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Chapter 2: Question 3-10DQ (page 75)

Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why?

Short Answer

Expert verified

Income of two companies cannot be compared easily because of the inconsistencies in the accounting and reporting policies adopted by the company while recording the revenue.

Step by step solution

01

Income statement

Income statement is prepared to show the revenue earned by the company and the expenses incurred to earn that profit. It is a component of the financial statements.

02

Comparison of income between the two companies

The comparison of income is difficult because each company use different accounting policies or methods to record the revenue transactions. For example, some companies may defer the recognition of revenue that comes via installment plan while the some companies may record it all right away. Some companies may use LIFO accounting method to record inventory and some may use FIFO accounting method.

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Most popular questions from this chapter

What is the difference between accumulated depreciation and depreciation expense? How are they related?

The Holtzman Corporation has assets of \(400,000, current liabilities of \)50,000, and long-term liabilities of \(100,000. There is \)40,000 in preferred stock outstanding; 20,000 shares of common stock have been issued.

a. Compute book value (net worth) per share.

b. If there is $22,000 in earnings available to common stockholders and

Holtzman’s stock has a P/E of 18 times earnings per share, what is the current

price of the stock?

c. What is the ratio of market value per share to book value per share?

Vriend Software Inc.’s book value per share is \(15.20. If earnings per share is\)1.88 and the firm’s stock trades in the stock market at 3.5 times book value pershare, what will the P/E ratio be? (Round to the nearest whole number.)

Using the Du Pont method, evaluate the effects of the following relationships forthe Butters Corporation:

c. What would happen to return on equity if the debt-to-total-assets ratio

decreased to 35 percent?

For December 31, 20X1, the balance sheet of Baxter Corporation was as follows:

Current assets

Liabilities

Cash

\(15,000

Accounts payable

\)17,000

Accounts receivable

20,000

Notes payable

25,000

Inventory

30,000

Bonds payable

55,000

Prepaid expenses

12,500

Fixed assets

Stockholder’s equity

Plant and equipment (gross)

Less: accumulated depreciation

\(255,000

51,000

Preferred stock

\)25,000

Net plant and equipment

\(204,000

Common stock

60,000

Paid in capital

30,000

Retained earnings

69,500

Total assets

\)281,500

Total liabilities and stockholder’s equity

\(281,500

Sales for 20X2 were \)245,000, and the cost of goods sold was 60 percent of sales. Selling and administrative expense was \(24,500. Depreciation expense was 8 percent of plant and equipment (gross) at the beginning of the year. Interest expense for the notes payable was 10 percent, while the interest rate on the bonds payable was 12 percent. This interest expense is based on December 31, 20X1 balances. The tax rate averaged 20 percent.

\)2,500 in preferred stock dividends were paid, and \(5,500 in dividends were paid to common stockholders. There were 10,000 shares of common stock outstanding.

During 20X2, the cash balance and prepaid expenses balances were

unchanged. Accounts receivable and inventory increased by 10 percent. A new machine was purchased on December 31, 20X2, at a cost of \)40,000. Accounts payable increased by 20 percent. Notes payable increased by \(6,500 and bonds payable decreased by \)12,500, both at the end of the year. The preferred stock, common stock, and paid-in capital in excess of par accounts did not change.

b. Prepare a statement of retained earnings for 20X2.
See all solutions

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