Financial Reporting and Analysis, 13th, Gi课后习题答案11

Chapter 8

Profitability

QUESTIONS

8- 1. Profits can be compared to the sales from which they are the residual. They can be compared to the assets that generate sales. Or, they can be viewed as return to the owner. Each measure looks at profits differently. The trends might move

in different directions, depending on the base.

8- 2. Extraordinary items are by nature nonrecurring. They should be segregated in order to concentrate on profit that will be expected in the next period. Recurring

earnings should be used in trend analysis of profitability.

8- 3. Expenses as a percent of sales must have increased if profits as a percent of sales declined.

8- 4. Profit margin in jewelry is usually much higher than in groceries. Groceries generate total profits based on volume of sales rather than high markup.

8- 5. A drop in profits or a rise in the asset base could cause a decline in the ratio. For example, higher cost of sales could cause a decline; or, a substantial investment in fixed assets that are not yet fully utilized could cause a decline.

8- 6. DuPont analysis relates return on assets to turnover and margin. It allows for further analysis of return on assets by this breakdown.

8- 7. Operating income is sales minus cost of sales and operating expenses. It does not include nonoperating items, such as other income, interest, and taxes.

Operating assets are basically current assets plus plant, property, and equipment.

They do not include investments, intangibles, and other assets.

Removing non-operating items from the DuPont analysis gives a clearer picture

of productive operations and the efficient use of the company’s assets.

8- 8. Equity earnings are the owner’s proportionate share of the nonconsolidated subsidiary earnings. These earnings are usually greater than the cash from

pidends from the nonconsolidated subsidiary.

8- 9. Return on assets is a function of net profit margin and total asset turnover.

Return on assets could decline, given an increase in net profit margin, if the total

asset turnover declined sufficiently.

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8-10. Return on investment measures return to all long-term supplies of funds. It includes net income plus tax-adjusted interest in the numerator and all long-term

funds in the denominator. Return on total equity is just return to shareholders.

Return on common equity is return only to common shareholders. Net income is reduced by preferred pidends in the numerator, and only common equity is in

the denominator.

8-11. Return on investment is a profitability measure comparing income to capital utilized by the firm. Some measures are return on assts, return on equity, or

income available to all capital sources, pided by capital. The given ratio is

preferred, since it measures the profit available to all long-term sources of capital against that capital. The interest is multiplied by the tax adjustment factor to put

interest on an after-tax basis.

8-12. This cannot be determined based only upon the absolute measures. It is necessary to compare these dollar figures to a base, such as investment or sales.

Also, it is necessary to know if nonrecurring items are part of the firm’s income

picture.

8-13. Interim reports are less reliable because they are not audited, but they can be very meaningful in indicating trends before the end of the year.

8-14. An objective considered here is timeliness rather than completeness. Full statements would take too long and involve too much cost to produce.

8-15. Comprehensive income includes net changes in (a) foreign currency translation adjustments, (b) unrealized holding gains and losses on available-for-sale

marketable securities, and (c) changes to stockholders’ equity resulting from

additional minimum pension liability adjustment. These items will tend to

fluctuate more than other income items.

8-16. Pro forma financial information is hypothetical or a projected amount. For pro forma formation to be meaningful the company must use a reliable estimate to

project future sales, expenses, etc. Used improperly pro forma financial

information can be a negative contribution to financial reporting.

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PROBLEMS PROBLEM 8-1

Net Profit Margin = Net Income Before Minority Share of Earnings and Nonrecurring Items

Net Sales

2011 2010

$52,500 $40,000 $1,050,000 $1,000,000

= 5.00% = 4.00%

Return on Assets = Net Income Before Minority Share of Earnings and Nonrecurring Items Average Total Assets

2011 2010

$52,500 $40,000

$230,000 $200,000

= 22.83% = 20.00%

Total Asset Turnover =

Net Sales

Average Total Assets

2011 2010 $1,050,000 $1,000,000 $230,000 $200,000 =4.57 times

per year

=5.00 times

per year

Return on Common Equity = Net Income Before Nonrecurring Items – Preferred Dividends

Average Common Equity

2011 2010 $52,500 $40,000 $170,000 $160,000 = 30.88% = 25.00%

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Ahl Enterprise has had a substantial rise in profit to sales. This is somewhat tempered by a reduction in asset turnover. Given a slight rise in common equity, there is a substantial rise in return on common equity.

