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Income Statement Accounts 2014 2013 Net Sales $ 1,720,000 $ 1,450,000 Cost of Goods Sold 1,204,000...

Income Statement Accounts 2014 2013
Net Sales $ 1,720,000 $ 1,450,000
Cost of Goods Sold 1,204,000 1,015,000
Selling and Admin. Expense 220,000 185,385
Non operating revenue 9,192 8,860
Interest Expense 14,620 12,100
Earnings Before Income Tax 290,572 246,375
Provision for Income Taxes 116,473 113,616
Net Income $ 174,099 $ 132,759
Balance Sheet Accounts
Current Liabilities $ 190,400 $ 189,000
Long-term debts 120,000 112,000
Preferred Stocks (10%) 100,000 100,000
Common Stocks 850,000 850,000
Retained Earnings 348,198 265,518
Other Information
Total Assets Include the following:
Goodwill 12,000 12,000
Construction in Progress 340,000 250,000
Instructions:
a. Compute the following for 2013 and 2014:
Net Profit Margin
Total Assets Turn over
Operating Profit Margin
Operating Assets Turnover
Return on Investment
Return on Common Equity

b. Based on the previous computation, summarize the trend in profitability for this firm

Solutions

Expert Solution

a) Net Profit Margin:

2013:

Net Profit Margin= Net Income/Sales=132,759/1,450,000=9.16%

2014:

Net Profit Margin= Net Income/Sales= 174,099 / 1,720,000 =10.12%

Total Asset Turnover:

2013:

Total Asset Turnover Ratio= Sales /Assets=1,450,000/(12000+250000)=5.534

2014:

Total Asset Turnover Ratio= Sales /Assets=1,720,000/(12000+ 340,000 )=4.886

Operating Profit Margin:

2013:

Operating profit margin= ​(EBIT=Gross Income−(Operating expense + Depreciation) )/Sales

Operating profit margin=(1,450,000 - 1,015,000 - 185,385 + 8,860 )/1,450,000=258475/1450000=17.83%(This include non operating income also)

Without Operating Income: Operating profit margin=(1,450,000 - 1,015,000 - 185,385)/1,450,000=17.21%(This gives more exact picture of direct operating flows margins from core business)

2014

Operating profit margin=( 1,720,000 - 1,204,000 - 220,000 )/1,720,000=296000/1720000=17.21%(This does not include non operating income )

Operating Asset Turnover:

2013

Operating Asset Turnover=Sales/Operating Assets=1,450,000/250000=5.80(Only assets which contribute to revenue generration of business)

2014:

Operating Asset Turnover=Sales/Operating Assets= 1,720,000/340,000=5.058

Return on Investment:

2013:

ROI=Net Income/Total Investment(Shareholder's Equity + LT Debt)=132,759/( 100,000 + 850,000 + 265,518 + 250,000 )=9.06%

2014:

ROI=Net Income/Total Investment(Shareholder's Equity + LT Debt)=174099/( 100,000 + 850,000 + 348,198 +340000)=10.63%

Return on common Equity:

2013:

Retrun on common equity=Net income/Common equity=132,759/850,000=15.62%

2014:

Retrun on common equity=Net income/Common equity=174099/850,000=20.48%

b) As per above calculation, the ROI and Net profit margin along with sales are in increasing trend.

While the efficiency of operatiions have remained flat, as we can see thee is constand operating magin trend in 2 years and asset turnover ration has decreased, this is due to that fact they have substantial asset in work in progree so once thse asset are capitalized we will see improved margind as wwll as turnover ratio.

Overall the comapny is performing gooood, but more can be analysed ig we will know the buisness and industry in which it is operating in.

Hope this answers finds you well, please let me know if you have any doubts.

ANd if you like the answer please give a thumbs up to it , so that it encourages me to provide quality answers to students like you.

jeff jeffy answered 1 year ago
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