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14-1

revenue and expenses data at Rogan Technologies Co, are as follows;

|  |  |2010 |2009 |

|Sales |  |500,000 |440,000 |

|Cost of goods sold |  |325,000 |242,000 |

|Selling expenses |  |70,000 |79,200 |

|Administrative expenses |  |75,000 |70,400 |

|Income tax expenses |  |25,000 |26,400 |

 

a. prepare an income statement in comparative form, stating each item for both 2010 and 2009 as a percent of sales. Round to one decimal place.

b. comment on the significant changes disclosed by the comparative income statement

 

14-3

revenue and expense data from the current calendar year for Sorenson Electronics company and for the electronics industry are as follows. the Sorenson electronics company data are expressed in dollars. The Electronics industry averages are expressed in percentages

|  |  |Sorenson Electronics Company |Electronics industry average |

|Sales |  |2,050,000 |102.5% |

|Sales returns and allowances |  |50,000 |2.5 |

|Net sales |  |2,000,000 |100.0% |

|Cost of goods sold |  |1,100,000 |61.0 |

|Gross profit |  |900,000 |39.0% |

|Selling expense |  |560,000 |23.0% |

|Administrative expenses |  |220,000 |10.0 |

|Total operating expenses |  |780,000 |33.0% |

|Operating income |  |120,000 |6.0% |

|Other income |  |44,000 |2.2 |

|  |  |164,000 |8.2% |

| | | |  |

|Other expense |  |20,000 |1.0 |

|Income before tax |  |144,000 |7.2% |

|Income tax |  |60,000 |5.0 |

|Net income |  |84,000 |2.2% |

 

a. prepare a common sized income statement comparing the results of operations for Hrothgar Electronics company with industry average. round to one decimal place.

b. As far as the data permit, comment on significant relationships revealed by the comparisons.

14-7

PepsiCo, Inc, the parent company of Frito- Lay snack food and pepsi beverages, had the following current assets and current liabilities at the end of two recent years:

|  |  |Dec, 30,2006( in millions) |Dec, 31,2005( In millions) |

|Cash and cash equivalents |  |1,651 |1,716 |

|Short term investment, at cost |  |1,171 |3,166 |

|Accounts and notes receivable, net |  |3,725 |3,261 |

|Inventories |  |1,926 |1,693 |

|Prepaid expenses and other current assets |  |657 |618 |

|Short term obligations |  |274 |2,889 |

|Accounts payable and other current liabilities |  |6,496 |5,971 |

|Income taxes payable |  |90 |546 |

 

a. determine the (1) current ratio and (2) quick ratio for both years. Round to one decimal place

b. what conclusions can you draw from these data?

14-14

Hasbro and Matte Incl are the two largest toy companies in North America. Condensed liabilities and stockholders equity from recent balance sheet are shown each company as follows in (thousands0:

|  |  |Hasbro |Mattel |

|Current liabilities |  |$905,873 |1,582,520 |

|Long term debt |  |494,917 |653,714 |

|Other liabilities |  |- |304,676 |

| | | |  |

|Total liabilities |  |1,400,790 |2,522,910 |

|Shareholders equity: |  |104,847 |441,396 |

|Additional paid in capital |  |322,254 |1,613,307 |

|Retaining earnings |  |2,020,348 |1,652,140 |

|Accumulated other comprehensive |  |  |  |

|Loss and other equity items |  |11,186 |(276,861) |

|Treasury stock at cost |  |(920,475) |(996,981) |

|Total stockholder's equity |  |1,538,160 |2,432,974 |

|Total liabilities and stockholder's equity |  |2,938,950 |4,955,884 |

The income from operations and interest expense from the income statement for both companies were as follows:

|  |Hasbro |Mattel |

|Income from operations |376,363 |728,818 |

|Interest income |27,521 |79,853 |

 

a. determine the ratio of liabilities to stockholder equity for both companies. Round to one decimal place

b. determine the number of times interest charges are earned for both companies round to one decimal place.

c. interpret the ratio differences between the two companies

 

problem 14-2A

for 2010, other technology company initiated sales promotion campaign that included the expenditure of an additional $20,000 for advertising. at the end of the year, George Wallace, the president, is presented with the following condensed comparative income statement:

 

Others technology Company

Comparative income Statement

For the year ended December 31,2010 and 2009

|  |  |2010 |2009 |

|Sales |  |$714,000 |$612,000 |

|Sales return and allowances |  |14,000 |12,000 |

|Net sales |  |700,000 |600,000 |

|Cost of goods sold |  |322,000 |312,000 |

|Gross profit |  |378,000 |288,000 |

|Selling expense |  |154,000 |120,000 |

|Administrative expenses |  |70,000 |66,000 |

|Total operating expenses |  |224,000 |186,000 |

|Income from operations |  |154,000 |102,000 |

|Other income |  |28,000 |24,000 |

|Income before income tax |  |182,000 |126,000 |

|Income tax |  |70,000 |60,000 |

|Net income |  |112,000 |66,000 |

 

Instructions:

1. prepare a comparative income statement for the two year period, presenting an analysis of each item in relationship to net sales for each of the years. Round to one decimal places

2. To the extent the data permit, comment on the significant relationships revealed by the vertical analysis prepared in (1)

14-1)

a.

