Case 5 17 pg 272
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Case 5-17 (pg. 272). a. Profit margin on sales = Net income ÷ Sales = 5% Sales = $15 ÷ 5% = $300. b. Return on assets = Net income ÷ Total assets = 7.5% Total assets = $15 ÷ 7.5% = $200.

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c. Gross profit margin = Gross profit ÷ Sales = 40% Gross profit = $300 x 40% = $120 Cost of goods sold = Sales – Gross profit = $300 – 120 = $180


d. Inventory turnover ratio = Cost of goods sold ÷ Inventory = 6 Inventory = $180 ÷ 6 = $30


e. Receivables turnover ratio = Sales ÷ Accounts receivable = 25 Accounts receivable = $300 ÷ 25 = $12


f. Acid-test ratio = Cash + AR + ST Investments ÷ Current liabilities = .9 Current liabilities = ($15 + 12 + 0) ÷.9 = $30




i. Prepaid expenses and other current assets = 2 Current assets – (Cash + AR + Inventory) = $60 – ($15 + 12 + 30) = $3



k. Return on shareholders’ equity = Net income ÷ Shareholders’ equity =10%Shareholders’ equity = $15 ÷ 10% = $150


l. Debt to equity ratio = Total liabilities ÷ Shareholders’ equity = 1/3 Total liabilities = $150 x 1/3 = $50

Bonds payable = Total liabilities - Current liabilities = $50 - 30 = $20


m. Interest expense = 8% x (Short-term notes + Bonds ) Shareholders’ equity = 1/3 Interest expense = 8% x ($5 + 20) = $2


n. Times interest earned ratio = (Net income + Interest +Taxes) ÷ Interest = 12 Times interest earned ratio = ($15 + 2 + Taxes) ÷ 2 = 12 Times interest earned ratio = ($15 + 2 + Taxes) = 24 Tax expense = $24 – ($15 + 2) = $7



SEARS (B) CASE Interest expense – Tax expense) – Net income = My first approach was to analyze SEARS’ most recent two annual income statements horizontally and vertically. The raw data came from EDGARSCAN, and then I did the analyses in an Excel spreadsheet, which I have pasted in here for convenience of presentation.The horizontal (trend) analysis (see below) is simply the percentage change in income statement items from 2000 to 2001.


Next, let’s look at the SEARS vertical analysis (see below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.


Ratios and benchmarking against industry
RATIOS AND BENCHMARKING below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.AGAINST INDUSTRY


Ratios and benchmarking against industry1
RATIOS AND BENCHMARKING below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.AGAINST INDUSTRY


Ratios and benchmarking against industry2
RATIOS AND BENCHMARKING below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.AGAINST INDUSTRY


Ratios and benchmarking against industry3
RATIOS AND BENCHMARKING below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.AGAINST INDUSTRY


Ratios and benchmarking against competitors
RATIOS AND BENCHMARKING below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.AGAINST COMPETITORS


Ratios and benchmarking against competitors1
RATIOS AND BENCHMARKING below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.AGAINST COMPETITORS


Ratios and benchmarking against competitors2
RATIOS AND BENCHMARKING below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.AGAINST COMPETITORS


Ratios and benchmarking against competitors3
RATIOS AND BENCHMARKING below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.AGAINST COMPETITORS


Ratios and benchmarking against competitors4
RATIOS AND BENCHMARKING below) in which income statement elements are common-sized as a % of sales revenue. This allows comparisons without the influence of variations of sales volume. Notice that there are two types of revenues; therefore, there are different ways to do this analysis.AGAINST COMPETITORS


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