Group #8

Jennifer ChanMichael EnglishJesse LeeNick RosasChelsea Underhill

Ch.3 Case & Project #1Pg. 158-159

Refer to the financial statements and accompanying notes of Pacific Sunwear of California given in Appendix B at the end of the book.

Online Link to Annual Report

http://www.hoovers.com/free/co/secoutline.xhtml?ID=16000&ipage=3600168

Pacific Sunwear

1. State the amount of the largest expense on the income statement for the year ending January 29, 2005 and describe the transaction represented by the expense.

Pacific Sunwear

• Income Statement Link

http://www.hoovers.com/free/co/secdoc.xhtml?ID=16000&ipage=3600168-167711-172958

• Largest expense is the cost of goods sold which includes buying, distribution and occupancy costs

$781,828$781,828 represents the cost of purchasing materials and

preparing goods for sale during a specific accounting period. In this case the fiscal year ending January 29th, 2005.

Cost of Goods Sold Equation: (Pg. 343)BI+P-EI=CGS

(Beginning inventory plus new purchases minus ending inventory equals the cost of goods sold)

Pacific Sunwear

2. Give the journal entry for interest income for the year ended January 29, 2005( for this question assume that the amount has not yet been received).

Pacific Sunwear

Journal EntryInterest Income Receivable 1889

Interest Income 1889

Interest Income Receivable Interest Income

Pacific Sunwear

Accounts Receivable

Pacific Sunwear

3. Assuming that all net sales are on credit, how much cash did Pacific Sunwear of California collect from customers? (Use a T-accounts receivable to infer collection)

Pacific Sunwear4. A shareholder has complained that

“more dividends should be paid because the company had net earnings of $106.9 million. Since this amount is all cash, more of it should go to the owners.” Explain why the shareholder’s assumption that earnings equal net cash inflow is valid. If you believe that the assumption is not valid, state so and support your position concisely.

Pacific SunwearThe assumption is not valid because of accrued revenues, which is…

“previously unrecorded revenues that need to be adjusted at the end of the accounting period to

reflect the amount earned and its related receivable account.”

Although there are sales on the account, it can’t be paid out yet, because the company doesn’t have the money physically. In other words, the company has the money recorded on the income statement, but they don’t have the cash in hand.

Pacific Sunwear

5. Describe and contrast the purpose of an income statement versus a balance sheet.

Pacific SunwearBalance Sheet: reports the amount of assets, liabilities, and stockholders equity of an accounting entity at a point in timeIncome Statement: reports the revenues minus the expenses of the accounting period.

An income statement only displays a company profits (revenues-expenses) as opposed to a balance sheet that displays anything that the company owns (such as assets), who they owe money to, and any investments in the company.

Pacific Sunwear

6. Compute the company’s total asset turnover for the year January 29, 2005. Explain its meaning.

Pacific Sunwear

Total Asset Turnover Ratio = Sales (or Operating) Revenue

Average Total Assets

Average Total Assets = Beginning Total Assets + Ending Total Assets

2

Pacific SunwearAverage Total Assets = 644,487 (beginning) + 677,778 (ending)

2

= 1,322,265 2

= $661,132.5

Total Asset Turnover Ratio = 1,229,762 (Sales Revenues) 661,132.5 (Average Total Assets)

= 1.86

Total Asset Turnover Ratio = 1.86

SummaryPac Sun’s assets are very low in relation to its revenues. Reasons for this may include the fact that Pac Sun likely rents out its locations (i.e. mall shops).

The total asset turnover ratio measures the sales generated per dollar of assets.

With respect to other such ratios mentioned in the book, Pac Sun’s ratio of 1.86 is average.

For every dollar’s worth of assets, Pac Sun generates $1.86 dollars of revenue.

PowerPoint presented by:

GROUP #8

Michael EnglishJennifer Chan

Jesse LeeChelsea Underhill

Nick Rosas