Refer to the fi nancial statements of The Home Depot in Appendix A at the end of this book, or down- load the annual report from the Cases section of the text’s Web site at www.mhhe.com/phillips4e .
Required:
1. How much did The Home Depot’s sales revenue increase or decrease in the year ended
January 30, 2011?
a. Decreased $5,112 (million)
b. Decreased $401 (million)
c. Increased $1,821 (million)
d. Increased $677 (million)
2. What is the largest expense on the income statement, and how much did it change from the
previous year?
a. Cost of Sales, which decreased $3,534 (million)
b. Cost of Sales, which increased $929 (million)
c. Selling, General and Administrative Expenses, which decreased $53 (million)
d. Selling, General and Administrative Expenses, which increased $1,944 (million)
3. Which of the following was The Home Depot’s net profit margin in the year ended
January 30, 2011? a. 34.3% b. 7.8% c. 4.9% d. 4.0% LO 3–1
S3–2 Comparing Financial Information
Refer to the fi nancial statements of The Home Depot in Appendix A and Lowe’s in Appendix B at the end of this book, or download the annual reports from the Cases section of the text’s Web site at www.mhhe.com/phillips4e .
Required:
1. Did Lowe’s sales revenues increase or decrease in the year ended January 28, 2011, as com-
pared to the previous year? By how much? Calculate this change as a percentage of the previ- ous year’s sales revenues. Is the trend in Lowe’s sales revenues more or less favorable than The Home Depot’s?
2. State the amount of the largest expense on the income statement of Lowe’s for the year
ended January 28, 2011, and describe the transaction represented by the expense. Did this expense increase or decrease and by what percentage, as compared to the previous year? Is the trend in Lowe’s largest expense more or less favorable than the trend for The Home Depot’s largest expense?
S3-3 Internet-Based Team Research: Examining the Income Statement
As a team, select an industry to analyze. Using your Web browser, each team member should access the annual report or 10-K for one publicly traded company in the industry, with each mem- ber selecting a different company. (See S1-3 in Chapter 1 for a description of possible resources for these tasks.)
Required:
1. On an individual basis, each team member should write a short report that lists the following
information:
a. The major revenue and expense accounts on the most recent income statement. b. Description of how the company has followed the conditions of the revenue recognition
principle.
c. The percentage of revenues that go to covering expenses, and that are in excess of
expenses (in other words, net profit margin expressed as a percentage).
2. Then, as a team, write a short report comparing and contrasting your companies using these
attributes. Discuss any patterns across the companies that you as a team observe. Provide potential explanations for any differences discovered.
S3-4 Ethical Decision Making: A Real-Life Example
Read the following excerpt from an article in Fortune magazine and answer the questions that appear below.
Forget about fraud. Companies don’t need to lie, cheat, and steal to fool investors. Clever manag- ers have always had, and continue to have, access to perfectly legal tricks to help make their bal- ance sheets and income statements look better than they really are—tricks that even today won’t jeopardize their ability to swear to the SEC that their books are on the up and up . . . One of the
most controversial of all number games—the one that got WorldCom in trouble—is to capitalize
expenses. That can have a tremendous impact on the bottom line.
1. When a company incurs a cost, its accountants have to decide whether to record the cost
as an asset or expense. When costs are recorded as an asset, they are said to be capitalized. This builds on ideas first presented in Chapter 2, where you learned that it was appropriate to record costs as assets, provided that they possess certain characteristics. What are those characteristics?
2. The author of the article argues that even with clear rules like those referenced in question 1
above, accounting still allows managers to use “tricks” like capitalizing expenses. What do you suppose the author means by the expression capitalizing expenses?
3. Suppose that, in the current year, a company inappropriately records a cost as an asset when
it should be recorded as an expense. What is the effect of this accounting decision on the cur- rent year’s net income? What is the effect of this accounting decision on the following year’s net income?
LO 3–1
Lowe’s
LO 3–1, 3–5
4. Later in the article (not shown) the author says that the videogame industry is one where
companies frequently capitalize software development costs as assets. These costs include wages paid to programmers, fees paid to graphic designers, and amounts paid to game testers. Evaluate whether software development costs are likely to possess the main characteristics possessed by all assets. Can you think of a situation where software development costs might not possess these main characteristics?
5. Do you think it is always easy and straightforward to determine whether costs should be capi-
talized or expensed? Do you think it is always easy and straightforward to determine whether a manager is acting ethically or unethically? Give examples to illustrate your views.
S3-5 Ethical Decision Making: A Mini-Case
Mike Lynch is the manager of an upstate New York regional offi ce for an insurance company. As the regional manager, his pay package includes a base salary, commissions, and a bonus, when the region sells new policies in excess of its quota. Mike has been under enormous pressure lately, stemming largely from two factors. First, he is experiencing mounting personal debt due to a fam- ily member’s illness. Second, compounding his worries, the region’s sales of new insurance policies have dipped below the normal quota for the fi rst time in years.
You have been working for Mike for two years, and like everyone else in the office, you consider yourself lucky to work for such a supportive boss. You also feel great sympathy for his personal prob- lems over the last few months. In your position as accountant for the regional office, you are only too aware of the drop in new policy sales and the impact this will have on the manager’s bonus. While you are working on the year-end financial statements, Mike stops by your office.
Mike asks you to change the manner in which you have accounted for a new property insurance policy for a large local business. A check for the premium, substantial in amount, came in the mail on December 31, the last day of the reporting year. The premium covers a period beginning on January 5. You deposited the check and correctly debited Cash and credited Unearned Revenue. Mike says, “Hey, we have the money this year, so why not count the revenue this year? I never did understand why you accountants are so picky about these things anyway. I’d like you to change the way you’ve recorded the transaction. I want you to credit a revenue account. And anyway, I’ve done favors for you in the past, and I am asking for such a small thing in return.” With that, he leaves your office.
Required:
How should you handle this situation? What are the ethical implications of Mike’s request? Who are the parties who would be helped or harmed if you went along with the request? If you fail to comply with his request, how will you explain your position to him? Justify your answers in writing. S3-6 Critical Thinking: Analyzing Changes in Accounts and Preparing an
Unadjusted Trial Balance
Complete this case, available online at www.mhhe.com/phillips4e. By completing this case, you will learn to identify changes in spreadsheet values and infer the underlying transactions respon- sible for those changes.
S3-7 Analyzing Transactions and Preparing an Unadjusted Trial Balance
Complete this case, available online at www.mhhe.com/phillips4e. By completing this case, you will learn to use a spreadsheet to capture transactions and use cell linking to prepare an end-of- period trial balance.