting passengers?How much revenue did it earn from operating activities other than transporting passengers?How much revenue did it earn from nonoperating activities?
    e. How much operating income did continental earn (or lose)?
    f. How much expense did it incur for nonoperating activities?
    g. How much profit or loss did continental report during the fiscal year?

    E4-11
    Listed below are selected account balances for Hemmingway Company for June 30.
    Accounts payable $95,300 Merchandise Inventory $390,000
    Accounts receivable 78,100 Notes Payable, current portion 50,000
    Accumulated depreciation 318,000 Notes payable, long term 571,300
    Buildings 750,000 Prepaid Insurance 38,000
    Cash 34,500 Retained Earnings 279,000
    Contributed Capital 700,000 Supplies on hand 52,000
    Cost of goods sold 840,000 Trademarks 45,000
    Equipment 450,000 Wages expense 375,000
    Interest payable 38,000 Wages Payable 36,000
    Land 250,000
    Determine each of the following amounts. (Hint: Not all items will be used.)
    a. Current assets
    b. Current liabilities
    c. Property, plant, and equipment
    d. Total assets
    e. Long-term liabilities
    f. Tal liabilities
    g. Stockholders' equity
    h. Total liabilities and stockholders' equity
    i. Working capital

    P4-3
    Identifying and correcting errors in an income statement.
    Just after preparing the adjusting entries for the year, the long-time controller at parrot Company took a leave of absence. Her inexperienced assistant did his best to prepare financial statements from the information the controller had left behind. He had particular difficulty with the income statement.
    The item labeled sales expense is the sum of the amounts charged customers during the year for goods and services provided
    Income Statement
    December 31, 2007
    Sales expense $260,722
    Cost of goods sold 102,690
    Net profit $158,032
    Operating expenses:
    Wages $59,780
    Utilities 9,002
    Interest 14,420
    Depreciation 13,510
    Total Operating expense 97,712
    Operating income $60,320
    Advertising expense 9,968
    Pretax income $50,352
    Income tax expense 13,150
    Net Income $63,502
    Earnings per share of common stock
    ($64,502 ÷ 15,000 shares) $4.30

    P4-13

    From the information above, answer the following questions.
    a. What was the total amount of contributed capital as of January 31, 2001
    b. Did total contributed capital increase or decrease between Jan 31, 2001 and Jan 31, 2004? By what amount?
    c. How much profit has been distributed to owners in cash during the three years covered by this statement?
    d. Has stockholders' equity increased or decreased over the three years and what was the main reason?
    e. Compute the ratio of cash dividends to net income for each year. Did the portion of profits paid out in dividends each year increase, decrease, or stay about the same?
    f. Compute the percentage change in net income between 2002 and 2003, and between 2003 to 2004. (hint: Divide the increase in net income from 2002 to 2003 by the net income for 2002) Do you believe this is an encouraging sign or a discouraging sign?
    g. Compute the percentage change in dividends between 2002 and 2003, and between 2003 and 2004. Is the rate of dividend increase greater or smaller than the rate of profit increase?

    P4-15

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    E4-3
    For each of the items listed below, indicate the financial statement (or statements) for which the information is true. Use I to indicate income statement. B to indicate balance sheet, and SE to indicate statement of stockholder's equity. If the item below is not true for any of the three financial statements, indicate with a N.
    1. The statement provides information about resources consumed during an accounting period.
    I

    2. The portion of profits that were distributed to owners of the firm is disclosed.
    SE

    3. The current market value of the firm's resources is reported.
    N

    4. The statement is dated as of a specific point in time.
    B

    5. The amounts that are owed to other organizations or individuals are reported.
    B

    6. The total amount of capital that has been contributed to the organization is reported.
    I

    7. The amount of capital that has been contributed to the organization during the accounting period just ended is reported.
    SE

    8. Information is reported regarding the rewards that have been earned from serving customers during the accounting period just ended.
    I

    9. The statement is not as of a specific date, but covers a period of time.
    I

    10. Reports information that has been developed on the accrual basis.
    I

    11. The statement contains information about the financial sacrifices that were made to acquire resources.
    B

    12. The statement contains information concerning contributed capital.
    B

    13. The statement contains information concerning the results of operating activities.
    I

    14. The amount of stock sold during the accounting period just ended is disclosed.
    N

    15. The information provided links two other statements.
    SE

    E4-5
    Downhill Inc. sells, rents, and services ski equipment. Information about the company's financial performance for a recent fiscal period is provided below.
    Average shares outstanding 20,000
    Cost of goods sold $36,000
    Debt outstanding 65,000
    General and administrative expenses 12,000
    Income tax expense 20,000
    Interest expense 7,500
    Payments to owners 30,000
    Rental revenue 50,000
    Sales revenue 81,000
    Selling expense 28,000
    Service revenue 23,000
    From the information provided, compute the following amounts for the period: (please show work)
    a. Gross profit 118,000
    b. Operating expenses 40,000
    c. Income from operations 78,000
    d. Pretax income 70,500
    e. Net income 50,500
    f. Earnings per share 2.525

    Sales revenue 81,000
    Add: Service revenue 23,000
    Rental revenue 50,000
    Total revenue 154,000
    Less: Cost of goods sold 36,000
    Gross profit 118,000
    Less: Operating expenses
    General and administrative expenses 12,000
    Selling expense 28,000 40,000
    Income from operations 78,000
    Less: Interest expense 7,500
    Pretax income 70,500
    Less: Income tax expense 20,000
    Net Income 50,500

    Earnings per share = 50,500/20,000 shares = $2.525

    E4-6
    Flowers by Freddie presented the income statement below for its ...

    Solution Summary

    This solution is comprised of a detailed explanation to indicate the financial statement (or statements) for which the information is true, compute gross profit, operating expenses, income from operations, pretax income, net income, and earnings per share for Downhill, Inc., answer about operating income and expenses for Flowers, determine Continental's primary source of revenue, calculate financial ratios for Hemmingway Company, and identify and correct errors in an income statement of Parrot Company.

    $2.19