The following income statement data for AT&T Inc. and Verizon Communications Inc. were taken from their recent annual reports (in millions):

The following income statement data for AT&T Inc. and Verizon Communications Inc. were taken from their recent annual reports (in millions):

 

 AT&T Verizon

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132,447 $127,079

Cost of services (expense). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,611 49,931

Selling and marketing expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,697 41,016

Depreciation and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        20,393      16,533

Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $   11,746 $   19,599 

a. Prepare a vertical analysis of the income statement for AT&T. Round to one decimal place.

b. Prepare a vertical analysis of the income statement for Verizon. Round to one decimal place.

c.  Based on Requirements (a) and (b), how does AT&T compare to Verizon?

Answers:

a.

Revenues.................................................................. $132,447 100.0%

Cost of services (expense).......................................... 60,611 45.8%

Selling and marketing expense.................................... 39,697 30.0%

Depreciation and other expenses................................. 20,393 15.4%

Operating income...................................................... $ 11,746 8.8%

b.

Revenues.................................................................. $127,079 100.0%

Cost of services (expense).......................................... 49,931 39.3%

Selling and marketing expense.................................... 41,016 32.3%

Depreciation and other expenses................................. 16,533 13.0%

Operating income...................................................... $ 19,599 15.4%

c. AT&T’s operating income is 8.8% of revenues, while Verizon’s operating income to revenues is 15.4%. Verizon appears to be more efficient in generating operating income from revenues. AT&T’s cost of services is 45.8% of revenues, while Verizon’s is over six percentage points less at 39.3% of revenues. This difference is a largecontributor to Verizon’s superior operating income-to-revenues efficiency. The other two expense items essentially cancel each other out in that the selling and marketing expenses are 30.0% of revenues for AT&T, while Verizon’s are slightly larger at 32.3% of revenues. In contrast, the depreciation expense is 15.4% of revenues for AT&T and only 13.0% for Verizon. In summary, it appears that Verizon is able to generate more operating income per sales dollar, mostly because of a lower cost of services per sales dollar in comparison to AT&T.

The following data are taken from recent financial statement of Nike, Inc. (in millions):Determine the amount of change

The following data are taken from recent financial statement of Nike, Inc. (in millions):


Year 2 Year 1
Sales (revenues) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $30,601 $27,799
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,273 2,693


a. Determine the amount of change (in millions) and percent of change in net income from Year 1 to Year 2. Round to one decimal place.

b. Determine the percentage relationship between net income and sales for Year 2 and Year 1. Round to one decimal place.

c.  What conclusions can you draw from your analyses?


Answers:
a. Net income: $3,273 – $2,693 = $580 million
$580/$2,693 = 21.5%

b.
Year 1: $2,693/$27,799 = 9.7%
Year 2: $3,273/$30,601 = 10.7%

c. Nike has increased net income between the two years by $580 million, or by 21.5%. This represents impressive earnings growth between the two years. Nike is able to accomplish this by growing sales and reducing expenses as a percent of sales between the two years.

Amazon.com, Inc. is the largest Internet retailer in the United States. Amazon’s income statements through income from operations for two recent years are as follows (in millions):

Amazon.com, Inc. is the largest Internet retailer in the United States. Amazon’s income statements through income from operations for two recent years are as follows (in millions):

Amazon.com, Inc. Operating Income Statements For the Years Ended December 31 (in millions) Year 2 Year 1 Product sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  $70,080 $60,903 

Service sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   18,908   13,549 

      Total sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $88,988 $74,452 

Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,752 $54,181 

Fulfillment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  10,766  8,585 

Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  4,332  3,133 

Technology and content. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9,275  6,565 

General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1,552  1,129 

Other operating expense (income), net . . . . . . . . . . . . . . . . . . . . . . . . . . .         133         114 

     Total operating expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $88,810 $73,707 

Income from operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $      178 $      745 

a. Prepare a vertical analysis of the two operating income statements. Round percentages to one decimal place.

b.  Use the vertical analysis to explain the decrease in income from operations. 

Answers:

a.

