Q4-1FRP - Intermediate Accounting (Kieso)

Question

The financial statements of P&G are presented in Appendix B. The company’s complete annual report, including the notes to the financial statements, is available online.

Instructions 

Refer to P&G’s financial statements and the accompanying notes to answer the following questions. 

(a) What type of income statement format does P&G use? Indicate why this format might be used to present income statement information. 

(b) What are P&G’s primary revenue sources? 

(c) Compute P&G’s gross profit for each of the years 2012–2014. Explain why gross profit decreased in 2014. 

(d) Why does P&G make a distinction between operating and nonoperating revenue? 

(e) What financial ratios did P&G choose to report in its “Financial Summary” section covering the years 2009–2014?

Step-by-Step Solution

Answer

The gross profit for the year 2012, 2013, and 2014 is $32,390, $32,523, and $32,564 respectively. 

Meaning of Financial Statements

Financial statements refer to the annual reports that a business entity prepares to determine its growth, solvency, liquidity, and profitability. It includes an income statement, balance sheet, cash flow statement, and statement of retained earnings. 

Type of income statement format

The P&G Company chooses the consolidated income statement format to present its information associated with revenues and expenses.

Primary sources of revenue

The primary sources of revenue for the company are the sale of goods and revenue generated through interest.

Computation of gross profit

Computation of gross profit for 2012

$$\begin{gathered} \text{Gross profit}=\text{Net sales}-\text{Cost of goods sold} \\ \text{Gross profit}=\$65,299-\$32,909 \\ \text{Gross profit}=\$32,390 \end{gathered}$$

Computation of gross profit for 2013

$$\begin{gathered} \text{Gross profit}=\text{Net sales}-\text{Cost of goods sold} \\ \text{Gross profit}=\$65,058-\$32,535 \\ \text{Gross profit}=\$32,523 \end{gathered}$$

Computation of gross profit for 2014

$$\begin{gathered} \text{Gross profit}=\text{Net sales}-\text{Cost of goods sold} \\ \text{Gross profit}=\$66,832-34,268 \\ \text{Gross profit}=\$32,564 \end{gathered}$$

Requirement for differentiating operating and non-operating revenue

The company differentiates the operating and non-operating revenues for a better understanding of the users.

It also facilitates in presenting the information associated with revenues accurately.

In addition, users of financial information can draw effective decisions from the bifurcated revenue data provided to them. 

Financial ratios reported in the “Financial Summary”

The company reported solvency ratios in its financial summary to present its ability to continue as a going concern.

Solvency ratios mainly include debt ratio, debt to equity ratio, and many more.