Determining and Interpreting the Effects of Transactions on Income Statement Categories

Determining and Interpreting the Effects of Transactions on Income Statement Categories and Return on Assets
Avon Products, Inc., is a leading manufacturer and marketer of beauty products and related merchandise. The company sells its products in 110 countries through a combination of direct selling and use of individual sales representatives. Presented here is a recent income statement (dollars in millions).
Net sales $10,690
Costs and expenses
Cost of sales 3,949
Selling, general, and administrative 5,402
Operating income (loss) 1,339
Interest and other income (expenses), net (101)
Income (loss) before provision (benefit) for income taxes 1,238
Provision (benefit) for income taxes 363
Net income (loss) $ 875
Its beginning and ending total assets were $5,716 and $6,074, respectively.
1. Listed here are hypothetical additional transactions. Assuming that they also occurred during the fiscal year, complete the following tabulation, indicating the sign of the effect of each additional transaction (+ for increase, ˆ’ for decrease, and NE for no effect). Consider each item independently and ignore taxes.
a. Recorded and received additional interest income of $7.
b. Purchased $80 of additional inventory on open account.
c. Recorded and paid additional advertising expense of $16.
d. Issued additional shares of common stock for $40 cash.

Operating Income (Loss) Return on Transaction Net Income Assets a. b. C. d.

2. Assume that next period, Avon does not pay any dividends, does not issue or retire stock, and earns 20 percent more than during the current period. If total assets increase by 5 percent, will Avon€™s ROA next period be higher, lower, or the same as in the current period?Why?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...


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