FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 4: Profitability Analysis

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 1

Essay

Review LaterAdd Note

Review Later

Use the following information about Sanibel Corporation to calculate the following ratios for 2011 (assume an effective tax rate of 35%): a.Return on Assets b.Profit margin for ROA c.Assets Turnover d.Return on Common Shareholders' Equity e.Profit Margin for ROCE f.Accounts Receivable Turnover g.Inventory Turnover h.Fixed Asset Turnover Sanibel Corporation Balance Sheet $\begin{array}{l}\begin{array}{lll}\text {As of December 31 ,}\\\text {Assets:}\\\text {Cash and cash equivalents}\\\text {Accounts Receivable}\\\text {Inventory}\\\text {Current Assets}\\\end{array}\begin{array}{lll}2011&2010\\\\\$ 712,300 & \$ 425,000 \\408,000 & 106,250 \\510.000 & 612.000\\1,630,300 & 1,143,250\\\end{array}\end{array}$ $\begin{array}{l}\begin{array}{lll}\text {Equipment}\\\text {Less: Accumulated depreciation}\\\text {Land}\\\\\text {Total assets}\\\end{array}\begin{array}{lll}714,000 & 654,500 \\(238,000) & (119,000) \\425,000 & 170,000 \\\\\$ 2,531,300&\$ 1,848,750\\\end{array}\end{array}$ $\begin{array}{lrrr}\text { Liabilities }\\\text { Accounts Payable } & \$ 297,500 & \$ 382,500 \\\text { Accrued Salaries Payable } & 93,500 & 136,000 \\\text { Rent Expense Payable } & 37,400 & 17,000 \\\text { Income Tax Payable } & 117.300 & 68.000\\\text {Current Liabilities}&545,700&603,500\\\end{array}$ $\begin{array}{lr}\text {Long-term note payable}&850,000& 510,000\\ \text {Total Liabilities}& 1,395,700&1,113,500\\\\\text { Stockholders' Equity: }\\\text { Common stock }&714,000 & 510,000 \\\text { Retained earnings }&421.600 & 225,250\\\\\text {Total liabilities and stockholders' equity}&\$ 2,531,300&\$ 1,848,750\\\\\text {Sanibel Corporation}\\\text {Income Statement}\\\text {For the year ended December 31,2011}\\\\\text {Revenues}& \$ 2,499,000 \\ \text {Cost of goods sold}&(1,428,000) \\ \text { Gross Profit }&& 1,071,000 \\\\\text { Operating Expenses }\\\text { Depreciation expense } & (112,000) \\\text { Salary expense } & (233,600) \\\text { Insurance Expense } & (40,000) \\\text { Rent Expense } & (160,000) \\\quad \text { Interest Expense } & (67.200)\\\text {Total Operating Expenses}&&(612,800)\\\\\text {Income from Operations }&&458,200\\\text {Income Tax Expense}&&(160,370)\\\\\text {Net income}&&\$ \quad 297.830 \\\end{array}$

Correct Answer

verified

a.Return on Assets--297,830 + 67,200 ( 1...

View Answer

Show Answer

Question 2

Multiple Choice

Review LaterAdd Note

Review Later

Hall and Porter argue that firms have two generic alternative strategies for any particular product.These strategies are:

A) low risk focus, low risk focus
B) retail customer focus, wholesale customer focus
C) product differentiation, low-cost leadership
D) low operating leverage, high operating leverage

E) A) and D)
F) B) and C)

Correct Answer

verified

Show Answer

Question 3

Multiple Choice

Review LaterAdd Note

Orca Industries Below are the two most recent balance sheets and most recent income statement for Orca Industries.The company has an effective tax rate of 35%. Balance Sheet $\begin{array}{l}\begin{array}{lll}\\\text {Assets:}\\\text {Cash}\\\text {Accounts Receivable (net) }\\\text {Inventory}\\\text {Long-lived assets}\\\text {Less: Accumulated depreciation}\\\text {Total assets}\\\end{array}\begin{array}{lll}2011&2010\\\\\$ 10,000 & \$ 6,000 \\6,000 & 1,500 \\8,000 & 10,000 \\12,000 & 11,000 \\\underline{(4,000) } & \underline{(2,000) } \\\underline{\$ 32,000 }& \underline{\$ 26,500}\end{array}\end{array}$ $\text { Liabilities and Stockholders' Equity: }$ $\begin{array}{lrr}\text { Accounts payable } & \$ 5,000 & \$ 6,000 \\\text { Deferred revenues } & 1,000 & 2,000 \\\text { Long-term note payable } & 10,000 & 10,000 \\\text { Less: Discount on note payable } & (800) & (1,000) \\\text { Common stock } & 12,000 & 6,000 \\\text { Retained earnings } &\underline{ 4,800 }&\underline{3,500}\\\text { Total liabilities and stockholders' equity } &\underline{ \$ 32.000 }&\underline{ \$ 26,500}\\\end{array}$ Income Statement For the year ended December 31, 2011 $\begin{array}{l}\begin{array} { l } \text { Revenues }& \$42,000 \\\text { Cast af goods sold }&( 24,000 ) \\\text { Depreciation expense } &( 2,000 ) \\\text { Interest expense } &( 3,000 ) \\\text { Bad debt exanense }&( 2,000 ) \\\text { Other expense (including income taxes) }&\underline{(9,000) } \\\text { Net incame }&\underline{\$2,000}\end{array}\\\begin{array} { l } \end{array}\end{array}$ -Refer to the information for Orca Industries.Orca's basic earnings per share is:

