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.