Case study examining income statements, profitability ratios.

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About Your Signature Assignment - Full case study and assignment attached.

Harrod's Sporting Goods Case Study is designed to align with specific program student learning outcome(s) in your program. Program Student Learning Outcomes are broad statements that describe what students should know and be able to do upon completion of their degree. Signature/Benchmark Assignments are graded with a grading guide or an automated rubric that allows the University to collect data that can be aggregated across a location or college/school and used for course/program improvements.

Review the Week 5 Case Study.

Complete the required activities 1 to 8 in Microsoft® Word or Microsoft® Excel®.

Click the Assignment Files tab to submit your assignment.

Required Activities:

1. Calculate the profitability ratios for all three years using the formulas provided in section “A. Profitability Ratios” within Chapter 3: 1. Profit margin 2. Return on assets (a and b) 3. Return on equity ( a and b)

2. Write a one-paragraph description of any trends that appear to have taken place over the three-year time period.

3. Examine the income statement in Figure 1 above. Note that there was an extraordinary loss of $170,000 in 2015. This might have represented uninsured losses from a fire, a lawsuit settlement, etc. It probably does not represent a recurring event or affect the earnings capability of the firm. For that reason, the astute financial analyst might add back in the extraordinary loss to gauge the true operating earnings of the firm. Since it was a tax-deductible item, we must first multiply by (1-tax rate) before adding it back in.* The tax rate was 35 percent for the year.

$170,000 Extraordinary loss _____.65_ (1-tax rate) $110,500 After-tax addition to profits from eliminating the extraordinary loss from net income

The more representative net income number for 2015 would now be:

Initially reported (Figure 1 above) $200,318 Adjustment for extraordinary loss being eliminated +110,500_ Adjusted net income $310,818

Note: This adjustment was made because the $170,000 deduction saved 35 percent of this amount in taxes. If we eliminate the $170,000, the tax benefit would also be eliminated. Thus, the firm would only benefit by 65 percent of $170,000, based on a 35 percent tax rate. The after-tax benefit of the tax adjustment for the extraordinary loss is $110,500. A. Recompute the same ratios for 2015 using the adjusted net income figure of $310,818.

4. Write a one-paragraph description of trends that appear to have taken place over the three-year time period (Refer to question 1 above for 2013 and 2014 data and question 3 above for the adjusted net income numbers for 2015).

5. Write a one-paragraph analysis of the company’s profitability ratios compared to the industry ratios (Figure 3 above) using the revised ratios for 2015 from question 3 above. Include asset turnover and debt to total assets as supplemental material in your analysis.

6. Calculate the Asset Utilization ratios for 2015 using the formulas provided in section “B. Asset Utilization Ratios” within Chapter 3:

1. Receivable turnover (Note: For the Receivables turnover ratio, only half the sales are on credit terms.) 2. Inventory turnover 3. Fixed Asset turnover

7. Write a brief one-paragraph description of any trends that appear to have taken place. Compare Harrod’s sales to total assets ratio to the industry in your description.

8. Write a one-paragraph conclusion that provides analysis of your answers to questions 4 and 5 above. a. Include your opinion on whether or not Becky Harrod has a legitimate complaint about being charged 2½ percent, instead of 1 percent over prime.


