Jennifer Chan

1
Group 8

• Jennifer Chan
• Michael English
• Jesse Lee
• Nick Rosas
• Chelsea Underhill

2
Ch.3 Case Project 1

• Pg. 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.co
m/free/co/secoutline.xhtml?ID16000ipage3600168
3
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.

4
Pacific Sunwear

• Income Statement Link
• http//www.hoovers.com/free/co/secdoc.xhtml?ID16
  000ipage3600168-167711-172958
• 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) BIP-EICGS (Beginn
ing inventory plus new purchases minus ending
inventory equals the cost of goods sold)
5
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).

6
Pacific Sunwear
Interest Income Receivable Interest Income
Journal Entry Interest Income Receivable
1889 Interest Income 1889
7
Pacific Sunwear
Accounts Receivable
8
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)

9
Pacific Sunwear

• 4. 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 shareholders 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.

10
Pacific Sunwear

• The 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 cant
  be paid out yet, because the company doesnt have
  the money physically. In other words, the company
  has the money recorded on the income statement,
  but they dont have the cash in hand.

11
Pacific Sunwear

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

12
Pacific Sunwear

• Balance Sheet reports the amount of assets,
  liabilities, and stockholders equity of an
  accounting entity at a point in time
• Income 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.

13
Pacific Sunwear

• 6. Compute the companys total asset turnover
  for the year January 29, 2005. Explain its
  meaning.

14
Pacific Sunwear

• Total Asset Turnover Ratio Sales (or
  Operating) Revenue
• 
  Average Total Assets
• Average Total Assets Beginning Total Assets
  Ending Total Assets
• 2
• 
  

15
Pacific Sunwear

• Average 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

16
Summary

• Pac Suns 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 Suns ratio of 1.86 is average.
• For every dollars worth of assets, Pac Sun
  generates 1.86 dollars of revenue.

17
PowerPoint presented by

• GROUP 8
• Michael English
• Jennifer Chan
• Jesse Lee
• Chelsea Underhill
• Nick Rosas