For Year 2019, Precision Masters had sales of $42,900, cost of goods sold of $26,800, depreciation...

For Year 2019, Precision Masters had sales of $42,900, cost of goods sold of $26,800, depreciation expense of $1,900, interest expense of $1,300, and the tax rate was 35%.

1. Prepare the income statement of the company of 2019.

2. Calculate NOPAT of the company.

3. Why is NOPAT a better measure of the company's operation result?

Solutions

Expert Solution

1. Income statement is prepared to ascertain the net income earned by the company. In an income statement, the net income is ascertained after adding all revenues and after reducing all expenses associated with it. Income tax, if any is reduced from it to get the net income.

2. Net Operating Profit After Tax (NOPAT) = Operating income × (1 - Rate of tax)
= $14,200 × (1-.35) = $9,230

3. NOPAT gives a clear picture about the operating efficiency of the business. NOPAT does not consider the effect of debt and the payment obligations relating it, example, payment of interest expense. Therefore, NOPAT is better measure of company's operation result, because it gives an accurate view about the operating efficiency as it considers only the operating income and expense as well as the taxes associated with it.

ekkarill92 answered 1 year ago

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