Week 5 Case Study Copyright © 2017 by University of Phoenix. All rights reserved. FIN/486 Version 6 1 Harrod’s Sporting Goods In January of 2016, Becky, who served as the company’s chief financial officer, walked into Jim’s office and said, “I’ve had it with the First National Bank of Omaha. It is willing to renew our loan and line of credit, but the bank wants to charge us 2½ percentage points over prime.” The prime rate is the rate at which banks make loans to their most creditworthy customers. It was 4.75 percent at the time Becky had visited the bank, so that the total rate on the loan would be 7.25 percent. It was not so much the total rate that Becky objected to, as the fact that Harrod’s was being asked to pay 2½ percent over prime. She felt that Harrod’s was a strong enough company that one percent over prime should be all that the bank required. Her banker told her he would review the firm’s financial statements with her next week and reconsider the premium Harrod’s was being asked to pay over prime. While Becky knew the bank “crunched all the numbers,” she decided to do some additional financial analysis on her own. She had a bachelor’s degree in finance with a 3.3 GPA. She began by examining Figures 1, 2, and 3 below. Figure 1 Harrod’s Sporting Goods Income Statement (2013-2015) 2013 2014 2015 Sales ............................................................. $4,269,871 $4,483,360 $5,021,643 Cost of goods sold ............................................................. 2,991,821 2,981,434 3,242,120 Gross Profit ............................................................. $1,278,050 $1,501,926 $1,779,523 Selling and administrative expense ............................................................. 865,450 1,004,846 1,175,100 Operating profit ............................................................. $412,600 $497,080 $604,423 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Week 5 Case Study Copyright © 2017 by University of Phoenix. All rights reserved. FIN/486 Version 6 Interest expense ............................................................. Extraordinary loss ............................................................. 115,300 __ 122,680 126,241 __ 170,000 Net income before taxes ............................................................. 297,300 374,400 308,182 Taxes ............................................................. 104,100 131,300 107,864 Net income ............................................................. $ 193,200 $ 243,100 $ 200,318 Figure 2 Harrod’s Sporting Goods Balance Sheet (2013-2015) 2013 2014 2015 Cash ............................................................... $ 121,328 $ 125,789 Marketable securities ............................................................... 56,142 66,231 144,090 Accounts receivable ............................................................... 341,525 216,240 398,200 Inventory ............................................................... 972,456 1,250,110 1,057,008 Total current assets ............................................................... $1,491,451 $1,658,370 $1,698,968 $ 99,670 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2 Week 5 Case Study Copyright © 2017 by University of Phoenix. All rights reserved. FIN/486 Version 6 Net plant and equipment ............................................................... 1,678,749 1,702,280 1,811,142 Total assets ............................................................... $3,170,200 $3,360,650 $3,510,110 Accounts payable ............................................................... $ 539,788 $ 576,910 $ 601,000 Notes payable ............................................................... 160,540 180,090 203,070 Total current liabilities ............................................................... $700,328 $757,000 $804,070 Long-term liabilities ............................................................... 1,265,272 1,292,995 1,372,240 Total liabilities ............................................................... $1,965,600 $2,049,995 $2,176,310 Common stock ............................................................... 367,400 368,000 368,000 Retained earnings1 ............................................................... 837,200 942,665 965,800 Total Stockholders’ equity ............................................................... 1,204,600 1,310,655 1,333,800 Total liabilities and stockholders’ equity ............................................................... $3,170,200 $3,360,650 $3,510,110 Liabilities and Stockholders’ Equity 1 Withdrawal of funds in the form of dividends or other means makes the increase in retained earnings less than net income. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3 Week 5 Case Study Copyright © 2017 by University of Phoenix. All rights reserved. FIN/486 Version 6 Figure 3 1. 2a. 2b. 3a. 3b. 4. 5. 6. + Harrod’s Sporting Goods Selected Industry Ratios for 2015 Net income/Sales Net income/Total Assets Sales/Total Assets Net income/Stockholder’s Equity Debt/Total Assets Sales/Receivables Sales/Inventory Sales/Fixed Assets 4.51% 5.10% 1.33 x 9.80% 0.48 5.75 x 3.01 x 3.20 x Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4 Week 5 Case Study Copyright © 2017 by University of Phoenix. All rights reserved. FIN/486 Version 6 5 Required Activities: 1. Calculate the profitability ratios for all three years using the formulas provided in section “A. Profitability Ratios” within Chapter 3: 1. Profit margin 2. Return on assets (a and b) 3. Return on equity ( a and b) 2. Write a one-paragraph description of any trends that appear to have taken place over the three-year time period. 3. Examine the income statement in Figure 1 above. Note that there was an extraordinary loss of $170,000 in 2015. This might have represented uninsured losses from a fire, a lawsuit settlement, etc. It probably does not represent a recurring event or affect the earnings capability of the firm. For that reason, the astute financial analyst might add back in the extraordinary loss to gauge the true operating earnings of the firm. Since it was a tax-deductible item, we must first multiply by (1-tax rate) before adding it back in.* The tax rate was 35 percent for the year. $170,000 _____.65_ $110,500 Extraordinary loss (1-tax rate) After-tax addition to profits from eliminating the extraordinary loss from net income The more representative net income number for 2015 would now be: Initially reported (Figure 1 above) Adjustment for extraordinary loss being eliminated Adjusted net income $200,318 +110,500_ $310,818 Note: This adjustment was made because the $170,000 deduction saved 35 percent of this amount in taxes. If we eliminate the $170,000, the tax benefit would also be eliminated. Thus, the firm would only benefit by 65 percent of $170,000, based on a 35 percent tax rate. The after-tax benefit of the tax adjustment for the extraordinary loss is $110,500. A. Recompute the same ratios for 2015 using the adjusted net income figure of $310,818. 4. Write a one-paragraph description of trends that appear to have taken place over the three-year time period (Refer to question 1 above for 2013 and 2014 data and question 3 above for the adjusted net income numbers for 2015). 5. Write a one-paragraph analysis of the company’s profitability ratios compared to the industry ratios (Figure 3 above) using the revised ratios for 2015 from question 3 above. Include asset turnover and debt to total assets as supplemental material in your analysis. 6. Calculate the Asset Utilization ratios for 2015 using the formulas provided in section “B. Asset Utilization Ratios” within Chapter 3: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Copyright © 2017 by University of Phoenix. All rights reserved. Week 5 Case Study FIN/486 Version 6 6 1. Receivable turnover (Note: For the Receivables turnover ratio, only half the sales are on credit terms.) 2. Inventory turnover 3. Fixed Asset turnover 7. Write a brief one-paragraph description of any trends that appear to have taken place. Compare Harrod’s sales to total assets ratio to the industry in your description. 8. Write a one-paragraph conclusion that provides analysis of your answers to questions 4 and 5 above. a. Include your opinion on whether or not Becky Harrod has a legitimate complaint about being charged 2½ percent, instead of 1 percent over prime. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Tutor Answer

Chucks574
School: UT Austin

Thank you so much

Running head: Income statements & profitability ratio

Income statements & profitability ratio:
Name:
Institution affiliation:
Date:

1

Income statements & profitability ratio

2

Q1
1) Profit margin
Profit margin= Net Income/ revenues
Item

2013

2014

2015

$193,200

$243,100

$200,318

$4,269,871

$4,483,360

$5,021,643

4.52

5.42

3.99

2013

2014

2015

Net income

$193,200

$243,100

$200,318

Total assets

$3,170,200

$3,360,650

$3,510,110

6.09

7.23

5.71

2013

2014

2015

$193,200

$243,100

$200,318

1,204,600

1,310,655

$1,333,800

16.04

18.55

15.02

Net income
Sales
% Profit
margin
2) Return on assets (a and b)

Return on assets =Net Income/ Total assets
Item

% ROA
3) Return on equity

Return on equity = Net income /Stakeholders Equity
Item
Net income
Stakeholders
Equity
% ROE

Income statements & profitability ratio

3

Q2
Over the three year time period, Harrod’s sporting goods has managed to generate
positive returns. This is in relation to the fact that the company’s profit margin, return on
investment as well as return on equity have been positive over the three year period. The
company’s sales incre...

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Anonymous
Outstanding Job!!!!

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