Thefinancialstatementassignmentsolution

Chp2 The Financial Statements

E2-4 Relationships between retained earnings and revenues and expenses across time

At the end of 2009 a fast-growing advertising agency had a negative balance of $596 millionin its retained earnings account. Compute the missing amounts in the following table, and comment on the company’s performance. Specifically, analyze the company’s sales growth, profits, profits as a percentage of sales, and dividends declared as a percentage of net income(dollars in millions).

　 | 2009 | 2008 | 2007 |

Beginning retained earnings | (758) | (523) | (499) |

Revenues for the period | ? | 1,522 | 1,383 |

Expenses for the period | 1,550 | 1,608 | ? |

Dividends declared | 5 | ? | 0 |

Solution:

From the question, we have told that there is a negative balance of $596 millionin in its retained earnings account at the end of 2009, thus we assume there is one more column for year 2010, and the beginning retained earnings is equal to the retained earnings account at the end of 2009, so we have a new financial statements as follow:

　 | 2010 | 2009 | 2008 | 2007 |

Beginning retained earnings | (596) | (758) | (523) | (499) |

Revenues for the period | | ? | 1,522 | 1,383 |

Expenses for the period | | 1,550 | 1,608 | ? |

Dividends declared | | 5 | ? | 0 |

From the text book we already know that in the statement of Retained Earnings, there is an equation: REBegin+NI–Div=REEnd (REEnd of year 2007 equial to the REBegin of year 2008)

Where NI = Revenues – Expenses, thus we have:

REBegin + Revenues – Expenses – Div = REEnd

By caculation, we have Expenses of year 2007 = (499)+1383-0-(523)=1407

Dividends of year 2008 =(523)+1522-1608-(758)=149

Revenues for year 2009 =(596)+5+1550-(758)=1717

Thus the final table with missing amounts are as following:

　 | 2009 | 2008 | 2007 |

Beginning retained earnings | (758) | (523) | (499) |

Revenues for the period | 1,717 | 1,522 | 1,383 |

Expenses for the period | 1,550 |...