PROBLEM 8-2

a.

2011 2010

Sales 100.0% 100.0%

Cost of goods sold 60.7 60.8

Gross profit 39.3 39.2

Selling expense 14.6 20.0

General expense 10.0 8.3

Operating income 14.7 10.9

Income tax 5.9 4.2

Net income 8.8% 6.7%

b. Starr Canning has had a sharp decrease in selling expense coupled with only a

modest rise in general expenses giving an overall rise in the net profit margin. PROBLEM 8-3

Earnings before interest and tax $ 245,000

Interest (750,000 x 6%) 45,000

Earnings before tax $ 200,000

Tax 80,000

Net income $ 120,000

Preferred pidends 15,000

Income available to common $ 105,000

a. Return on Assets = Net Income Before Minority Share of

Earnings Equity Income and

Nonrecurring Items = $120,000 = 4.00%

Average Total Assets $3,000,000

b. Return on Total Equity = Net Income Before Nonrecurring

Items – Dividends on

Redeemable Preferred Stock = $120,000 = 6.67% Average Total Equity $1,800,000

225

c. Return on Common Equity =

Net Income Before Nonrecurring Items –

Preferred Dividends

Average Common Equity

$120,000 – $15,000

= 7.00%

$1,500,000

d. Times Interest Earned = Recurring Earnings, Excluding

Interest Expense, Tax Expense Equity

Earnings, and Noncontrolling Interest = $245,000 = 5.44 times

Interest Expense, Including

Capitalized Interest

$45,000 per year PROBLEM 8-4

Vent Molded Plastics Plastics Industry

Sales 101.0 %100.3 %

Sales returns 1.0 0.3

Cost of goods sold 72.1 67.1

Selling expense 9.4 10.1

General expense 7.0 7.9

Other income 0.4 0.4

Other expense 1.5 1.3

Income tax 4.8 5.5

Net income 5.5 %8.5 %

Sales returns are higher than the industry. Cost of sales is much higher, offset some by lower operating expenses. Other expense (perhaps interest) is somewhat higher. Lower taxes are perhaps caused by lower income. Overall profit is less, primarily due to cost of sales.

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PROBLEM 8-5

a. $1,589,150

= 122.72%

$1,294,966

2011 sales were 122.72% of those in 2010.

b. $138,204

= 100.80%

$137,110

2011 net earnings were 100.80% of those in 2010.

c. 1. Net Profit Margin = Net Income Before Minority Share of Earnings, Equity Income and Nonrecurring Items

Net Sales

2011 2010

$149,260

= 9.39% $149,760 =

11.56%

$1,589,150 $1,294,966

2. Return on Assets = Net Income Before Minority Share of Earnings and Nonrecurring Items Average Total Assets

2011 2010

$149,260

= 10.38% $149,760 =

12.67%

$1,437,636* $1,182,110*

*Used year end because average could not be computed for 2010.

3. Total Asset Turnover =

Net Sales Average Total Assets

2011 2010

$1,589,150

= 1.11 times $1,294,966

= 1.10 times

$1,437,636* $1,182,110*

*Used year end because average could not be computed for 2010.

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4. DuPont Analysis: Return on Assets = Net Profit

Margin

x

Total Asset

Turnover

2011 10.42* = 9.39% x 1.11

2010 10.72* = 11.56% x 1.10

*Rounding causes the difference from the 10.38% and 12.67% computed in (2).

5.

2011 2010 Operating income

Net sales $ 1,589,150 $ 1,294,966 Less: Cost of product sold $ 651,390 $ 466,250 Research and development expenses 135,314 113,100

General and selling 526,680 446,110 Operating income $ 275,766 $ 269,506

Operating Income Margin = Operating Income

Net Sales

2011 2010 $275,766 $269,506 $1,589,150 $1,294,966

= 17.35% = 20.81%

6. Return on Operating Assets =

Operating Income Average Operating Assets 2011 2010

$275,766 $269,506

$1,411,686* $1,159,666*

= 19.53% = 23.24% *Used year end because average could not be computed for 2010.

