Question

Option #2: Financial Statement Analysis Problems

Complete the following problems:

1. For this problem, use the following randomly generated list of accounts, placing them in appropriate order to prepare an income statement.

Accounts	($000,000)
Depreciation	25
General and administrative expenses	22
Sales	345
Sales expenses	18
Cost of goods sold	255
Lease expense	4
Interest expense	3

1. The following randomly constructed table requires that as part of your Critical Thinking Assignment you arrange the accounts into a well-labeled income statement. Make sure you label and solve for gross profit, operating profit, and net profit before taxes.
2. Using a 35% tax rate, calculate taxes paid and net profit after taxes.
3. Assuming a dividend of $1.10 per share with 4.25 million shares outstanding, calculate EPS and additions to retained earnings.

2. Explain why the income statement can also be called a “profit-and-loss statement.” What exactly does the word balance mean in the title of the balance sheet? Why do we balance the two halves?

3. CS Industries, Inc. began 2016 with retained earnings of $25.32 million. During the year, it paid four quarterly dividends of $0.35 per share to 2.75 million common stockholders. Preferred stockholders, holding 500,000 shares, were paid two semiannual dividends of $0.75 per share. The firm had a net profit after taxes of $5.15 million. Prepare the statement of retained earnings for the year ended December 31, 2016.

4. Sky Metals, Inc. is a metal fabrication firm that manufactures prefabricated metal parts for customers in a variety of industries. The firm’s motto is “If you need it, we can make it.” The CEO of Sky Metals recently held a board meeting during which he extolled the virtues of the corporation. The company, he stated confidently, had the capability to build any product and could do so using a lean manufacturing model. The firm would soon be profitable, claimed the CEO, because the company used state-of-the-art technology to build a variety of products while keeping inventory levels low. As a business press reporter, you have calculated some ratios to analyze the financial health of the firm. Sky Metals' current ratios and quick ratios for the past 6 years are shown in the following table:

	2010	2011	2012	2013	2014        2015	2015
Current ratio	1.2	1.4	1.3	1.6	1.8           2.2	2.2
Quick ratio	1.1	1.3	1.2	0.8	0.6          0.4	0.4

What do you think of the CEO’s claim that the firm is lean and soon to be profitable?

5. If we know that a firm has a net profit margin of 4.5%, total asset turnover of 0.72, and a financial leverage multiplier of 1.43, what is its ROE? What is the advantage to using the DuPont system to calculate ROE over the direct calculation of earnings available for common stockholders divided by common stock equity?

Answer 1

Since, multiple questions have been posted, I have answered all the parts of Question 1.

_____

Part 1-a)

The income statement is prepared as below:

Income Statement
Sales		345
Less Cost of Goods Sold		255
Gross Profit		90
Less Operating Expenses:
Depreciation	25
General and Administrative Expenses	22
Sales Expenses	18
Lease Expense	4
Total Operating Expenses		69
Operating Profit		21
Less Non-Operating Expenses:
Interest Expense		3
Net Profit before Taxes		$18

______

Part 1-b)

The value of taxes paid and net profit is determined as below:

Net Profit before Taxes	18
Less Taxes Paid (18*35%)	6.3
Net Profit after Taxes	$11.7

______

Part 1-c)

The value of EPS and addition to retained earnings is calculated as follows:

EPS = Net Profit after Taxes/Number of Common Stock Outstanding = 11.7/4.25 = $2.75 per share

Addition to Retained Earnings = Net Income - Dividends Paid = 11.7 - 4.25*1.10 = $7.025 million or $7,025,000