Which of the following might an analyst not want to eliminate from past earnings when using past earnings to forecast future earnings?

The rationale for adding back the _______________________________________________________ relates to attaining consistency in the numerator and denominator of ROA.

To calculate diluted EPS,the accountant does all of the following except:

Grundig Technologies is a manufacturer.Below are the company's two most recent balance sheets and its most recent income statement.Use this information to answer the following questions: a.Calculate the rate of return on assets (ROA)for 2011.Disaggregate ROA into the profit margin for ROA and total assets turnover components. b.Calculate the rate of return on common stockholders' equity (ROCE)for 2011.Disaggregate ROCE into the profit margin for ROCE,total assets turnover and capital structure leverage components. c.Did financial leverage work to the advantage of the common shareholders during 2011? Explain. $\begin{array}{lrr}\text { Gitudig \& echinologies }\\\text {Balance Sheet}\\\text {As of December 31}\\\text { ASSETS } & \mathbf{2 0 1 1} & \mathbf{2 0 1 0} \\\text { Cash } & \$ 69,000 & \$ 22,000 \\\text { Accounts Receivable } & 82,000 & 66,000 \\\text { Supplies } & 15,000 & 19,000 \\\text { Inventories } & 180,000 & 189,000 \\\text { Land } & 75,000 & 110,000 \\\text { Equipment } & 260,000 & 200,000 \\\text { Accumulated Deprec.-EQ. } & (69,000) & (42,000)\\\text { TOTAL ASSETS }& \$ 612,000 & \$ 564,000 \\\\\text { Accounts Payable } & \$ 34,000 & \$ 47,000 \\\text { Unearned Rent } & 15,000 & 19,000 \\\text { Bonds Payable } & 150,000 & 200,000\\\text { Stockholders' Equity }\\\text {Common Stock( \$1 Par Value)}&214,000 & 164,000 \\\text {Retained Earnings}&199,000 & 134,000 \\\text { TOTAL LIABILITIES AND EQUITY }&\$ 612.000 & \$ 564,000 \\\\\text {Grundig Technologies}\\\text {Income Statement}\\\text {For the year ended December 31,2011}\\\\\text { Sales }& \$ 560,000 \\\text { Cost of Goods Sold } & \$ 320,000)\\\text { Gioss Profit }&\$ 240,000\\\\\text { General and Administrative Expense } & (\$ 38,000) \\\text { Selling Expense } & (\$ 27,000) \\\text { Interest Expense } & (\$ 17,000)\\\\\text { Income before Income taxes }&\$ 158,000\\\text { Income Tax Expense (35\%)}&\$ 158,000\\\text { Net Income}&(\$ 55,300)\\\end{array}$

Economic theory suggests that higher levels of ____________________ in any activity should lead to higher levels of ___________________________________.

Examine the four following conditions involving inventory turnover.Discuss what economic factors might be leading to the condition and whether it suggests positive or negative future economic conditions. $\begin{array}{l|l}\hline \begin{array}{l}\text { Condition A: Increasing cost of goods sold } \\\text { to sales percentage, coupled with an } \\\text { increasing inventory turnover. }\end{array} & \begin{array}{l}\text { Condition B: Decreasing cost of goods sold } \\\text { to sales percentage, coupled with a } \\\text { decreasinginventory turnover. }\end{array} \\\hline \begin{array}{l}\text { Condition C: Increasing cost of goods sold } \\\text { to sales percentage, coupled with a } \\\text { decreasing inventory turnover. }\end{array} & \begin{array}{l}\text { Condition D: Decreasing cost of goods sold } \\\text { to sales percentage, coupled with an } \\\text { increasing inventory turnover. }\end{array} \\\hline\end{array}$

The ____________________ effect of interest expense on net income equals one minus the marginal tax rate times the interest expense.