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7. Operating Asset Turnover =

Net Sales Average Operating Assets 2011 2010

$1,589,150 $1,294,966 $1,411,686* $1,159,666*

= 1.13 times per year = 1.12 times per year

*Used year end because average could not be computed for 2010.

8. DuPont Analysis: Return on

Operating Assets

=

Operating

Income

Margin

x

Operating

Asset

Turnover

2011: 19.61%* = 17.35% x 1.13 2010: 23.31%* = 20.81 x 1.12

*Rounding causes the difference from the 19.53% and 23.24% computed in (6).

9. Return on Investment =

Net Income Before Minority Share of Earnings and Nonrecurring Items + [(Interest Expense) x (1 – Tax Rate)] Average (Long-Term Liabilities) + Equity

2011 2010

Net earnings before minority share $ 149,260 $ 149,760 Interest expense 18,768 11,522 Earnings before tax 263,762 271,500 Provision for income tax 114,502 121,740 Tax rate 43.4 %44.8 % 1 – tax rate 56.6 %55.2 % Interest expense x (1 – tax rate) 10,623 6,360 Net earnings before minority share +

interest expense x 1(1 – tax rate)] 159,883 156,120 Long-term debt and equity 1,019,420 933,232 Return on investment 15.7 %16.7 %

229

10. Return on Common Equity = Net Income Before Nonrecurring Items – Preferred Dividends

Ending Common Equity

2011 2010 $138,204 $137,110 $810,292 $720,530

= 17.06% = 19.03%

d. Profits in relation to sales, assets, and equity have all declined. Turnover has remained stabl

e. Overall, although absolute profits have increased in 2011, compared with 2010, the profitability ratios show a decline.

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PROBLEM 8-6

a. 1. Net Profit Margin = Net Income Before Noncontrolling Interest, Equity Income and Nonrecurring Items

Net Sales

2011 2010 2009 $97,051 $51,419 $45,101 $1,600,000 $1,300,000 $1,200,000

= 6.07% = 3.96% = 3.76%

2. Return on Assets = Net Income Before Noncontrolling Interest and Nonrecurring Items Average Total Assets

2011 2010 2009 $97,051 $51,419 $45,101 $1,440,600 $1,220,000 $1,180,000

= 6.74% = 4.21% = 3.82%

3. Total Asset Turnover =

Net Sales Average Total Assets

2011 2010 2009 $1,600,000 $1,300,000 $1,200,000 $1,440,600 $1,220,000 $1,180,000

= 1.11 times per year = 1.07 times

per year

= 1.02 times

per year

4. DuPont Analysis

Return on Assets = Net Profit Margin x Total Asset Turnover 2011: 6.74% = 6.07% x 1.11 times

2010: 4.24%* = 3.96% x 1.07 times

2009: 3.84%* = 3.76% x 1.02 times

*Rounding difference from the 4.21% and 3.82% computed in (2).

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5. Operating Income Margin = Operating Income

Net Sales

2011 2010 2009

(2) Net sales $ 1,600,000 $ 1,300,000 $ 1,200,000 Less:

Material and manufacturing

costs of products sold 740,000 624,000 576,000 Research and development 90,000 78,000 71,400 General and selling 600,000 500,500 465,000

$ 1,430,000 $ 1,202,500 $ 1,112,400 (1) Operating income $ 170,000 $ 97,500 $ 87,600 (1) Divided by (2) 10.63% 7.50% 7.30%

6. Return on Operating Assets =

Operating Income

Average Operating Assets

2011 2010 2009

Operating Income $170,000 $97,500 $87,000 Average Operating Assets $1,390,200 $1,160,000 $1,090,000

= 12.23% = 8.41% = 7.98%

7. Operating Asset Turnover =

Net Sales

Average Operating Assets

2011 2010 2009

Net Sales $1,600,000 $1,300,000 $1,200,000 Average Operating Assets $1,390,200 $1,160,000 $1,090,000

= 1.15 times = 1.12 times = 1.10 times 8. DuPont Analysis with operating ratios

Return on

Operating Assets

= Net Profit Margin x Total Asset Turnover

2011: 12.22%* = 10.63% x 1.15

2010: 8.40%* = 7.50% x 1.12

2009: 8.03% = 7.30% x 1.10

*Rounding difference from the 12.23%, 8.41%, and 7.98% computed in (6).

