Profitability Analysis and Interpretation Test Bank 5e - Financial Statement Analysis 5e Complete Test Bank by Easton. DOCX document preview.
Module 3
Profitability Analysis
and Interpretation
Learning Objectives – Coverage by question | |||||
True/False | Multiple Choice | Exercises | Problems | Essays | |
LO1 – Compute and interpret return on equity (ROE). | 1 | 1-3 | 1, 2 | 1-5 | |
LO2 – Apply DuPont disaggregation of ROE into return on assets (ROA) and financial leverage. | 2, 10 | 25 | 13, 14 | 11 | |
LO3 – Disaggregate ROA into profitability and productivity and analyze both. | 15 | 10, 11, 25 | 13, 14 | 11 | |
LO4 – Identify balance sheet operating items and compute net operating assets. | 2, 4 | 4, 5, 15 | 5, 7-9 | 1-5 | |
LO5 – Identify income statement operating items and compute net operating profit after tax. | 5, 6 | 6-8 | 3, 4, 6 | 1-5 | |
LO6 – Compute and interpret return on net operating assets (RNOA). | 14 | 9 | 1, 2, 7, 8 | 1-5 | 7 |
LO7 – Disaggregate RNOA into net operating profit margin and net operating asset turnover. | 7-9 | 10-14 | 7,8 | 6 | 3 |
LO8 – Compute and interpret nonoperating return (Appendix 3A). | 7, 11 | 1, 10, 11, 16, 17 | 1, 2, 9 | 7, 8 | 4 |
LO9 – Compute and interpret measures of liquidity and solvency (Appendix 3B). | 1, 12, 13 | 18-24 | 10-12 | 9, 10 | 1, 2, 5, 6 |
Module 3: Profitability Analysis and Interpretation
True/False
Topic: Use of Ratios
LO: 9
1. Ratios provide one way to compare companies in the same industry regardless of their size.
Topic: Financial Leverage and RNOA
LO: 2, 4
2. Highly leveraged firms have higher RNOA than firms with lower leverage.
Topic: Return on Equity and Treasury Stock
LO: 1
3. Repurchasing shares near year-end will increase a firm’s return on equity (ROE).
Topic: Nonoperating Return
LO: 4
4. All else equal, when investors consider a firm’s return on equity (ROE) they consider less risky a firm that earns proportionately more of that return from operating activities as opposed to nonoperating activities.
Topic: Tax on Operating Profit
LO: 5
5. To determine tax on net operating profit, we begin with total tax expense and deduct taxes related to net nonoperating expenses.
Topic: NOPAT
LO: 5
6. NOPAT is equivalent to income from operating activities.
Topic: Asset Turnover Effect on RNOA/ROE
LO: 7, 8
7. Increasing a company’s net operating asset turnover (NOAT) increases both RNOA and ROE.
Topic: Profitability and RNOA
LO: 7
8. If Company A has a higher net operating profit margin (NOPM) than Company B, then Company A’s RNOA will be higher.
Topic: Net Operating Asset Turnover
LO: 7
9. Net operating asset turnover (NOAT) measures a company’s profitability.
Topic: Financial Leverage and Debt Ratings
LO: 2
10. All else being equal, higher financial leverage will decrease a company’s debt rating and increase the interest rate it must pay.
Topic: Return on Equity (ROE)
LO: 8
11. ROE can be disaggregated into operating and nonoperating returns. Nonoperating return will be positive as long as Spread is positive.
Topic: Current Ratio
LO: 9
12. A current ratio greater than 1.0 is generally desirable for a company.
Topic: Solvency
LO: 9
13. Solvency ratios measure a company’s ability to meet its debt obligations.
Topic: ROA versus RNOA
LO: 6
14. The only difference between return on assets (ROA) and return on net operating assets (RNOA) is that the denominator in RNOA is typically smaller than the denominator in ROA because the former is net of operating liabilities.
Topic: Basic DuPont Analysis
LO: 3
15. The DuPont analysis disaggregates return on equity into profitability, productivity, and leverage components.
Topic: ROE Computation
LO: 1, 8
1. ROE is computed as:
A) Net income attributable to controlling interest / Average equity attributable to controlling interest
B) Net income attributable to controlling interest / Net sales
C) [RNOA + (FLEV × Spread)] x NCI ratio
D) A and B
E) A and C
Topic: ROE Computation (Numerical calculations required)
LO: 1
2. The 2016 balance sheet of E.I. du Pont de Nemours and Company shows average DuPont shareholders’ equity attributable to controlling interest of $9,996 million, net operating profit after tax of $2,308 million, net income attributable to DuPont of $2,513 million, and common shares issued of 950.044 million.
Assume the company has no preferred shares issued. DuPont’s return on equity (ROE) for the year is:
A) 30.7%
B) 37.6%
C) 25.1%
D) 36.4%
E) There is not enough information to calculate the ratio.
Topic: ROE Computation (Numerical calculations required)
LO: 1
3. The 2016 financial statements of The New York Times Company reveal average shareholders’ equity attributable to controlling interest of $837,283 thousand, net operating profit after tax of $48,032 thousand, net income attributable to The New York Times Company of $29,068 thousand, and average net operating assets of $354,414 thousand.
