Posted: April 10th, 2016

# 3. If Planter did not prepare revised statements before releasing the 2012 annual report, what would be the amount of overstatement or understatement of net income for the two-year period? What would be the overstatement or understatement of retained earnings at December 31, 2012, if revised statements were not prepared?

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PROBLEM 5-2: CALCULATION OF GROSS PROFIT RATIO FOR WAL-MART AND TARGET

The following information was summarized from the consolidated
statements of income of Wal-Mart Stores, Inc. and Subsidiaries for
the years ended January 31, 2011 and 2010, and the consolidated
statements of operations of Target Corporation for the years ended
January 29, 2011, and January 30, 2010. (For each company, years
FY2010 FY2009
(in Millions) Sales* Cost of Sales Sales* Cost of Sales
Wal-Mart \$418,952 \$315,287 \$405,132 \$304,444
65,786 45,725 63,435 44,062
Target
* Described as net sales by Wal-Mart.

Required:
1. Calculate the gross profit ratios for Wal-Mart and Target for 2010 and 2009.
2. Which company appears to be performing better? What factors
might cause the difference in the gross profit ratios of the two
companies? What other information should you consider to
determine how these companies are performing in this regard?

1 Gross profit ratios (dollar amounts in millions):

Step 1:
Gross Profit Formula T
Gross Profit Ratio Formula
T

Step 2:
FY2010 FY2009
WALMART
Sales F F
Cost of Sales F F
Gross Profit C C
Gross Profit Ratio C C

FY2010 FY2009
TARGET
Sales F F
Cost of Sales F F
Gross Profit C C
Gross Profit Ratio C C

2 Rationale:

T
General Instructions
1. The following worksheet may be used to complete the exercise/problem.
You may need to refer to your textbook for additional information.
2. The blue cells are for data entry. Enter text in the T cells, figures in the F cells, calculation in C cells

P5-4A

The following condensed income statements and balance sheets are available for Planter Stores for a two-year period.
(All amounts are stated in thousands of dollars.)

Income Statements FY2012 FY2011
Revenues \$ 35,982 \$ 26,890
Cost of goods sold 12,594 9,912
Gross profit \$ 23,388 \$ 16,978
Operating expenses 13,488 10,578
Net income \$ 9,900 \$ 6,400

Balance Sheets December 31, 2012 December 31, 2011
Cash \$ 9,400 \$ 4,100
Inventory 4,500 5,400
Other current assets 1,600 1,250
Long-term assets, net 24,500 24,600
Total assets \$ 40,000 \$ 35,350

Current liabilities 9,380 10,600
Capital stock 18,000 18,000
Retained earnings 12,620 6,750
Total liabilities and stockholders’ equity
\$ 40,000 \$ 35,350

Before releasing the 2012 annual report, Planter’s controller learns that the inventory of one of the stores
(amounting to \$500,000) was counted twice in the December 31, 2011, inventory. The inventory
was correctly counted in the December 31, 2012 inventory.

Required
1. Prepare revised income statements and balance sheets for Planter Stores for each of
the two years. Ignore the effect of income taxes.

(Input all amounts in thousands of dollars.)
Revised income statements:FY2012 FY2011
T F F
T F F
Gross profit C C
T F F
Net income C C
Revised balance sheets:
######## ########
T F F
T F F
T F F

Current
assets C C
T F F
Total assets C C

T F F
T F F
T F F
Total liabilities and stockholders’ equity
C C

2. Compute the current ratio at December 31, 2011, before the statements are revised, and compute the
current ratio at the same date after the statements are revised. If Planter applied for a loan in early 2012
and the lender required a current ratio of at least 1 to 1, would the error have affected the loan?
Explain your answer.

Current
ratio: Formula: T

Before revision: C C
=
F

=
F C
After revision: F

T

3. If Planter did not prepare revised statements before releasing the 2012 annual report, what would be
the amount of overstatement or understatement of net income for the two-year period? What would be
the overstatement or understatement of retained earnings at December 31, 2012, if revised statements
were not prepared?

Net income for two years, before revision: C
Net income for two years, after revision: C
T

Retained earnings at December 31, 2012, before the revision:
F
Retained earnings at December 31, 2012, after F revision:
the

T

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