Selected homework answers from Module 2
E2-27
BARTH COMPANY
Income Statement
For Year Ended December 31, 2019
Sales revenue................................................................................. $500,000
Less: Cost of goods sold expense 180,000
GROSS PROFIT $320,000
Less: Operating expenses
Wages expense.......................................................................... 40,000
Supplies expense........................................................................ 6,000
Total operating expenses............................................................ 46,000
Net income...................................................................................... $274,000
BARTH COMPANY
Balance Sheet
December 31, 2019
Assets Liabilities
Current assets: Current liabilities:
Cash............................................. $148,000
Accounts payable $ 16,000
Accounts receivable..................... 30,000
Supplies inventory........................ 3,000
Non-current liabilities:
Inventory...................................... 36,000
Bonds payable 200,000
Total current assets 217,000
Total Liabilities $216,000
Land............................................. 80,000
Equity:
Equipment.................................... 70,000
Common stock 150,000
Buildings....................................... 151,000
Retained earnings 160,000
Goodwill....................................... 8,000
Total equity 310,000
Total assets.................................. $526,000
Total liabilities and equity.............................................................
$526,000
E2-28
BAIMAN CORPORATION BAIMAN CORPORATION
Income Statement Balance Sheet
For Month Ended January 31 January 31
Sales..................................... $40,000 Cash.............................................................
$ 0
Wage expense...................... 12,000 Accounts receivable.....................................40,000
Net income (loss).................. $28,000 Total assets..................................................
$40,000
Wages payable.............................................
$12,000
Retained earnings........................................28,000
Total liabilities and equity..............................
$40,000
Sales are recorded when performance obligation is satisfied so the $40,000 is on the
Income Statement. As the cash is NOT collected yet, it will appear as “accounts
receivable” in the asset section of the Balance Sheet.
Wages expense is recorded on the Income statement as they are INCURRED (used) in
January. As the cash is NOT paid yet, it will appear as “wages payable” in the liability
section of the Balance Sheet.
Last we calculate Net Income (Sales Revenue – Expenses = $28,000).
As this is the first year of business, and no dividends have been paid, this is the amount
of retained earnings also.
As noted the Balance Sheet balances, total assets ($40,000) equal total liabilities
($12,000) + total equity ($28,000).
E2-33
a.
($ thousands) ANF TJX
Sales................................ $3,590,109
100.0% $38,972,934
100.0%
Cost of goods sold............ 1,430,193
39.8% 27,831,177
71.4%
Gross profit....................... 2,159,916
60.2% 11,141,757
28.6%
Total expenses................. 2,081,108
58.0% 8,081,959
20.7%
Net income....................... $ 78,8082.2% $ 3,059,798
7.9%
ANF is a high-end retailer and TJX operates in the value-priced segment of the market.
Clearly, their respective business models are evident in the gross profit margin. ANF’s
gross profit margin is more than twice that of TJX (60.2% compared to 28.6%). This
implies that ANF adds a healthy markup to determine their merchandise sales price. The
high-end segment also requires additional personnel, advertising, and other operating
costs. ANF’s expense margin is nearly three times higher (58% compared to 20.7%). On
balance, TJX is more profitable than ANF with each sales dollar (7.9% vs. 2.2%).
b.
($ thousands) ANF TJX
Current assets.................. $1,335,950
56.0% $ 8,469,222
59.1%
Long-term assets.............. 1,049,643
44.0% 5,856,807
40.9%
Total assets...................... $2,385,593
100.0% $14,326,029
100.0%
Current liabilities............... $ 558,91723.4% $ 5,531,374
38.6%
Long-term liabilities........... 608,05525.5% 3,746,049
26.1%
Total liabilities................... 1,166,972
48.9% 9,277,423
64.8%
Stockholders' equity.......... 1,218,621
51.1% 5,048,606
35.2%
Total liab. and equity......... $2,385,593
100.0% $14,326,029
100.0%
ANF has slightly lower levels of current assets relative to total assets than does TJX. For
clothing retailers, current assets are primarily cash and inventories. If the two companies
have about the same levels of cash, we would conclude that ANF holds less inventory.
This makes sense given that TJX has discount-type stores chock-full of merchandise.
c. ANF has a much smaller proportion of total liabilities in its capital structure (48.9%
compared to 64.8% at TJX) which might seem to imply that TJX relies more on debt to fund its
assets and is therefore riskier. However, TJX has significantly more current liabilities that are
low risk because they are typically non-interest bearing and are paid off with sales of inventory
and available cash (current assets are greater than current liabilities for both companies). The
proportion of long-term liabilities is about the same across the two companies. Because long-
term debt bears interest and requires periodic payments of interest and principal, it is riskier
than current liabilities. On par, TJX is a slightly riskier company.
E2-35
a.
($ millions) CMCSA VZ
Sales..................................... $94,507100.0% $130,863
100.0%
Operating costs..................... 75,49879.9% 108,585
83.0%
Operating profit..................... 19,00920.1% 22,278
17.0%
Nonoperating expenses........ 7,147 7.6% 6,2394.8%
Net income............................ $11,86212.6% $ 16,039
12.3%
Verizon’s product lines yield slightly lower operating profit margin than do Comcast’s. Its
nonoperating expense, however, is lower than Comcast’s. The operating and
nonoperating relative effects offset leaving the two companies with profit margins that
are roughly equal.
b.
($ millions) CMCSA VZ
Current assets........................ $ 21,848 8.7% $ 34,636
13.1%
Long-term assets.................... 229,83691.3% 230,193
86.9%
Total assets............................ $251,684100.0% $264,829
100.0%
Current liabilities..................... $ 27,60311.0% $ 37,930
14.3%
Long-term liabilities................. 151,57960.2% 172,189
65.0%
Total liabilities......................... 179,18271.2% 210,119
79.3%
Stockholders' equity............... 72,50228.8% 54,710
20.7%
Total liabilities and equity....... $251,684100.0% $264,829
100.0%
Verizon is larger in both sales and total assets. Both companies are highly capital
intensive, with long-term assets accounting for about 90% of total assets. Both
companies’ business models necessitate continued investment in long-term assets as
they seek to continue to develop their telecom infrastructure.
c. The two companies have relatively high debt loads. This is typical for capital-intensive
industries like telecom. Given the large level of capital expenditures (CAPEX) that the
companies will make over the next decade, and the amount of additional debt that they
will have to incur to fund CAPEX, the debt levels will be a continuing financial issue for
both companies.