The company’s return on equity (ROE) for the year is:
A) 3.5%
B) 13.8%
C) 6.9%
D) 14.3%
E) There is not enough information to calculate the ratio.
Topic: NOA Computation (Numerical calculations required)
LO: 4
4. The 2017 balance sheet of Staples, Inc. shows total assets of $8,271 million, operating assets of $6,566 million, operating liabilities of $3,527 million, and shareholders’ equity of $3,688 million.
Staples’ 2017 net operating assets are:
A) $11,798 million
B) $ 6,566 million
C) $ 4,744 million
D) $ 3,039 million
E) None of the above
Topic: Average NOA Computation (Numerical calculations required)
LO: 4
5. The 2016 balance sheet of Whole Foods Market reports operating assets of $5,489 million, operating liabilities of $2,066 million, and total liabilities of $3,117 million.
Whole Food’s average net operating assets are:
A) $3,423 million
B) $2,372 million
C) $3,562 million
D) $2,510 million
E) There is not enough information to calculate the amount.
Topic: Tax Shield Computation (Numerical calculations required)
LO: 5
6. Mattel Inc.’s 2016 financial statements show operating profit before interest and tax of $519,233 thousand, net income of $318,022 thousand, provision for income taxes of $91,720 thousand and net nonoperating expense before tax of $109,491 thousand.
Assume Mattel’s statutory tax rate for 2016 is 37%. Mattel’s 2016 tax shield is:
A) $ 68,979 thousand
B) $ 40,512 thousand
C) $ 277,510 thousand
D) $ 186,460 thousand
E) None of the above
Topic: Effective Tax Rate Computation (Numerical calculations required)
LO: 5
7. Mattel Inc.’s 2016 financial statements show operating profit before interest and tax of $519,233 thousand, net income of $318,022 thousand, provision for income taxes of $91,720 thousand and net nonoperating expense before tax of $109,491 thousand. Assume Mattel’s statutory tax rate for 2016 is 37%.
Mattel’s 2016 effective tax rate is:
A) 22.4%
B) 37.0%
C) 19.4%
D) 17.7%
E) None of the above
Topic: NOPAT Definition
LO: 5
8. Net operating profit after tax (NOPAT) includes operating revenues less expenses such as:
A) Cost of goods sold (COGS)
B) Taxes on operating income
C) Selling, general and administrative expenses (SG&A)
D) After-tax earnings from investments and interest expenses
E) All of the above
F) A, B and C only
Topic: RNOA Computation (Numerical calculations required)
LO: 6
9. The 2016 financial statements of The New York Times Company reveal average shareholders’ equity attributable to controlling interest of $837,283 thousand, net operating profit after tax of $48,032 thousand, net income attributable to The New York Times Company of $29,068 thousand, and average net operating assets of $354,414 thousand.
The company’s return on net operating assets (RNOA) for the year is:
A) 3.5%
B) 6.9%
C) 13.6%
D) 18.7%
E) There is not enough information to calculate the ratio.
Topic: Nonoperating Return Computation (Numerical calculations required)
LO: 3, 7, 8
10. The fiscal 2016 financial statements of Nike Inc. shows net operating profit margin (NOPM) of 11.4%, net operating asset turnover (NOAT) of 3.83, return on equity of 30.1%, and adjusted return on assets of 17.1%.
What is the company’s nonoperating return?
A) (13.6)%
B) 18.7%
C) (14.5)%
D) 35.4%
E) There is not enough information to calculate the ratio.
Topic: Nonoperating Return Computation (Numerical calculations required)
LO: 3, 7, 8
11. The 2016 balance sheet of The New York Times Company shows net operating profit margin (NOPM) of 3.1%, net operating asset turnover (NOAT) of 4.39, return on equity of 3.5%, and adjusted return on assets of 2.2%.
What is the company’s nonoperating return?
A) (24.0)%
B) 7.9%
C) (1.1)%
D) (10.1)%
E) None of the above
Topic: Net Operating Profit Margin (NOPM) Computation (Numerical calculations required)
LO: 7
12. The fiscal year-end 2016 financial statements for Walt Disney Co. report revenues of $55,632 million, net operating profit after tax of $9,954 million, net operating assets of $58,603 million. The fiscal year-end 2015 balance sheet reports net operating assets of $59,079 million.
Walt Disney’s 2016 net operating profit margin is:
A) 16.9%
B) 12.5%
C) 17.9%
D) 11.7%
E) There is not enough information to calculate the ratio.
Topic: Net Operating Asset Turnover (NOAT) Computation (Numerical calculations required)
LO: 7
13. The fiscal 2016 financial statements for Walgreens Boots Alliance, Inc., report net sales of $117,351 million, net operating profit after tax of $4,687 million, net operating assets of $39,502 million. The 2015 balance sheet reports net operating assets of $42,683 million.
Walgreen’s 2016 net operating asset turnover is:
A) 11.5%
B) 2.86
C) 13.3%
D) 2.97
E) There is not enough information to calculate the ratio.
Topic: Net Operating Asset Turnover (NOAT) Computation (Numerical calculations required)
LO: 7
14. Kroger’s 2016 financial statements show net operating profit after tax of 2,286 million, net income of $1,975 million, sales of $115,337 million, and average net operating assets of 18,616 million.
