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Financial Statement Analysis Midterm Assignment Assignment

The document is a midterm assignment for a financial statement analysis course taken in the spring 2019-2020 semester. It contains 6 questions testing the student's understanding of key financial concepts like calculating gross profit, net income, inventory costing methods, and preparing an income statement. The student provided step-by-step workings and explanations for their answers.

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Haidar Nura
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Download as DOCX, PDF, TXT or read online on Scribd
110 views

Financial Statement Analysis Midterm Assignment Assignment

The document is a midterm assignment for a financial statement analysis course taken in the spring 2019-2020 semester. It contains 6 questions testing the student's understanding of key financial concepts like calculating gross profit, net income, inventory costing methods, and preparing an income statement. The student provided step-by-step workings and explanations for their answers.

Uploaded by

Haidar Nura
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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College of Business Administration

Department of Accounting

Financial Statement Analysis


The Mid-term assignment for the spring 2019-2020

Name: Aliyu Mohammed Nura Date: 4/17/2020

ID #: U17200358 Marks Obtained: _____/15


Show calculations for all questions to receive full mark

Question 1:

A company has net sales and cost of goods sold of $752,000 and $543,000, respectively. Its
net income is $17,530.

The company's gross profit is 209000

The company’s operating expenses are 191470

Question 2:

Omar Company had $800,000 in sales, sales discounts of $12,000, sales returns and
allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses.

Net income equals 115000

Question 3:

Comment on the following statements:

a. “The balance sheet is pretty useless for decision making. It only shows the position at
a single point in time and a past point in time, at that.”

Answer

This statement is false. The balance sheet is shows what the company owns and
ows, it shows a company’s growth at different points in time. In my opinion, the
balance sheet contains a wealth of information that should factored in desition
making.

b. A company’s income statement shows an annual sales revenue of about AED 60


million and interest payable of AED 6.5 million. The auditors discovered that an
employee had fraudulently paid himself AED 2,000 and charged this to ‘interest
payable’ in the income statement.
Would the auditors be reasonable to conclude that the income statement fails to show
a ‘fair representation’ of what happened during the year concerned?
Answer
The main concern has to do with the amount, due to the company’s large sales
revenue of AED 60 million and an interest payable of AED 6.5 million, it is barely
noticeable. In my opinion, it will be unreasonable to conclude that the income
statement fails to show a fair representation. However, the auditors have to report the
employee for fraudulent behavior and amount will be factored back into the business
as per the company’s policy

Question 4:

On January 1 of 2018, a company acquired and placed in service a machine at a cost of


$162,000. It has been estimated that the machine has a service life of six years and no salvage
value.

Required:
a) Calculate the depreciation expense using the double declining balance method for the
first two years.
b) Calculate the depreciation expense using the straight line method for the first two
years
c) Which method will result on higher net income for the first year of operation, explain
your answer?
Answer

1. Double Decline Method


Depr Acc.
Year Book value Rate Exps Depr
Year 1 162000 17% 27540 27540
Year 2 134460 17% 22858.2 50398.2

2. Straight Line Method

162000/6 = 27000
Year 1: 27000
Year 2: 27000

Accumulated Depreciation for 2 years > 27000 + 27000 = 54000

3. The double decline method will be result in higher net income because it reduces tax
Question 5:

Eve Corporation have the following inventory information:


Units Unit Cost
Nov. 1 Beginning inventory 100 $22
Nov. 5 Purchase 75 $23
Nov. 18 Purchase 120 $25
Nov. 29 Purchase 45 $30

A physical count of inventory on November 30th revealed that 200 units were sold during the
month.

Required:
1. Calculate the cost of goods sold and the ending balance inventory using: LIFO, FIFO,
and average cost.
2. Explain why ending inventory and cost of goods sold differ under the three methods
of inventory valuations.
Answer

LIFO:

Cost of goods sold= 5155

Ending inventory= 3120

FIFO

Cost of goods sold= 4550

Ending inventory= 3725

Average

Cost of goods sold= 4868

Ending inventory= 3407.6

Ending inventory and cost of goods differ because LIFO, FIFO and average method use
different assumptions, LIFO assumes that latest products are first to be sold, FIFO assumes
that the most recent products are first to be sold and average method assume that all products
are priced the same.
Question 6:

Prepare a multiple –step income statement for Fayrouz Inc. for the year ended December 31st,
2019 from the following accounts.

Account Amount
Net Sales $72,750
Dividends income 2,715
Gain on sale of equipment 960
General and administrative expense 7,260
Cost of goods sold 33,690
Equity losses 240
Interest expense 2,310
Selling expenses 5,760
Income tax expense 8,825
Interest income 2,250

Answer:

Multi-step Income Statement for Fayrouz Inc.


Net Sales $72,750
Cost of goods sold -33,690
Gross Profit $39,060

Selling and administrative expences


General and administrative expense -7,260
Selling expenses -5,760
Operating Expenses -13,020 -13,020
Other Income and expenses
Dividends income 2,715
Gain on sale of equipment 960
Equity losses -240
Interest expense -2,310
Interest income 2,250
Earnings before income tax 3,375
Income tax expense -8,825
Net Income $20,590

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