232

9. Return on Investment =

Net Income Before Minority Share of Earnings and Nonrecurring Items + [(Interest Expense) x (1 – Tax Rate)] Average (Long-Term Liabilities) + Equity

Estimated tax rate:

2011 2010 2009

(1) Provision for income taxes $ 62,049 $ 35,731 $ 32,659

(2) Earnings before income taxes and

minority equity $ 159,100 $ 87,150 $ 77,760 (1) ÷ (2) 39.00% 41.00% 42.00% 1 – tax rate 61.00% 59.00% 58.00% (3) Interest expense x (1 – tax rate)

$19,000 x 61.00% 11,590

$18,200 x 59.00% 10,738

$17,040 x 58.00% 9,883 (4) Earnings before minority equity 97,051 51,419 45,101 (3) + (4) (A) 108,641 62,157 54,984

(5) Total long-term debt 211,100 121,800 214,000

(6) Total stockholders’ equity811,200 790,100 770,000

(5) + (6) = (B) 1,022,300 911,900 984,000

(A) ÷ (B) 10.63% 6.82% 5.59%

10. Return on Total Equity =

Net Income Before Nonrecurring Items –Dividends on Redeemable Preferred Stock

Average Total Equity

2011 2010 2009

Net income etc. $ 86,851 $ 42,919 $ 37,001 Average total equity $ 811,200 $ 790,100 $ 770,000

=10.71% = 5.43% = 4.81 b. All ratios computed indicate a significant improvement in profitability.

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PROBLEM 8-7

a. 1. Net Profit Margin = Net Income Before Noncontrolling Interest, Equity Income and Nonrecurring Items

Net Sales

2011 2010 2009 $171,115 $163,497 $143,990 $1,002,100 $980,500 $900,000

= 17.08% = 16.67% = 16.00%

2. Return on Assets = Net Income Before Noncontrolling Interest and Nonrecurring Items Average Total Assets

2011 2010 2009 $171,115 $163,497 $143,990 $839,000 $770,000 $765,000

= 20.40% = 21.23% = 18.82%

3. Total Asset Turnover =

Net Sales Average Total Assets

2011 2010 2009 $1,002,100 $980,500 $900,000 $839,000 $770,000 $765,000

= 1.19 times per year = 1.27 times

per year

= 1.18 times

per year

4. DuPont Analysis

Return on Assets =

Net Profit

Margin

x

Total Asset

Turnover

2011: 20.33%* = 17.08% x 1.19 times per year 2010: 21.17%* = 16.67% x 1.27 times per year 2009: 18.88%* = 16.00% x 1.18 times per year *Rounding difference from the 20.40%, 21.23%, and 18.82% computed in (2).

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5. Return on Investment =

Net Income Before Noncontrolling Interest and Nonrecurring Items + [(Interest Expense) x (1 – Tax Rate)] Average (Long-Term Liabilities) + Equity

Estimated tax rate:

2011 2010 2009

(1) Provision for income taxes $ 116,473 $ 113,616 $ 105,560

(2) Earnings before income taxes $ 287,588 $ 277,113 $ 249,550 Tax rate [(1) + (2)] 40.50% 41.00% 42.30% 1 – tax rate 59.50% 59.00% 57.70% (3) Interest expense x (1 – tax rate)

$14,620 x 59.50% 8,699

$12,100 x 59.00% 7,139

$11,250 x 57.70% 6,491 (4) Net earnings 171,115 163,497 143,990 (3) + (4) = (A) 179,814 170,636 150,481

