Determining and Interpreting the Effects of TransactionsonIncome Statement Categories and Return on Assets (P5-7)
Avon Products, Inc., is a leading manufacturer and marketer of beauty products and related merchandise. The company sells its products in 110 countries through a combination of direct selling and use of individual sales representatives. Presented here is a recent income statement (dollars in millions).
Net sales | $10.690 |
Costs and expenses |
|
Cost of sales | 3,949 |
Selling, general, and administrative | 5.402 |
Operating income (loss) | 1,339 |
Interest and other income (expenses), net | (101) |
Income (loss) before provision (benefit) for income taxes | 1,238 |
Provision (benefit) for income taxes | 363 |
Net income (loss) | $ 875 |
Its beginning and ending total assets were $5,716 and $6,074, respectively.
Required:
1. Listed here are hypothetical additional transactions. Assuming that they also occurred during the fiscal year, complete the following tabulation, indicating the sign of the effect of each additionaltransaction (+ for increase, – for decrease, and NE for no effect). Consider each item independently and ignore taxes.
a.Recorded and received additional interest income of $7.
b.Purchased $80 of additional inventory on open account.
c.Recorded and paid additional advertising expense of $ 16.
d. Issued additional shares of common stock for $40 cash.
Transaction | Operating Income (Loss) | Net Income | Return on Assets |
a. |
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b. |
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c. |
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d. |
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2. Assume that next period. Avon does not pay any dividends, does not issue or retire stock, and earns 20 percent more than during the current period. If total assets increase by 5 percent, will Avon's ROA next period be higher, lower, or the same as in the current period? Why?
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