ROGAN TECHNOLOGIES CO.

Comparative Income Statement

For the Years Ended December 31, 2010 and 2009

2010 2009

Amount Percent Amount Percent

Sales $500,000 100.0% $440,000 100.0%

Cost of goods sold 325,000 65.0 242,000 55.0

Gross profit $175,000 35.0% $198,000 45.0%

Selling expenses $ 70,000 14.0% $ 79,200 18.0%

Administrative operating

expenses 75,000 15.0 70,400 16.0

Total expenses $145,000 29.0% $149,600 34.0%

Income from operations $ 30,000 6.0% $ 48,400 11.0%

Income tax expense 25,000 5.0 26,400 6.0

Net income $ 5,000 1.0% $ 22,000 5.0%

b. The vertical analysis indicates that the cost of goods sold as a percent of sales increased by 10 percentage points (65.0% – 55.0%), while selling expenses decreased by 4 percentage points (14% – 18%), administrative expenses decreased by 1% (15% – 16%), and Income Tax Expense decreased by 1 percentage point (5% – 6%). Thus, net income as a percent of sales dropped by 4% (4% + 1% + 1% – 10%).

14-3)

a.

SORENSON ELECTRONICS COMPANY

Common-Sized Income Statement

For the Year Ended December 31, 20—

Sorenson Electronics

Electronics Industry

Company Average

Amount Percent

Sales $ 2,050,000 102.5% 102.5%

Sales returns and allowances 50,000 2.5 2.5

Net sales $ 2,000,000 100.0% 100.0%

Cost of goods sold 1,100,000 55.0 61.0

Gross profit $ 900,000 45.0% 39.0%

Selling expenses $ 560,000 28.0% 23.0%

Administrative expenses 220,000 11.0 10.0

Total operating expenses $ 780,000 39.0% 33.0%

Operating income $ 120,000 6.0% 6.0%

Other income 44,000 2.2 2.2

$ 164,000 8.2% 8.2%

Other expense 20,000 1.0 1.0

Income before income tax $ 144,000 7.2% 7.2%

Income tax expense 60,000 3.0 5.0

Net income $ 84,000 4.2% 2.2%

b. The cost of goods sold is 6 percentage points lower than the industry average, but the selling expenses and administrative expenses are five percentage points and 1 percentage point higher than the industry average. The combined impact is for net income as a percent of sales to be 2 percentage points better than the industry average. Apparently, the company is managing the cost of manufacturing product better than the industry but has slightly higher selling and administrative expenses relative to the industry. The cause of the higher selling and administrative expenses as a percent of sales, relative to the industry, can be investigated further.

14-7)

a. (1) Current Ratio = [pic]

Dec. 30, 2006: [pic] = 1.3 Dec. 31, 2005: [pic] = 1.1

(2) Quick Ratio = [pic]

Dec. 30, 2006: [pic] = 1.0 Dec. 31, 2005: [pic] = 0.9

b. The liquidity of PepsiCo has increased some over this time period. Both the current and quick ratios have increased. The current ratio increased from 1.1 to 1.3, and the quick ratio increased from 0.9 to 1.0. PepsiCo is a strong company with ample resources for meeting short-term obligations.

14-14)

a. Ratio of Liabilities to Stockholders’ Equity = [pic]

Hasbro: [pic] = 0.9

Mattel, Inc.: [pic]= 1.0

b.

[pic] = [pic]

Hasbro: [pic] = 14.7

Mattel, Inc.: [pic] = 10.1

c. Both companies carry a moderate proportion of debt to the stockholders’

equity, near 1.0 times stockholders’ equity. The companies’ debt as a percent of stockholders’ equity is similar. Both companies also have very strong interest coverage, earning in excess of 10 times interest charges. Together, these ratios indicate that both companies provide creditors with a margin of safety, and that earnings appear more than enough to make interest payments.

P14-2A)

1.

OTHERE TECHNOLOGY COMPANY

Comparative Income Statement

For the Years Ended December 31, 2010 and 2009

2010 2009

Amount Percent Amount Percent

Sales $ 714,000 102.0% $ 612,000 102.0%

Sales returns and allowances 14,000 2.0 12,000 2.0

Net sales $ 700,000 100.0% $ 600,000 100.0%

Cost of goods sold 322,000 46.0 312,000 52.0

Gross profit $ 378,000 54.0% $ 288,000 48.0%

Selling expenses $ 154,000 22.0% $ 120,000 20.0%

Administrative expenses 70,000 10.0 66,000 11.0

Total operating expenses $ 224,000 32.0% $ 186,000 31.0%

Income from operations $ 154,000 22.0% $ 102,000 17.0%

Other income 28,000 4.0 24,000 4.0

Income before income tax $ 182,000 26.0% $ 126,000 21.0%

Income tax expense 70,000 10.0 60,000 10.0

Net income $ 112,000 16.0% $ 66,000 11.0%

2. The vertical analysis indicates that the costs other than selling expenses (cost of goods sold and administrative expenses) improved as a percentage of sales. As a result, net income as a percentage of sales increased from 11.0% to 16.0%. The sales promotion campaign appears to have been successful. While selling expenses as a percent of sales increased slightly (2%), the increased cost was more than made up for by increased sales.

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