(5) Average long-term debt 120,000 112,000 101,000

(6) Average shareholders’ equity406,000 369,500 342,000

(5) + (6) = (B) 526,000 481,500 443,000

(A) ÷ (B) 34.19% 35.44% 33.97%

6. Return on Total Equity =

Net Income Before Nonrecurring Items –Dividends on Redeemable Preferred Stock

Average Total Equity

2011 2010 2009

Net earnings $171,115 $163,497 $143,990 Average total equity $406,000 $369,500 $342,000

= 42.15% = 44.25% = 42.10%

7. Sales to Fixed Assets =

Net Sales Average Net Fixed Assets

2011 2010 2009 $1,002,100 $980,500 $900,000 $302,500 $281,000 $173,000

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= 3.31 = 3.49 = 5.20

b. The ratios computed indicate a very profitable firm. Most ratios indicate a very slight

reduction in profitability in 2011.

Sales to fixed assets has declined materially, but this is the only ratio for which the trend appears to be negative.

PROBLEM 8-8

a. 1. Net Profit Margin = Net Income Before Noncontrolling Interest, Equity Income and Nonrecurring Items

Net Sales

2011 2010 2009 $20,070 – $8,028 $16,660 – $6,830 $15,380 – $6,229 $297,580 $256,360 $242,150

= 4.05% = 3.83% = 3.78%

2. Return on Assets = Net Income Before Minority Share of Earnings and Nonrecurring Items

Total Assets

2011 2010 2009 $20,070 – $8,028 $16,660 – $6,830 $15,380 – $6,229 $145,760 $137,000 $136,000

= 8.26% = 7.18% = 6.73%

3. Total Asset Turnover =

Net Sales Total Assets

2011 2010 2009 $297,580 $256,360 $242,150 $145,760 $137,000 $136,000

= 2.04 times per year = 1.87 times

per year

= 1.78 times

per year

236

4. DuPont Analysis

Return on Assets =

Operating Income

Margin

x

Total Asset

Turnover

2011: 8.26% = 4.05% x 2.04 times 2010: 7.16%* = 3.83% x 1.87 times 2009: 6.73% = 3.78% x 1.78 times *Rounding difference from the 7.18% computed in (2).

5. Operating Income Margin = Operating Income Net Sales

2011 2010 2009 $26,380 $22,860 $20,180 $297,580 $256,360 $242,150

= 8.86% = 8.92% = 8.33%

6. Return on Operating Assets =

Operating Income

End of Year Operating Assets

2011 2010 2009

$26,380 $22,860 $20,180 $89,800 + $45,850 $84,500 + $40,300 $83,100 + $39,800 = 19.45% = 18.32% = 16.42%

7. Operating Assets Turnover =

Net Sales

End of Year Operating Assets

2011 2010 2009

$297,580 $265,360 $242,150 $89,800 + $45,850 $84,500 + $40,300 $83,100 + $39,800

= 2.19 times per year = 2.13 times

per year

= 1.97 times

per year

237

8. DuPont Analysis

Return on Operating Assets =

Operating Income

Margin

x

Operating Asset

Turnover

2011: 19.40%* = 8.86% x 2.19 times 2010: 18.29%* = 8.92% x 2.05 times 2009: 16.41%* = 8.33% x 1.97 times

*Rounding difference from the 19.45%, 18.32%, and 16.42% computed in (6).

9. Gross Profit Margin = Gross Profit Net Sales

2011 2010 2009

$91,580 $80,060 $76,180

$297,580 $256,360 $242,150

= 30.77% = 31.23% = 31.46%

b. Net profit margin and total asset turnover both improved. This resulted in a

substantial improvement to return on assets.

Operating income margin declined slightly in 2011 after a substantial improvement in 2010. Operating asset turnover improved each year. The result of the improvement in operating income margin and operating asset turnover was a substantial

improvement in return on operating assets.

Gross profit margin declined slightly each year.

Overall profitability improved substantially over the three-year period.