Kroger’s net operating asset turnover for the year is:
A) 12.3%
B) 8.11
C) 6.20
D) 10.9%
E) There is not enough information to calculate the ratio.
Topic: NNO Computation (Numerical calculations required)
LO: 4
15. The 2016 balance sheet of Microsoft Corp. reports total assets of $193,694 million, operating liabilities of $68,010 million, and total shareholders’ equity of $71,997 million.
Microsoft 2016 nonoperating liabilities are:
A) $140,007 million
B) $ 53,687 million
C) $ 68,010 million
D) $121,697 million
E) There is not enough information to calculate the amount.
Topic: Computing Financial Leverage (FLEV) (Numerical calculations required)
LO: 8
16. The fiscal 2016 financial statements of Nike Inc. shows average net operating assets (NOA) of $8,450 million, average net nonoperating obligations (NNO) of $(4,033) million, average total liabilities of $9,014 million, and average equity of $12,483 million.
The company’s 2016 financial leverage (FLEV) is:
A) (0.477)
B) (0.559)
C) (0.323)
D) (0.447)
E) There is not enough information to determine the ratio.
Topic: Computing Financial Leverage (FLEV) (Numerical calculations required)
LO: 8
17. The fiscal 2017 financial statements of Reed Enterprises shows average net operating assets (NOA) of $4,795 million, average net nonoperating obligations (NNO) of $605 million, average total liabilities of $6,330 million, and year-end equity of $5,240 million.
The company’s 2017 financial leverage (FLEV) is:
A) 0.144
B) 0.126
C) 0.115
D) 0.091
E) There is not enough information to determine the ratio.
Topic: Liquidity
LO: 9
18. Liquidity refers to:
A) A company’s operating cycle
B) A company’s ability to general sales from use of its assets
C) A company’s ability to meet its debt obligations
D) A company’s amount of financial leverage
E) A company’s cash availability
Topic: Current Ratio
LO: 9
19. The current ratio is used to assess:
A) Solvency
B) Bankruptcy position
C) Liquidity
D) Financial leverage
E) None of the above
Topic: Liquidity Measure
LO: 9
20. Which of the following is a measure of liquidity?
A) Liabilities-to-Equity Ratio = Total Liabilities / Stockholder’s Equity
B) Times Interest Earned = Earnings before interest and taxes / Interest Expense
C) Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
D) Return on net operating assets (RNOA)
E) All of the above
Topic: Computing Current Ratio (Numerical calculations required)
LO: 9
21. The fiscal 2016 balance sheet for Whole Foods Market reports the following data (in millions). What is the company’s current ratio?
Cash and cash equivalents | Marketable Securities | Accounts receivable | Merchandise inventories | Current assets | Current liabilities |
$351 | $379 | $242 | $517 | $1,975 | $1,341 |
A) 0.69
B) 1.38
C) 0.72
D) 1.47
E) None of the above
Topic: Computing Quick Ratio (Numerical calculations required)
LO: 9
22. The fiscal 2016 balance sheet for Whole Foods Market reports the following data (in millions). What is the company’s quick ratio?
Cash and cash equivalents | Marketable securities | Accounts receivable | Merchandise inventories | Current assets | Current liabilities |
$351 | $379 | $242 | $517 | $1,975 | $1,341 |
A) 0.69
B) 1.38
C) 0.72
D) 1.47
E) None of the above
Topic: Computing Times Interest Earned Ratio (Numerical calculations required)
LO: 9
23. Selected income statement data follow for Harley Davidson, Inc., for the year ended December 31, 2016 (in thousands). What is the company’s times interest earned ratio?
Income before provision for income taxes | Interest expense | Statutory tax rate | Provision for income taxes | Net income |
$1,023,911 | $29,670 | 37% | $331,747 | $692,164 |
A) 34.5
B) 24.3
C) 17.8
D) 35.5
E) None of the above
Topic: Computing Liabilities-to-Equity Ratio (Numerical calculations required)
LO: 9
24. Selected balance sheet data follow for Goodyear Tire & Rubber Company for the year ended December 31, 2016 (in millions). What is the company’s liabilities-to-equity ratio?
Total operating liabilities | Total nonoperating liabilities | Total current liabilities | Total liabilities | Total liabilities and shareholders’ equity |
$6,307 | $5,479 | $4,817 | $11,786 | $16,511 |
A) 2.49
B) 1.40
C) 3.23
D) 0.71
E) None of the above
Topic: Computing Traditional DuPont Ratios (Numerical calculations required)
LO: 3
25. Selected ratios follow for Nike, Inc. for the year ended December 31, 2016 (in millions). What is the company’s return on equity (ROE) for the year?