Amount Percent Amount Percent

Product sales$70,080 78.8% $60,903 81.8%

Service sales18,908 21.2% 13,549 18.2%

Total sales$88,988 100.0% $74,452 100.0%

Cost of sales$62,752 70.5% $54,181 72.8%

Fulfillment10,766 12.1% 8,585 11.5%

Marketing4,332 4.9% 3,133 4.2%

Technology and content 9,275 10.4% 6,565 8.8%

General and administrative 1,552 1.7% $ 1,129 1.5%

Other operating expense (income), net 133 0.2% 114 0.2%

Total operating expenses $88,810 99.8% $73,707 99.0%

Income from operations $ 178 0.2% $ 745 1.0%

b. The vertical analysis indicates that the income from operations declined from 1.0% to

0.2% of sales between the two years. Total expenses increased from 99.0% to 99.8%

of total sales. This increase is explained by the increase in fulfillment (11.5% to

12.1%), marketing (4.2% to 4.9%), technology and content (8.8% to 10.4%), and general

and administrative (1.5% to 1.7%) expenses. There was a sizable decrease in the cost

of sales from 72.8% to 70.5% of total sales. However, this decrease was not sufficient 

to offset the increases in the other expenses; thus, total expenses increased and 

income from operations decreased as a percent of total sales between the two

years. Management should investigate the reasons for the expense increases,

paying special attention to technology and content.  

The accountant for Eva’s Laundry prepared the following unadjusted and adjusted trial balances. Assume that all balances in the unadjusted trial balance

The accountant for Eva’s Laundry prepared the following unadjusted and adjusted trial balances. Assume that all balances in the unadjusted trial balance and the amounts of the adjustments are correct. Identify the errors in the accountant’s adjusting entries, assuming that none of the accounts were affected by more than one adjusting entry.


Eva’s Laundry Trial Balances May 31, 2019 Unadjusted Adjusted Debit Balances Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500 7,500
Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,250 23,250
Laundry Supplies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,750 6,750
Prepaid Insurance* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,200 1,600
Laundry Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190,000 177,000
Accumulated Depreciation—Laundry Equipment . . . . 48,000 48,000
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600 9,600
Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,000
Eva Baldwin, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110,300 110,300
Eva Baldwin, Drawing  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,775 28,775
Laundry Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182,100 182,100
Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,200 49,200
Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,575 25,575
Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,500 18,500
Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13,000
Laundry Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . .3,000
Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .600
Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,250 3,250 350,000 350,000 358,000 351,000 *$3,600 of insurance expired during the year.


Answers:

1. The accountant debited Accounts Receivable for $5,000 but did not credit
Laundry Revenue. This adjusting entry represents accrued laundry revenue.
2. The accountant debited rather than credited Laundry Supplies for $3,000.
3. The accountant credited the prepaid insurance account for $3,600, but debited
the insurance expense account for only $600.
4. The accountant credited Laundry Equipment for the depreciation expense of
$13,000 instead of crediting the accumulated depreciation account.
5. The accountant did not debit Wages Expense for $1,000.
The corrected adjusted trial balance is shown below.
Debit Credit
Balances Balances
Cash7,500
Accounts Receivable23,250
Laundry Supplies750
Prepaid Insurance1,600
Laundry Equipment190,000
Accumulated Depreciation—Laundry Equipment61,000
Accounts Payable9,600
Wages Payable1,000
Eva Baldwin, Capital110,300
Eva Baldwin, Drawing28,775
Laundry Revenue187,100
Wages Expense50,200
Rent Expense25,575
Utilities Expense18,500
Depreciation Expense13,000
Laundry Supplies Expense3,000
Insurance Expense3,600
Miscellaneous Expense3,250
369,000 369,000

The unadjusted and adjusted trial balances for American Leaf Company on October 31, 2019, follow:

The unadjusted and adjusted trial balances for American Leaf Company on October 31, 2019, follow:

American Leaf Company Trial Balances October 31, 2019 Unadjusted Adjusted Debit   Balances

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 16

Accounts Receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 44

Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 10

Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 8

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 26

Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 40

Accumulated Depreciation—Equipment . . . . . . . . . 8 12

Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 26

Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 2

Les Huff, Capital  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 92

Les Huff, Drawing   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8

Fees Earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 80

Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 26

Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8

Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 12

Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4

Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . 0 4

Supplies Expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 2

Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . 4 4

200 200 212 212

Journalize the five entries that adjusted the accounts at October 31, 2019. None of the accounts were affected by more than one adjusting entry.

Answers:

1. Accounts Receivable6

Fees Earned6

Accrued fees earned.

2. Supplies Expense2

Supplies2

Supplies used.

3. Insurance Expense12

Prepaid Insurance12

Insurance expired.

4. Depreciation Expense4

Accumulated Depreciation—Equipment4

Equipment depreciation.

5. Wages Expense2

Wages Payable2

Accrued wages.

On December 31, a business estimates depreciation on equipment used during the first year of operations to be $13,900.

