Question

Joe’s trading company has the following projected financial results for 2013:

• $4,200,000 sales $3,000,000 cost of goods sold

• $600,000 capital (fixed asset) expenditures

• $300,000 owner’s equity

• $200,000 depreciation (same for tax and book purposes)

• $50,000 increase in inventory

• $40,000 decrease in accounts receivable

• $60,000 increase in accounts payable

• $500,000 overhead expenses (excluding Depreciation)

• $ 80,000 interest expense

• 35% effective tax rate.

Please calculate the following a) Joe’s cash flow: _________ b) Joe’s net income for 2013: _________ c) Gross Margin % _________ d) Profit Margin % _________

Answer 1

(a)

Compute the net income for 2013, using the equation as shown below:

Net income = (Sales – Cost of goods sold – Depreciation – Overheads expenses – Interest expenses)*(1 – Tax rate)

                    = ($4,200,000 - $3,000,000 - $200,000 - $500,000 - $80,000)*(1 – 0.35)

                    = $273,000

Hence, the net income is $273,000.

Compute the cash flow for 2013, using the equation as shown below:

Cash flow = Net income + Depreciation - Increase in inventory + Decrease in receivables + Increase in payables

                  = $273,000 + $200,000 - $50,000 + $40,000 + $60,000

                  = $523,000

Hence, the cash flow for 2013 is $523,000.

(b)

Compute the net income for 2013, using the equation as shown below:

Net income = (Sales – Cost of goods sold – Depreciation – Overheads expenses – Interest expenses)*(1 – Tax rate)

                    = ($4,200,000 - $3,000,000 - $200,000 - $500,000 - $80,000)*(1 – 0.35)

                    = $273,000

Hence, the net income is $273,000.

(c)

Compute the gross profit margin, using the equation as shown below:

Gross profit margin = (Sales – Cost of goods sold)/ Net sales

                                = ($4,200,000 - $3,000,000)/ $4,200,000

                                = 28.57%

Hence, the gross profit margin is 28.57%.     

(d)

Compute the profit margin, using the equation as shown below:

Profit margin = Net profit/ Net sales

                      = $273,000/ $4,200,000

                      = 6.50%

Hence, the profit margin is 6.50%.