238

PROBLEM 8-9

a. 1. Return on Assets = Net Income Before Noncontrolling Interest and Nonrecurring Items End of Year Total Assets

2011 2010 2009 (A) $ 2,100,000 $ 1,950,000 $ 1,700,000

$ 2,600,000 $ 2,300,000 $ 2,200,000

7,000,000 6,200,000 5,800,000

100,000 100,000 100,000 10,000,000 9,000,000 8,300,000 (B) $ 19,700,000 $ 17,600,000 $ 16,400,000 (A) ÷ (B) 10.66% 11.08% 10.37%

2. Return on Investment =

Net Income Before Noncontrolling Interest and Nonrecurring Items + [(Interest Expense) x (1 – Tax Rate)] End of Year (Long-Term Liabilities + Equity)

Estimated tax rate:

2011 2010 2009

(1) Provision for income taxes $ 1,500,000 $ 1,450,000 $ 1,050,000

(2) Income before tax 3,600,000 3,400,000 2,750,000 Tax rate = (1) ÷ (2) 41.67% 42.65% 38.18% 1 – tax rate 58.33% 57.35% 61.82% (3) Interest expense x (1 – tax rate)

$800,000 x 58.33% $ 466,640

$600,000 x 57.35% $ 344,100

$550,000 x 61.82% $ 340,010 (4) Net income $ 2,100,000 $ 1,950,000 $ 1,700,000 (3) + (4) (A) $ 2,566,640 $ 2,294,100 $ 2,040,010 Long-term debt $ 7,000,000 $ 6,200,000 $ 5,800,000 Preferred stock 100,000 100,000 100,000 Common equity 10,000,000 9,000,000 8,300,000 (B) $ 17,100,000 $ 15,300,000 $ 14,200,000 (A) ÷ (B) 15.01% 14.99% 14.37%

239

3. Return on Total Equity =

Net Income Before Nonrecurring Items –Dividends on Redeemable Preferred Stock

Ending Total Equity

2011 2010 2009 $2,100,000 $1,950,000 $1,700,000 $100,000 + $10,000,000 $100,000 + $9,000,000 $100,000 + $8,300,000

= 20.79% = 21.43% = 20.24%

4. Return on Common Equity = Net Income Before Nonrecurring Items – Preferred Dividends

Ending Common Equity

2011 2010 2009 $2,100,000 – $14,000 $1,950,000 – $14,000 $1,700,000 – $14,000 $10,000,000 $9,000,000 $8,300,000

= 20.86% = 21.51% = 20.31%

b. Return on assets improved in 2010 and then declined in 2011. Return on investment

improved each year. Return on total equity improved and then declined. Return on common equity improved and then declined.

In general, profitability has improved in 2010 over 2009 but was down slightly in 2011.

c. The use of long-term debt and preferred stock both benefited profitability.

Return on common equity is slightly more than return on total equity, indicating a benefit from preferred stock.

Return on total equity is substantially higher than return on investment, indicating a benefit from long-term debt.

240

PROBLEM 8-10

a.

Sales $ 120,000

Gross profit (40%) 48,000

Cost of goods sold (60%) $ 72,000

Beginning inventory $ 10,000

+ Purchases 100,000

Total available $ 110,000

– Ending inventory ?

Cost of goods sold $ 72,000

Ending inventory ($110,000 – $72,000) $ 38,000

b. If gross profit were 50%, the analysis would be as follows:

Sales $ 120,000

Gross profit (50%) 60,000

Cost of goods sold (50%) $ 60,000

Beginning inventory $ 10,000

+ Purchases 100,000

Total available $ 110,000

– Ending inventory 50,000

Cost of goods sold $ 60,000

Ending inventory ($110,000 – $60,000) $50,000

If gross profit were higher, the loss would be higher because ending inventory would be estimated at $50,000 instead of $38,000.

241

PROBLEM 8-11

Net Profit Retained

Earnings

Total

Stockholders’

Equity

a. A stock pidend is

declared and paid.

b. Merchandise is purchased on credit.

c. Marketable securities are sold above cost.

d. Accounts receivable are collected.

e. A cash pidend is

declared and paid.

f. Treasury stock is

purchased and recorded at cost.

g. Treasury stock is sold

above cost.

h. Common stock is sold.

i. A fixed asset is sold for

less than book value.

j. Bonds are converted into common stock.

+

-

-

+

-

-

+

-

-

+

+

-

+

242

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