The ability of a firm to generate income from operations given a particular level of sales is measured by the ______________________________.

Adjustments for dilutive securities and the adjustment to weighted average number of Shares outstanding presumes that the dilutive securities are converted to common shares:

Rattigan Industries reported net income (amounts in thousands)for Year 4 of $60,615 on sales of $1,560,235.It declared preferred dividends of $22,100.Preferred shareholders' equity totaled $265,750 at both the beginning and end of Year 4.Common shareholders' equity totaled $298,150 at the beginning of Year 4 and $365,000 at the end of Year 4.Rattigan had no minority interest in its equity.Total assets were $1,440,000 at the beginning of Year 4 and $1,550,000 at the end of Year 4.

Which of the following is not a way a company can achieve a low-cost position?

Orca Industries Below are the two most recent balance sheets and most recent income statement for Orca Industries.The company has an effective tax rate of 35%. Balance Sheet $\begin{array}{l}\begin{array}{lll}\\\text {Assets:}\\\text {Cash}\\\text {Accounts Receivable (net) }\\\text {Inventory}\\\text {Long-lived assets}\\\text {Less: Accumulated depreciation}\\\text {Total assets}\\\end{array}\begin{array}{lll}2011&2010\\\\\$ 10,000 & \$ 6,000 \\6,000 & 1,500 \\8,000 & 10,000 \\12,000 & 11,000 \\\underline{(4,000) } & \underline{(2,000) } \\\underline{\$ 32,000 }& \underline{\$ 26,500}\end{array}\end{array}$ $\text { Liabilities and Stockholders' Equity: }$ $\begin{array}{lrr}\text { Accounts payable } & \$ 5,000 & \$ 6,000 \\\text { Deferred revenues } & 1,000 & 2,000 \\\text { Long-term note payable } & 10,000 & 10,000 \\\text { Less: Discount on note payable } & (800) & (1,000) \\\text { Common stock } & 12,000 & 6,000 \\\text { Retained earnings } &\underline{ 4,800 }&\underline{3,500}\\\text { Total liabilities and stockholders' equity } &\underline{ \$ 32.000 }&\underline{ \$ 26,500}\\\end{array}$ Income Statement For the year ended December 31, 2011 $\begin{array}{l}\begin{array} { l } \text { Revenues }& \$42,000 \\\text { Cast af goods sold }&( 24,000 ) \\\text { Depreciation expense } &( 2,000 ) \\\text { Interest expense } &( 3,000 ) \\\text { Bad debt exanense }&( 2,000 ) \\\text { Other expense (including income taxes) }&\underline{(9,000) } \\\text { Net incame }&\underline{\$2,000}\end{array}\\\begin{array} { l } \end{array}\end{array}$ -Refer to the information for Orca Industries.The profit margin for computing ROA for Orca Industries is:

One problem with using EPS as a measure of profitability is that it does not consider the amount of ____________________ or ____________________ required to generate a particular level of earnings.

Below are three relationships that are important to the determination of profitability.Assume assets were $22,900,000 on Dec.31,2008. 1. Operating leverage $= \underline { \text { Earnings before interest but after taxes } }$ Average assets. 2. Financial structure leverage $= \frac { \text { Net income available to common shareholders } } { \text { Earnings before interest but after taxes } }$ 3. $\mathrm { ROCE } = \mathrm { ROA } \times$ Common earnings leverage $\times$ Financial structure leverage REQUIRED: Compute the operating leverage, financial structure leverage, and ROCE (rounded to two places). Then use these relationships to analyze how the profitability of X-Mart changed over the three year period below. What does the company need to do to reverse this trend? What are the risks of your strategy? $\begin{array}{|l|c|c|c|}\hline \text { As of Dec. } 31 & \mathbf{2 0 0 9} & \mathbf{2 0 1 0} & \mathbf{2 0 1 1} \\\hline \text { ROA } & 0.10 & 0.10 & 0.08 \\\hline \text { Assets } & \$ 27,500,000 & \$ 23,000,000 & \$ 27,600,000 \\\hline \begin{array}{l}\text { Net income available to common } \\\text { shareholders }\end{array} & \$ 67,250,000 & \$ 68,960,210 & \$ 70,910,840 \\\hline \begin{array}{l}\text { Earnings after taxes but before } \\\text { interest }\end{array} & \$ 25,000,000 & \$ 24,541,000 & \$ 24,794,000 \\\hline\end{array}$

When the financial analysts multiplies the profit margin for ROA with the assets turnover ratio the result is called ______________

Return on assets will likely differ across firms and across time.Three elements of risk that will help explain these differences are operating leverage,___________________________________,and stage and length of product life cycle.

Common-size analysis requires the analyst to be aware that percentages can change because of all of the following except: