Here are simplified financial statements of Phone Corporation from a recent year
ID: 2739788 • Letter: H
Question
Here are simplified financial statements of Phone Corporation from a recent year:
INCOME STATEMENT (Figures in millions of dollars)
Net sales 13,700
Cost of goods sold 4,360
Other expenses 4,047
Depreciation 2,698
Earnings before interest and taxes (EBIT) 2,595
Interest expense 715
Income before tax 1,880
Taxes (at 35%) 658
Net income 1,222
Dividends 916
BALANCE SHEET (Figures in millions of dollars)
End of Year Start of Year Assets
Cash and marketable securities 95 - 164
Receivables 2,682 - 2,610
Inventories 217 - 268
Other current assets 897 - 962
Total current assets 3,891 - 4,004
Net property, plant, and equipment 20,033 - 19,975
Other long-term assets 4,276 - 3,830
Total assets 28,200 - 27,809
Liabilities and shareholders’ equity Payables 2,624 - 3,100
Short-term debt 1,449 - 1,603
Other current liabilities 841 - 817
Total current liabilities 4,914 - 5,520
Long-term debt and leases 5,524 - 5,759
Other long-term liabilities 6,238 - 6,209
Shareholders’ equity 11,524 - 10,321
Total liabilities and shareholders’ equity 28,200 - 27,809
Calculate the following financial ratios: (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 2 decimal places.)
g. Operating profit margin %____?
h. Inventory turnover ____?
i. Days in inventory days____?
j. Average collection period days ____?
l. Return on assets % _____?
m. Return on capital %** _____?
* - use average equity
** - use average capital
Explanation / Answer
Calculation of the ratios is as follows:
1. Operating profit margin = Operating Income / Net sales
= 2595 / 13700
= 18.94 %
2. Inventory turnover = Cost of goods sold / Average inventory
= 4360 / 242.5
= 17.98
Note: Average Inventory = (217 + 268) / 2 = 242.5
3. Inventory Days = 365 * (Average inventory/ Cost of goods sold)
= 365 * (242.5 / 4360)
= 20 (approx)
4. Average collection period = 365 * (Avg Accounts Receivable / Sales Revenue )
= 365 * ( 2646 / 13700 )
= 70 (approx)
5. Return on asset = Net Income / Avg total assets
=1222 / 28004.5
= 4.36 %
Note : Avg Total assets = (28200 + 27809) / 2 = 28004.5
6. Return on capital = (Net Income - Dividend) / Avg capital
= (1222 - 916) / 10922.5
= 2.80%
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