Total contributed capital 33,500 Retained earnings (beginning balance, $6,615 + net income, $21,420 - dividends declared and paid, $7,200) 20,835 Total stockholders' equity 54,335 Total liabilities and stockholders' equity $106,090 AP5-4. Req. 1. Transaction Operating Income Net Income Return on Assets (Loss) a. NE + + b. NE NE – c. – – – d. NE NE – The effects of the transactions can be seen by making the related journal entries and using A, L, SE, R, and E to denote asset, liability, shareholders’ equity, revenue, and expense, respectively. a. Cash (+A) 7 Interest income (+R) 7 b. Inventory (+A) 80 Accounts payable (+L) 80 c. Advertising expense (+E) 16 Cash (–A) 16 d. Cash (+A) 40 Common stock and additional paid-in capital (+SE) 40 Req. 2. Assuming that next period Avon’s total assets increase by 5%, but Avon earns 20% more income as during the current period, Avon’s ROA will increase over that earned in the current period. Both the denominator and the numerator increase. In this case, net income is increasing at a faster rate than average total assets, causing ROA to be higher in the next period. (Students are encouraged to calculate ROA to verify this assertion.) Current Next Year Year Net Income $514 = 0.07 $617 = 0.08
Total contributed capital 33,500 Retained earnings (beginning balance, $6,615 + net income, $21,420 - dividends declared and paid, $7,200) 20,835 Total stockholders' equity 54,335 Total liabilities and stockholders' equity $106,090 AP5-4. Req. 1. Transaction Operating Income (Loss) Net Income Return on Assets a. NE + + b. NE NE – c. – – – d. NE NE – The effects of the transactions can be seen by making the related journal entries and using A, L, SE, R, and E to denote asset, liability, shareholders’ equity, revenue, and expense, respectively. a. Cash (+A) 7 Interest income (+R) 7 b. Inventory (+A) 80 Accounts payable (+L) 80 c. Advertising expense (+E) 16 Cash (–A) 16 d. Cash (+A) 40 Common stock and additional paid-in capital (+SE) 40 Req. 2. Assuming that next period Avon’s total assets increase by 5%, but Avon earns 20% more income as during the current period, Avon’s ROA will increase over that earned in the current period. Both the denominator and the numerator increase. In this case, net income is increasing at a faster rate than average total assets, causing ROA to be higher in the next period. (Students are encouraged to calculate ROA to verify this assertion.) Current Year Next Year Net Income $514 = 0.07 $617 = 0.08