Return on net operating assets (RNOA) | Profit Margin (PM) | Net operating profit margin (NOPM) | Asset turnover (AT) | Financial leverage (FL) |
43.6% | 11.6% | 11.4% | 1.51 | 1.72 |
A) 13.1%
B) 32.2%
C) 17.5%
D) 30.1%
E) None of the above
Topic: Use financial statements to compute ROE and disaggregate into operating and nonoperating components
LO: 1, 6, 8
1. Selected balance sheet and income statement data follow for E.I. DuPont de Nemours and Company (in millions). Use the data to calculate the following:
a. Return on equity (ROE)
b. Return on net operating assets (RNOA)
c. The company’s nonoperating return
2016 | 2016 | 2016 | 2016 | 2015 | 2016 |
Net income attributable to DuPont | NOPAT | Operating assets | Operating liabilities | Net operating assets | Average DuPont shareholders’ equity |
$2,513 | $2,308 | $33,997 | $21,232 | $12,801 | $9,996 |
Topic: Use financial statements to compute ROE and disaggregate into operating and nonoperating components
LO: 1, 6, 8
2. Selected balance sheet and income statement data follow for The New York Times Company for fiscal 2016 (in thousands). Use the data to calculate the following:
- Return on equity (ROE)
- Return on net operating assets (RNOA)
- The company’s nonoperating return
2016 Net income attributable to New York Times common stockholders | 2016 NOPAT | 2016 Net operating assets | 2015 Net operating assets | 2016 Common equity | 2015 Common equity |
$29,068 | $48,032 | $353,696 | $355,132 | $847,815 | $826,751 |
Topic: Use financial statements to compute tax on operating profit and NOPAT.
Note to instructor: In this fiscal year (2016), Microsoft has net nonoperating expense (the usual situation). The next exercise is for Microsoft’s prior fiscal year and involves negative net nonoperating expense (atypical situation).
LO: 5
3. Use the income statement for Microsoft Corporation to compute the following:
- Tax shield
- The tax on operating profit
c. NOPAT
The company’s combined federal and state statutory tax rate is 37.0%.
MICROSOFT CORP. Income Statement June 30, 2016 | |
(in millions) | |
Revenue | |
Product | $61,502 |
Service | 23,818 |
Total revenue | 85,320 |
Cost of revenue | |
Product | 17,880 |
Service and other | 14,900 |
Total cost of revenue | 32,780 |
Gross margin | 52,540 |
Research and development | 11,988 |
Sales and marketing | 14,697 |
General and administrative | 4,563 |
Impairment, integration, and restructuring | 1,110 |
Operating income | 20,182 |
Other income (expense) | |
Interest income | 903 |
Gains on investments | 668 |
Interest expense | (1,243) |
Losses on derivatives and other nonoperating expenses | (759) |
Income before taxes | 19,751 |
Provision for income taxes | 2,953 |
Net income | $16,798 |
Topic: Use financial statements to compute tax shield and NOPAT.
Note to instructor: In this fiscal year (2015), Microsoft has negative net nonoperating expense (the atypical situation). The prior exercise uses Microsoft’s fiscal 2016 information and involves nonoperating expense (the usual situation).
LO: 5
4. Use the income statement for Microsoft Corporation to compute the following:
- Tax shield
- The tax on operating profit
c. NOPAT
The company’s combined federal and state statutory tax rate is 37.0%.
MICROSOFT CORP. Income Statement June 30, 2015 | ||
(in millions) | ||
Revenue | ||
Product | $75,956 | |
Service | 17,624 | |
Total revenue | 93,580 | |
Cost of revenue | ||
Product | 21,410 | |
Service and other | 11,628 | |
Total cost of revenue | 33,038 | |
Gross margin | 60,542 | |
Research and development | 12,046 | |
Sales and marketing | 15,713 | |
General and administrative | 4,611 | |
Impairment, integration, and restructuring | 10,011 | |
Operating income | 18,161 | |
Other nonoperating income (expense) | ||
Interest income | 766 | |
Gains on investments | 716 | |
Interest expense | (781) | |
Losses on derivatives and other nonoperating expenses | (355) | |
Income before taxes | 18,507 | |
Provision for income taxes | 6,314 | |
Net income | $12,193 | |
Topic: Use financial statements to compute net operating assets (NOA).
LO: 4
5. Use Microsoft’s balance sheets for the fiscal year 2016 to compute the following (assume equity and other investments is operating):
a. Operating assets
b. Operating liabilities
c. Net operating assets (NOA)
MICROSOFT CORPORATION Balance Sheet As of June 30, 2016 | |
(in millions) | |
Current assets: | |
Cash and cash equivalents | $ 6,510 |
Short-term investments | 106,730 |
Accounts receivable, net | 18,277 |
Inventories | 2,251 |
Other current assets | 5,892 |
Total current assets | 139,660 |
Property and equipment, net | 18,356 |
Equity and other investments | 10,431 |
Goodwill | 17,872 |
Intangible assets, net | 3,733 |
Other long-term assets | 3,642 |
Total assets | $193,694 |
Current liabilities: | |
Accounts payable | $ 6,898 |
Short-term debt | 12,904 |
Accrued compensation | 5,264 |
Income taxes | 580 |
Short-term unearned revenue | 27,468 |
Other current liabilities | 6,243 |
Total current liabilities | 59,357 |
Long-term debt | 40,783 |
Long-term unearned revenue | 6,441 |
Deferred income taxes | 1,476 |
Other long-term liabilities | 13,640 |
Total liabilities | 121,697 |
Stockholders' equity: | |
Common stock and paid-in capital | 68,178 |
Retained earnings | 2,282 |
Accumulated other comprehensive income | 1,537 |
Total stockholders' equity | 71,997 |
Total liabilities and stockholders' equity | $193,694 |
Topic: Use financial statements to compute tax amounts.
