Creative Technology, a computer hardware company based in Singapore, developed the modern standard for computer sound cards in the early 1990s. Recently, Creative has released a line of portable audio products to directly compete with Apple€™s popular I-Pod mp3 player. Presented here is a recent income statement (dollars in millions).
Net sales ....................... $815
Costs and expenses
Cost of sales ..................... 534
Research and development ................ 70
Selling, general, and administrative ............ 168
Operating income (loss) ................ 43
Interest and other income (expenses), net .......... 82
Income (loss) before provision (benefit) for income taxes ... 125
Provision (benefit) for income taxes ............. (9)
Net income (loss) ................... $134
Its beginning and ending stockholders€™ equity was $429 and $691, respectively.

Required:
1. Listed here are hypothetical additional transactions. Assuming that they had also occurred during the fiscal year, complete the following tabulation, indicating the sign of the effect of each additional transaction (+ for increase, €“ for decrease, and NE for no effect). Consider each item independently and ignore taxes.
a. Recorded sales on account of $500 and related cost of goods sold of $475.
b. Incurred additional research and development expense of $100, which was paid in cash.
c. Issued additional shares of common stock for $200 cash.
d. Declared and paid dividends of $90.

2. Assume that next period Creative does not pay any dividends, does not issue or retire stock, and earns the same income as during the current period. Will Creative€™s ROE next period be higher, lower, or the same as the current period?Why?

Transcribed Image Text:

Return on Operating Income (Loss) Transaction Gross Profit Equity C. d.