Posted: July 19th, 2016

What other information should you consider to determine how these companies are performing in this regard?

Year 1 Year 2 Year 3
Sales 366000 90000 90000
Equipment* 100000 0 0
Salaries and wages 50000 50000 50000
Advertising 5000 5000 5000
Rent and utilities 36000 36000 36000
Net income (loss) 175000 -1000 -1000
*Equipment was purchased at the beginning of Year 1 for $100,000 and is expected to last for three years and then be worth $1,000.

1. Convert the income statements for each of the three years to the accrual basis.

2. Describe how the revenue recognition principle applies. Do you believe that the cash-basis or the accrual-basis income statements are more useful to management? To investors? Why?

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 are labeled as 2010 and 2009, respectively, although Wal-Mart labels these as the 2011 and 2010 fiscal years.)

[see the attached file for the table]

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?

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.)