LO: 5
6. Use the following income statement for Mattel Inc. ($ thousands) to compute the following:
- Tax shield
- Taxes on operating profit
- Tax rate on operating profit
The company’s statutory tax rate is 37%.
Mattel Inc. and Subsidiaries Consolidated Statement of Income For the year ended December 31, 2016 | ||
(in thousands) | ||
Net sales | $5,456,650 | |
Cost of sales | 2,902,259 | |
Gross profit | 2,554,391 | |
Advertising and promotion expenses | 634,947 | |
Other selling and administrative expenses | 1,400,211 | |
Operating income | 519,233 | |
Interest expense | 95,118 | |
Interest (income) | (9,144) | |
Other nonoperating (income), net | 23,517 | |
Income before income taxes | 409,742 | |
Provision for income taxes | 91,720 | |
Net income | $ 318,022 | |
Topic: Use financial statement data to compute RNOA, NOPM, and NOAT.
LO: 4, 6, 7
7. Selected balance sheet and income statement data follow for Staples, Inc. (in millions). Use the data to calculate a) return on net operating assets (RNOA), b) net operating profit margin (NOPM), and c) net operating asset turnover (NOAT) for fiscal 2015.
2015 Revenues | 2015 NOPAT | 2015 Operating assets | 2015 Operating liabilities | 2014 Net operating assets |
$18,764 | $556 | $8,337 | $3,286 | $5,796 |
Topic: Use financial statement data to compute RNOA, NOPM, and NOAT, and confirm RNOA.
LO: 4, 6, 7
8. Selected balance sheet and income statement data follow for Walgreens Boots Alliance, Inc. for the year ended August 31, 2016 (in millions). Use the data to calculate a) return on net operating assets (RNOA), b) net operating profit margin (NOPM), and c) net operating asset turnover (NOAT). Confirm that RNOA = NOPM × NOAT.
2016 Net Sales | 2016 NOPAT | 2016 Net earnings | 2016 Operating assets | 2016 Operating liabilities | 2015 Net operating assets |
$117,351 | $4,687 | $4,173 | $62,881 | $23,379 | $42,683 |
Topic: Use financial statements to compute FLEV and Spread.
Note to instructor: More challenging because students must infer total shareholders’ equity from NNO and NOA.
LO: 4, 8
9. Selected income statement and balance sheet data follow for Snap-On Incorporated for fiscal 2016 and 2015. Use these data to calculate a) FLEV, b) spread, and c) return on equity (ROE) for fiscal 2016 only.
(in millions) | 2016 | 2015 |
Net nonoperating expenses, after tax (NNE) | $ 33.3 | $ 34.2 |
Net operating assets (NOA) | $3,567.8 | $3,218.0 |
Net nonoperating obligations (NNO) | $ 932.6 | $ 787.3 |
Return on net operating assets (RNOA) | 17.5% | 16.8% |
Topic: Use financial statement data to compute measures of liquidity.
Note to Instructor: this is more challenging as it requires students to assess whether “Restricted cash” is a quick asset. It is not because it cannot be used to satisfy ordinary current liabilities.
LO: 9
10. Selected balance sheet income statement data follow for Whole Foods Market, Inc. for the year ended September 25, 2016 (in millions). Use the data to calculate the company’s current ratio and quick ratio.
Cash and cash equivalents | Short-term investments | Restricted cash | Accounts receivable | Merchandise inventories | Current assets | Current liabilities |
$351 | $379 | $122 | $242 | $517 | $1,975 | $1,341 |
Topic: Use financial statement data to compute measures of solvency
LO: 9
11. Selected balance sheet and income statement data follow for Harley Davidson, Inc. for the year ended December 31, 2016 (in thousands). Use the data to calculate a) times interest earned, and b) liabilities-to-equity ratio
Income before provision for income taxes | Interest expense | Statutory tax rate | Total liabilities | Total shareholders’ equity |
$1,023,911 | $29,670 | 37.0% | $7,970,082 | $1,920,158 |
Topic: Use financial statement data to compute measures of liquidity and solvency.
LO: 9
12. Selected balance sheet and income statement data follow for Goodyear Tire & Rubber Company for the year ended December 31, 2016 (in millions). Use the data to calculate the company’s current ratio and liabilities-to-equity ratio.
Cash and cash equivalents | Accounts receivable | Total current assets | Total current liabilities | Total liabilities | Total liabilities and shareholders’ equity |
$1,132 | $1,769 | $5,718 | $4,817 | $11,786 | $16,511 |
Topic: Use financial statements to compute and interpret traditional DuPont ROE ratio and components.
LO: 2, 3
13. Use the following selected balance sheet and income statement data for Mattel Inc. (in $ thousands) to compute a) return on equity, b) profit margin (PM), c) asset turnover (AT), and d) financial leverage (FL) for fiscal 2016. Show that ROE = PM × AT × FL.