On December 31, a business estimates depreciation on equipment used during the first year of operations to be $13,900.

a. Journalize the adjusting entry required as of December 31.

b. If the adjusting entry in (a) were omitted, which items would be erroneously stated on (1) the income statement for the year and (2) the balance sheet as of December 31?

Answers:

a.  Dec. 31 Depreciation Expense13,900

Accumulated Depreciation—Equipment 13,900

Depreciation on equipment.

b. (1) Depreciation expense would be understated. Net income would be 

overstated.

(2) Accumulated depreciation would be understated, and total assets would 

be overstated. Owner’s equity (owner’s capital account) would be overstated.

The accountant for Healthy Life Company, a medical services consulting firm, mistakenly omitted adjusting entries for

The accountant for Healthy Life Company, a medical services consulting firm, mistakenly omitted adjusting entries for (a) unearned revenue earned during the year ($34,900) and (b) accrued wages ($12,770). Indicate the effect of each error, considered individually, on the income statement for the current year ended July 31. Also indicate the effect of each error on the July 31 balance sheet. Set up a table similar to the following, and record your answers by inserting the dollar amount in the appropriate spaces. Insert a zero if the error does not affect the item.

Error (a) Error (b) Over-stated Under-stated Over-stated Under-stated

1. Revenue for the year would be $ ____ $ ____ $ ____ $ ____

2. Expenses for the year would be $ ____ $ ____ $ ____ $ ____

3. Net income for the year would be $ ____ $ ____ $ ____ $ ____

4. Assets at July 31 would be $ ____ $ ____ $ ____ $ ____

5. Liabilities at July 31 would be $ ____ $ ____ $ ____ $ ____

6. Owner’s equity at July 31 would be $ ____ $ ____ $ ____ $ ____

Answers:

Error (a) Error (b)

Over- Under- Over- Under-

stated stated stated stated

 1. Revenue for the year would be  $ 0 $34,900 $ 0 $ 0

 2. Expenses for the year would be  0 0 0 12,770

 3. Net income for the year would be  0 34,900 12,770 0

 4. Assets at July 31 would be  0 0 0 0

 5. Liabilities at July 31 would be  34,900 0 0 12,770

 6. Owner’s equity at July 31 would be  0 34,900 12,770 0

If the net income for the current year had been $196,400 in Exercise 3-23, what would have been the correct net income if the proper adjusting entries had been made?

If the net income for the current year had been $196,400 in Exercise 3-23, what would have been the correct net income if the proper adjusting entries had been made?

Answers:

$218,530 ($196,400 + $34,900 – $12,770)

For a recent year, the balance sheet for The Campbell Soup Company includes accrued expenses of $553 million

For a recent year, the balance sheet for The Campbell Soup Company includes accrued expenses of $553 million. The income before taxes for Campbell for the year was $1,073 million.

a. Assume the adjusting entry for $553 million of accrued expenses was not recorded at the end of the year. By how much would income before taxes have been misstated?

b. What is the percentage of the misstatement in (a) to the reported income of $1,073 million? Round to one decimal place.


Answers:
a. $553 million overstated
b. 51.5% ($553 ÷ $1,073)

The balance in the equipment account is $3,150,000, and the balance in the accumulated depreciation—equipment account is $2,075,000.

The balance in the equipment account is $3,150,000, and the balance in the accumulated depreciation—equipment account is $2,075,000.

a. What is the book value of the equipment?

b.  Does the balance in the accumulated depreciation account mean that the equipment’s loss of value is $2,075,000? Explain.

Answers:

a. $1,075,000 ($3,150,000 – $2,075,000)

b. No. Depreciation is an allocation of the cost of the equipment to the periods benefiting from its use. It does not necessarily relate to value or loss of value.

In a recent balance sheet, Microsoft Corporation reported Property, Plant, and Equipment of $27,804 million and Accumulated Depreciation of $14,793 million.

In a recent balance sheet, Microsoft Corporation reported Property, Plant, and Equipment of $27,804 million and Accumulated Depreciation of $14,793 million.

a. What was the book value of the fixed assets?

b.  Would the book value of Microsoft’s fixed assets normally approximate their market values?

Answers:

a. $13,011 million ($27,804 – $14,793)

b. No. Depreciation is an allocation method, not a valuation method. That is, depreciation allocates the cost of a fixed asset over its useful life. Depreciation does not attempt to measure market values, which may vary significantly from year to year.

For a recent period, the balance sheet for Costco Wholesale Corporation reported accrued expenses of $3,446 million

For a recent period, the balance sheet for Costco Wholesale Corporation reported accrued expenses of $3,446 million. For the same period, Costco reported income before income taxes of $3,197 million. Assume that the adjusting entry for $3,446 million of accrued expenses was not recorded at the end of the current period. What would have been the income (loss) before income taxes?


