True or False

1. The income statement measures the changes in the assets and liabilities that occurred
during the period.
2. The income statement measures the results of operations for a period.
3. The income statement measures the results of operations for a period.
4. The income statement measures the financial position of a firm for a period.
5. Common size income statement provides intermediate profit measures.
6. Common size income statement groups revenues together and then deducts all categories
to arrive at net earnings.
7. Common size income statement expresses each item on an income statement as a
percentage of net sales.
8. Common size income statement includes all changes of equity during a period.
9. The gross profit margin and cost of goods sold percentage are complements of each
other.
10. Repairs and maintenance expenses are depreciated in the same manner as depreciation
expense.
11. The operating profit figure includes all operating revenues and expenses as well as
interest and taxes related to operation.
12. Gross profit is the difference between net sales and cost of goods sold.
13. Operating profit is the difference between net sales and expenses associated with
generating sales including interest expenses.
14. Earnings per share figure calculated by dividing the average number of common stock
shares outstanding into the net earnings available to common stockholders.

MCQS:

1)
Why is it important to evaluate the operating expenses?
a. increases in operating expenses may indicate inefficiencies, and decreases in operating
expenses may be detrimental to long-term sales growth.
b. it is important to determine whether companies are spending at least 10 cents of every sales
dollar on advertising expenses.
c. Increases in operating expenses are always an indication that a firm will increase sales in the
future.
d. None of the above.

2)
Which of the following assets will not be depreciated over its service life?
a. Buildings.
b. Furniture
c. Land
d. Equipment
3)
Why is the figure for operating profit important?
a. Because it is used for calculating federal income tax expense.
b. Because it provides a basis for assessing the success of a company apart from its financing and
investment activities and separate from its tax.
c. Because it provides a basis for assessing the wealth of a firm.
d. All of the above.

4)
Which of the following causes(s) a change in the retained earnings account balance?
a. Prior earning adjustment
b. payment of dividends
c. Net profit or loss
d. All of the above

5)
Which of the following statements is correct in regard to the stockholders’ equity statement?
a. it is the same as retained earnings statement.
b. it is the statement that only reconciles only the treasury stock account.
c. it is a statement that summarizes changes in the entire stockholders’ equity section of the
balance sheet.
d. None of the above

6)
Sales allowances are categorized in the net income statement under:
a. Cost of sales
b. Other revenue
c. Net Sales
d. None of the above

7)
Sales will increase or decrease if:
a. The amount of units sold increases or decreases
b. The price at which the product or service is sold increases or decreases.
c. A and B
d. None of the above

8)
Gross profit margin can increase or decrease as a result of:
a. A change in sales prices,
b. A change in cost of goods sold,
c. A change in volume.
d. All of the above
Question One:

Consider the following items from the net income. Prepare the multiple-step income statement
for Segma Company.

What are the ratios of profit margins?

Net Sales $1,840,000

Interest expense 16,000
Equity losses 9,000
Gain on sale of equipment 15,000
Depreciation expense 24,000
Selling expenses 270,000
Insurance 60,000
Rent 40,000
Cost of goods sold 1,072,000
Salaries 55,000
Interest income 13,000
Income tax expense 96,000
-----------------------------------------------------------------------------------------------------

Question Two:
You have given the Moon Company’s annual report, calculate any profit measures deemed
necessary and discuss the implications of the profitability of the company.
Question Three:

------------------------------------------------------------------------------------------------------
Question Four:

-----------------------------------------------------------------------------------------------
Question Five:
-----------------------------------------------------------------------------
Question Six:
Consider this income statement common size:
INTEL
Common Size Income Statement

2013 2012 2011

Sales 100.0% 100.0% 100.0%
Cost of Sales 40.2 37.9 37.5
Gross Profit 59.8% 62.1% 62.5%
Research and development 20.1 19.0 15.5
Marketing, general and administrative 15.3 15.1 14.2
Restructuring and asset impairment .5 -- --
Amortization of acquisition-related
intangibles .6 0.6 0.5
Operating income 23.3% 27.4% 32.3%
Gains (losses) on equity investments, net 0.9 0.3 0.2
Interest and other, net (0.3) 0.2 0.4
 Income before taxes 23.9% 27.9% 32.9%
Provision for taxes 5.7 7.3 9.0
Net Income 18.2% 20.6% 23.9%

Effective tax rate 23.7% 26.0% 27.2%

Growth rates 2012 - 2013 2011- 2012
Net revenues (1.2)% (1.2)%
Operating costs 3.9% 13.7%
Operating costs + COGS 4.4% 6.0%

Calculate the Growth rates of Revenues and operating costs, then analyze the profitability of the
company?
------------------------------------------------------------------------------------------------------
Question Seven:

You have given this common size Net income statement, Analyze the profitably of AMAT
company.
Applied Materials (AMAT / NASDAQ)
Annual Common Size Income Statement
S u m ma ry p e rc e n ta g e s in ita lic s will n o t fo o t d u e to rou n d in g

Results for the Years Ending

Oct 27, 2013 Oct 28, 2012 Oct 30, 2011

Net sales 100.0% 100.0% 100.0%

Less: Cost of goods sold 60.2% 62.0% 58.5%
Gross profit 39.8% 38.0% 41.5%
Sales, general and administrative 12.0% 12.3% 8.6%
Research and development (R&D) 17.6% 14.2% 10.6%
Restructuring, impairment, and amortization 4.5% 6.8% 0.0%
Purchased in-process R&D 0.0% 0.0% 0.0%
Other operating expenses (0.1%) 0.0% (0.5%)
Total operating expenses 34.1% 33.3% 18.7%
Operating profit (loss) 5.8% 4.7% 22.8%
Other income (expenses), net excluding interest expense 0.2% 0.0% 0.4%
Earnings (loss) before interest and taxes 5.9% 4.7% 23.2%
Interest expense 1.3% 1.1% 0.6%
Earnings (loss) before taxes 4.7% 3.6% 22.6%
Provision for (benefit from) income taxes 1.3% 2.4% 4.3%
Earnings (loss) after taxes 3.4% 1.3% 18.3%
Extraordinary items, net 0.0% 0.0% 0.0%
Discontinued operations, net 0.0% 0.0% 0.0%
Cumulative effect of changes in accounting principles, net 0.0% 0.0% 0.0%
Other after-tax income (loss), net 0.0% 0.0% 0.0%

Net profit (loss) 3.4% 1.3% 18.3%

Effective tax rate 26.9% 65.5% 19.0%