(in thousands) | 2016 | 2015 |
Net sales | $5,456,650 | $5,702,613 |
Operating income | 519,233 | 540,922 |
Interest expense | 95,118 | 85,270 |
Net income | 318,022 | 369,416 |
Total assets | 6,493,794 | 6,535,143 |
Total liabilities | 4,086,012 | 3,901,889 |
Topic: Use financial statements to compute and interpret traditional DuPont ROE ratio and components.
LO: 2, 3
14. Use the following selected balance sheet and income statement data for Valero Energy Corporation (in $ millions) to compute a) return on equity, b) profit margin (PM), c) asset turnover (AT), and d) financial leverage (FL) for fiscal 2016. Show that ROE = PM × AT × FL.
(Millions of Dollars) | 2016 | 2015 |
Operating revenues | $75,659 | $87,804 |
Interest expense | 446 | 433 |
Net income attributable to Valero stockholders | 2,289 | 3,990 |
Total assets | 46,173 | 44,227 |
Total Valero stockholders’ equity | 20,024 | 20,527 |
Statutory tax rate | 37% | 37% |
Topic: Use financial statements to compute ROE and disaggregate into operating and non-operating components
LO: 1, 4, 5, 6
1. Income statements and balance sheets follow for The New York Times Company. Refer to these financial statements to answer the requirements.
The New York Times Company Consolidated Statements of Income | ||
Fiscal year ended | ||
(in thousands) | Dec. 29, 2016 | Dec. 30, 2015 |
Revenues | ||
Circulation | $ 880,543 | $ 851,790 |
Advertising | 580,732 | 638,709 |
Other | 94,067 | 88,716 |
Total revenues | 1,555,342 | 1,579,215 |
Production costs | ||
Wages and benefits | 363,051 | 354,516 |
Raw materials | 72,325 | 77,176 |
Other | 192,728 | 186,120 |
Total production costs | 628,104 | 617,812 |
Selling, general and administrative costs | 721,083 | 713,837 |
Depreciation and amortization | 61,723 | 61,597 |
Total operating costs | 1,410,910 | 1,393,246 |
Restructuring charge | 14,804 | 0 |
Multiemployer pension plan withdrawal expense | 6,730 | 9,055 |
Pension settlement charges | 21,294 | 40,329 |
Early termination charge | 0 | 0 |
Operating profit | 101,604 | 136,585 |
Loss from joint ventures | (36,273) | (783) |
Interest expense, net | 34,805 | 39,050 |
Income from continuing operations before income taxes | 30,526 | 96,752 |
Income tax expense/(benefit) | 4,421 | 33,910 |
Income from continuing operations | 26,105 | 62,842 |
Loss from discontinued operations, net of income taxes | (2,273) | 0 |
Net income | 23,832 | 62,842 |
Net loss attributable to the noncontrolling interest | 5,236 | 404 |
Net income attributable to The New York Times Company common stockholders | $29,068 | $63,246 |
Continued next page
The New York Times Company Consolidated Balance Sheets | ||
As of | ||
(in thousands) | Dec. 29, 2016 | Dec. 30, 2015 |
Cash and cash equivalents | $ 100,692 | $ 105,776 |
Short-term investments | 449,535 | 507,639 |
Accounts receivable, net | 197,355 | 207,180 |
Prepaid assets | 15,948 | 19,430 |
Other current assets | 32,648 | 22,507 |
Total current assets | 796,178 | 862,532 |
Long-term marketable securities | 187,299 | 291,136 |
Investments in joint ventures | 15,614 | 22,815 |
Property plant and equipment, net | 596,743 | 632,439 |
Goodwill | 134,517 | 109,085 |
Deferred income taxes | 301,342 | 309,142 |
Miscellaneous assets | 153,702 | 190,541 |
Total assets | $2,185,395 | $2,417,690 |
Accounts payable | $ 104,463 | $ 96,082 |
Accrued payroll and other related liabilities | 96,463 | 98,256 |
Unexpired subscriptions | 66,686 | 60,184 |
Current portion of long-term debt | 0 | 188,377 |
Accrued expenses and other | 131,125 | 120,686 |
Total current liabilities | 398,737 | 563,585 |
Long-term debt and capital lease obligations | 246,978 | 242,851 |
Pension benefits obligation | 558,790 | 627,697 |
Postretirement benefits obligation | 57,999 | 62,879 |
Other | 78,647 | 92,223 |
Total other liabilities | 942,414 | 1,025,650 |
Stockholders’ equity | ||
Common stock of $0.10 par value | ||
Class A common stock | 16,921 | 16,826 |
Class B convertible stock | 82 | 82 |
Additional paid-in capital | 149,928 | 146,348 |
Retained earnings | 1,331,911 | 1,328,744 |
Common stock held in treasury, at cost | (171,211) | (156,155) |
Accumulated other comprehensive loss, net of tax | (479,816) | (509,094) |
Total New York Times Company stockholders’ equity | 847,815 | 826,751 |
Noncontrolling interest | (3,571) | 1,704 |
Total stockholders’ equity | 844,244 | 828,455 |
Total liabilities and stockholders’ equity | $2,185,395 | $2,417,690 |
Continued next page
Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $397,299 thousand in 2014.
d. Compute return on common shareholders equity (ROE) for 2016 and 2015. Stockholders’ equity attributable to New York Times Company in 2014 is $726,328 thousand.