Answers:
Income: $6,643 million ($3,197 + $3,446)

The estimated amount of depreciation on equipment for the current year is $8,200. Journalize the adjusting entry to record the depreciation.

The estimated amount of depreciation on equipment for the current year is $8,200. Journalize the adjusting entry to record the depreciation.

Answers:

Depreciation Expense8,200

Accumulated Depreciation—Equipment8,200

Depreciation on equipment.

A-Z Construction Company was organized on May 1 of the current year. On May 2, A-Z Construction prepaid $18,480 to the city for taxes

A-Z Construction Company was organized on May 1 of the current year. On May 2, A-Z Construction prepaid $18,480 to the city for taxes (license fees) for the next 12 months and debited the prepaid taxes account. A-Z Construction is also required to pay in January an annual tax (on property) for the current calendar year of $45,000.

a. Journalize the two adjusting entries required to bring the accounts affected by the two taxes up to date as of December 31, the end of the current year.

b. What is the amount of tax expense for the current year?


Answers:

a.  Dec. 31 Taxes Expense12,320
Prepaid Taxes12,320
Prepaid taxes expired 
 [($18,480 ÷ 12 months) × 8 months].
31 Taxes Expense45,000
Taxes Payable45,000
Accrued taxes.
b. $57,320 ($12,320 + $45,000)

The prepaid insurance account had a balance of $3,000 at the beginning of the year. The account was debited for $32,500 for premiums on policies

The prepaid insurance account had a balance of $3,000 at the beginning of the year. The account was debited for $32,500 for premiums on policies purchased during the year. Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment: (a) the amount of unexpired insurance applicable to future periods is $4,800; (b) the amount of insurance expired during the year is $30,700.


Answers:

a. Insurance Expense30,700
Prepaid Insurance30,700
Insurance expired ($3,000 + $32,500 – $4,800).
b. Insurance Expense30,700
Prepaid Insurance30,700
Insurance expired.

The balance in the unearned fees account, before adjustment at the end of the year, is $97,770. Of these fees, $39,750

The balance in the unearned fees account, before adjustment at the end of the year, is $97,770. Of these fees, $39,750 have been earned. In addition, $24,650 of fees have been earned but have not been billed. Journalize the adjusting entries (a) to adjust the unearned fees account and (b) to record the accrued fees.

Answers:

a. Unearned Fees39,750

Fees Earned39,750

Unearned fees earned during year.

b. Accounts Receivable24,650

Fees Earned24,650

Accrued fees earned.

The balance in the prepaid insurance account, before adjustment at the end of the year, is $27,000. Journalize the adjusting entry required

The balance in the prepaid insurance account, before adjustment at the end of the year, is $27,000. Journalize the adjusting entry required under each of the following alternatives for determining the amount of the adjustment: (a) the amount of insurance expired during the year is $20,250; (b) the amount of unexpired insurance applicable to future periods is $6,750.


Answers:

a. Insurance Expense20,250
Prepaid Insurance20,250
Insurance expired.
b. Insurance Expense20,250
Prepaid Insurance20,250
Insurance expired ($27,000 – $6,750).

The supplies and supplies expense accounts at February 28, after adjusting entries have been posted at the end of the first year of operations

The supplies and supplies expense accounts at February 28, after adjusting entries have been posted at the end of the first year of operations, are shown in the following T accounts:

Supplies
Bal. 690 |

Supplies Expense
Bal. 4,110 |

Determine the amount of supplies purchased during the year.


Answers:
$4,800 ($690 + $4,110)

At August 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted

At August 31, the end of the first month of operations, the usual adjusting entry transferring prepaid insurance expired to an expense account is omitted. Which items will be incorrectly stated, because of the error, on (a) the income statement for August and (b) the balance sheet as of August 31? Also indicate whether the items in error will be overstated or understated.

Answers:

a. Insurance expense (or expenses) will be understated. Net income will be overstated.

b. Prepaid insurance (or assets) will be overstated. Owner’s equity (Owner’s Capital) will be overstated.

The balance in the supplies account, before adjustment at the end of the year, is $4,850. Journalize the adjusting entry required if the amount of supplies on hand at the end of the year is $880.

The balance in the supplies account, before adjustment at the end of the year, is $4,850. Journalize the adjusting entry required if the amount of supplies on hand at the end of the year is $880.


Answers:

Supplies Expense3,970
Supplies3,970
Supplies used ($4,850 – $880).