Question

1.) What is the difference between a multiple-step and a single-step format of the earnings statement? Which format is the most useful for analysis?

2.) How is a common-size income statement created?

3.) What are the two causes of an increasing or decreasing sales number?

4.) Discuss all reasons that could explain an increase or decrease in gross profit margin.

5.) Explain how a company could have a decreasing gross profit margin but an increasing operating profit margin.

6.) What is an example of an industry that would need to spend a minimum amount on advertising to be competitive? On research and development?

7.) Alpha Company purchased 30% of the voting common stock of Beta Company on January 1 and paid $500,000 for the investment. Beta Company reported $100,000 of earnings for the year and paid $40,000 in cash dividends. Calculate investment income and the balance sheet investment account for Alpha Company under the cost method and under the equity method.

8.) Discuss the four items that are included in a company’s comprehensive income.

9.) Explain what can be found on a statement of stockholders’ equity.

10.) Why is the bottom line figure, net income, not necessarily a good indicator of a firm’s financial success?

11.) Using the excerpt from the Moon Company’s annual report, calculate any profit measures deemed necessary and discuss the implications of the profitability of the company.

12.) LA Theatres Inc. has two distinct revenue sources, ticket and concession revenues. The following information from LA Theatres Inc. income statements for the past three years is

available:

(in millions)                                                                2016                2015                2014

Ticket revenue                                                            $1,731             $1,642             $1,120

Concession revenue                                                         792                  687                  411

Total revenue                                                              $2,523             $2,329             $1,531

Cost of goods sold—tickets                                        $   951             $   854             $   549

Cost of goods sold—concessions                                      70                    69                    48

Total cost of goods sold                                              $1,021             $   923                  597

Gross profit                                                                 $1,502             $1,406             $   934

a.) Calculate gross profit margins for tickets and concessions for all three years. Calculate an overall gross profit margin for LA Theatres Inc. for all three years.

b.) Analyze the changes in gross profit margin for all three years.

13.) Writing Skills Problem:

Income statements are presented for the Elf Corporation for the years ending December 31, 2016, 2015, and 2014.

Elf Corporation Income Statements for the Years

Ending December 31, 2016, 2015, and 2014

(in millions)                                                                2016                2015                2014

Sales                                                                            $700                $650                $550

Cost of goods sold                                                      300                325                275

Gross profit                                                                 $350                $325                $275

Operating expenses:

            Administrative                                                            100                100                100

            Advertising and marketing                                 50                    75                    75

Operating profit                                                          $200                $150                $100

Interest expense                                                              70                    50                    30

Earnings before tax                                                     $130                $100                $ 70

Tax expense (50%)                                                         65                    50                    35

Net income                                                                 $ 65                $ 50                $ 35

Required: What a one-paragraph analysis of Elf Corporation’s profit performance for the period.

Answer 1

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