e. What is nonoperating return component of ROE for 2016 and 2015?
f. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?
a. | (in thousands) | 2016 | 2015 |
Income from operations | $101,604 | $136,585 | |
Income/(loss) from joint ventures | (36,273) | (783) | |
Provision for income taxes | (4,421) | (33,910) | |
Tax shield on nonoperating items | (12,878) | (14,449) | |
NOPAT | $ 48,032 | $ 87,443 |
b. | (in thousands) | 2016 | 2015 |
Total assets | $2,185,395 | $2,417,690 | |
Less Cash and cash equivalents | (100,692) | (105,776) | |
Less Short-term marketable securities | (449,535) | (507,639) | |
Less Long-term marketable securities | (187,299) | (291,136) | |
Operating assets | 1,447,869 | 1,513,139 | |
Total current liabilities | 398,737 | 563,585 | |
Less Current portion of long-term debt | 0 | (188,377) | |
Plus Pension benefits obligation | 558,790 | 627,697 | |
Plus Postretirement benefits obligation | 57,999 | 62,879 | |
Plus Other liabilities | 78,647 | 92,223 | |
Operating liabilities | 1,094,173 | 1,158,007 | |
Net operating assets (NOA) | $ 353,696 | $ 355,132 |
Topic: Use financial statements to compute ROE and disaggregate into operating and nonoperating components
LO: 1, 4, 5, 6
2. Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.
Snap-On Incorporated Consolidated Statements of Earnings | |||
(Amounts in millions) | For the fiscal year ended | ||
2016 | 2015 | ||
Net sales | $ 3,430.4 | $ 3,352.8 | |
Cost of goods sold | (1,720.8) | (1,704.5) | |
Gross profit | 1,709.6 | 1,648.3 | |
Operating expenses | (1,054.1) | (1,053.7) | |
Operating earnings before financial services | 655.5 | 594.6 | |
Financial services revenue | 281.4 | 240.3 | |
Financial services expenses | (82.7) | (70.1) | |
Operating income from financial services | 198.7 | 170.2 | |
Operating earnings | 854.2 | 764.8 | |
Interest expense | (52.2) | (51.9) | |
Other income (expense) -- net | (0.6) | (2.4) | |
Earnings before income taxes and equity earnings | 801.4 | 710.5 | |
Income tax expense | (244.3) | (221.2) | |
Earnings before equity earnings | 557.1 | 489.3 | |
Equity earnings, net of tax | 2.5 | 1.3 | |
Net earnings | 559.6 | 490.6 | |
Net earnings attributable to noncontrolling interests | (13.2) | (11.9) | |
Net earnings attributable to Snap-on Incorporated | $ 546.4 | $ 478.7 | |
Continued next page
Snap-On Incorporated Consolidated Balance Sheets | ||
Fiscal Year End | ||
(Amounts in millions) | 2016 | 2015 |
Cash and cash equivalents | $ 77.6 | $ 92.8 |
Trade and other accounts receivable - net | 598.8 | 562.5 |
Finance receivables - net | 472.5 | 447.3 |
Contract receivables - net | 88.1 | 82.1 |
Inventories - net | 530.5 | 497.8 |
Deferred income tax assets | 0.0 | 109.9 |
Prepaid expenses and other assets | 116.5 | 106.3 |
Total current assets | 1,884.0 | 1,898.7 |
Property and equipment - net | 425.2 | 413.5 |
Deferred income tax assets | 72.8 | 106.3 |
Long-term finance receivables - net | 934.5 | 772.7 |
Long-term contract receivables - net | 286.7 | 266.6 |
Goodwill | 895.5 | 790.1 |
Other intangibles - net | 184.6 | 195.0 |
Other assets | 39.9 | 44.0 |
Total assets | 4,723.2 | 4,486.9 |
Notes payable and current maturities of long-term debt | 301.4 | 18.4 |
Accounts payable | 170.9 | 148.3 |
Accrued benefits | 52.8 | 52.1 |
Accrued compensation | 89.8 | 91.0 |
Franchisee deposits | 66.7 | 64.4 |
Other accrued liabilities | 307.9 | 296.3 |
Total current liabilities | 989.5 | 670.5 |
Long-term debt | 708.8 | 861.7 |
Deferred income tax liabilities | 13.1 | 169.8 |
Retiree health care benefits | 36.7 | 37.9 |
Pension liabilities | 246.5 | 227.8 |
Other long-term liabilities | 93.4 | 88.5 |
Total liabilities | 2,088.0 | $ 2,056.2 |
Preferred stock | – | – |
Common stock | 67.4 | $ 67.4 |
Additional paid-in capital | 317.3 | 296.3 |
Retained earnings | 3,384.9 | 2,986.9 |
Accumulated other comprehensive income (loss) | (498.5) | (364.2) |
Treasury stock at cost | (653.9) | (573.7) |
Total shareholders’ equity attributable to Snap-on Inc. | 2,617.2 | 2,412.7 |
Noncontrolling interests | 18.0 | 18.0 |
Total shareholders’ equity | 2,635.2 | 2,430.7 |
Total liabilities and shareholders’ equity | $ 4,723.2 | $ 4,486.9 |
Continued next page
Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for fiscal 2016 and 2015.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $3,011.7 million in 2014.
