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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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slide5

b. Return on assets = Net income ÷ Total assets = 7.5% Total assets = $15 ÷ 7.5% = $200

slide7

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

slide9

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

slide11

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

slide13

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

slide19

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

slide21

Property, plant, and equipment =

  • Total assets – Current assets = $200 – 60 = $140
slide23

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

slide25

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

slide27

m. Interest expense = 8% x (Short-term notes + Bonds ) Interest expense = 8% x ($5 + 20) = $2

slide29

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

slide31

Operating expenses = (Sales – Cost of goods sold – Interest expense – Tax expense) – Net income =

  • ($300 - 180 - 2 - 7) - 15 = $96
slide33

SEARS (B) CASEMy 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.

slide35

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.

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