Question

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

As per rules I am answering the first 4 subparts of the question

1:

Income Statement
Sales	345,000,000
Less: Cost of goods sold	255000000
Gross Profit		90,000,000
Less: Operating Expenses
Depreciation	25000000
General and administrative expenses	22000000
Sales expenses	18000000
Lease expense	4000000
Operating Income		21,000,000
Interest expense		3000000
Profit before Tax		18,000,000
Less: Tax		6300000
Net Income		11,700,000
Dividend		4675000
Transfer to retained earnings		7025,000

2: Taxes = 35%*18000000 = $ 6300,000

Net profit after taxes = 11,700,000

3: EPS = Net Income/ Shares outstanding

= 11700,000/ 4250,000

=$2.75

Addition to retained earnings = Net income - dividend

= $ 7025,000

4: Income Statement depicts the revenues and expenses of the business from all sources. Hence it is called the profit and loss statement.