d. Compute return on equity (ROE) for 2016 and 2015. (Stockholders’ equity attributable to Snap-On in 2014 is $2,207.8 million.)
e. What is nonoperating return component of ROE for 2016 and 2015?
f. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?
a. | (Amounts in millions) | 2016 | 2015 |
Income from operations | 854.2 | 764.8 | |
Equity in earnings (losses) of affiliates | 2.5 | 1.3 | |
Provision for income taxes | (244.3) | (221.2) | |
Tax shield on nonoperating items | (19.5) | (20.1) | |
NOPAT | 592.9 | 524.8 |
b. | (Amounts in millions) | 2016 | 2015 |
Operating assets (Total assets - Cash & cash equiv.) | $4,645.6 | $4,394.1 | |
Total liabilities | 2,088.0 | 2,056.2 | |
Nonoperating liabilities | 1,010.2 | 880.1 | |
Operating liabilities | 1,077.8 | 1,176.1 | |
Net operating assets (NOA) | $3,567.8 | $3,218.0 |
Topic: Use financial statements to compute ROE and disaggregate into operating and nonoperating components
LO: 1, 4, 5, 6
3. Income statements and balance sheets follow for E.I. DuPont de Nemours and Company. Refer to these financial statements to answer the requirements.
E. I. du Pont de Nemours and Company Consolidated Income Statements For The Year Ended December 31, | ||
($ millions) | 2016 | 2015 |
Net sales | $ 24,594 | $ 25,130 |
Cost of goods sold and other operating charges | 15,155 | 15,571 |
Selling, general and administrative expenses | 4,319 | 4,615 |
Research and development expense | 1,641 | 1,898 |
Other (income) expense, net | (708) | (697) |
Interest expense | 370 | 342 |
Employee separation/asset related charges(income), net | 552 | 810 |
Income from continuing operations before income taxes | 3,265 | 2,591 |
Provision for income taxes on continuing operations | 744 | 696 |
Income from continuing operations after income taxes | 2,521 | 1,895 |
Income from discontinued operations after income taxes | 4 | 64 |
Net income | 2,525 | 1,959 |
Less: Net income attributable to noncontrolling interests | 12 | 6 |
Net income attributable to DuPont | $ 2,513 | $ 1,953 |
E. I. du Pont de Nemours and Company Consolidated Balance Sheets As of December 31, | ||
($ millions) | 2016 | 2015 |
Assets | ||
Cash and cash equivalents | $ 4,605 | $ 5,300 |
Marketable securities | 1,362 | 906 |
Accounts and notes receivable, net | 4,971 | 4,643 |
Inventories | 5,673 | 6,140 |
Prepaid expenses | 506 | 398 |
Total current assets | 17,117 | 17,387 |
Net property, plant and equipment | 9,231 | 9,784 |
Goodwill | 4,180 | 4,248 |
Other intangible assets | 3,664 | 4,144 |
Investment in affiliates | 649 | 688 |
Deferred income taxes | 3,308 | 3,799 |
Other assets | 1,815 | 1,116 |
Total assets | $39,964 | $41,166 |
Table continued next page
Table continued
E. I. du Pont de Nemours and Company Consolidated Balance Sheets—continued As of December 31, | ||
(in millions) | 2016 | 2015 |
Liabilities and equity | ||
Accounts payable | $ 3,705 | $ 3,398 |
Short-term borrowings and capital lease obligations | 429 | 1,165 |
Taxes payable | 101 | 173 |
Other accrued liabilities | 4,662 | 5,580 |
Total current liabilities | 8,897 | 10,316 |
Long-term borrowings and capital lease obligations | 8,107 | 7,642 |
Other liabilities | 12,333 | 12,591 |
Deferred income taxes | 431 | 417 |
Total liabilities | 29,768 | 30,966 |
Common stock, $0.30 par value | 285 | 288 |
Preferred stock, without par value – cumulative | 237 | 237 |
Additional paid-in capital | 11,190 | 11,081 |
Reinvested earnings | 14,924 | 14,510 |
Accumulated other comprehensive loss | (9,911) | (9,396) |
Common stock held in treasury | (6,727) | (6,727) |
Total DuPont stockholders’ equity | 9,998 | 9,993 |
Noncontrolling interests | 198 | 207 |
Total equity | 10,196 | 10,200 |
Total liabilities and stockholders’ equity | $39,964 | $41,166 |
Required
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rate is 37% for both years.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $13,239 million in 2014.
d. Compute return on equity (ROE) for 2016 and 2015. DuPont Stockholders’ equity in 2014 is $13,320 million.
e. What is nonoperating return component of ROE for 2016 and 2015?
f. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?
a. | ($ millions) | 2016 | 2015 |
Income from continuing operations before interest and taxes | $2,927 | 2,236 | |
Provision for income taxes | (744) | (696) | |
Tax shield on interest expense | 125 | 131 | |
NOPAT | $2,308 | $1,671 |
b. | ($ millions) | 2016 | 2015 |
Operating assets | |||
Total assets | $39,964 | $41,166 | |
Less Cash and cash equivalents | 4,605 | 5,300 | |
Less Marketable securities | 1,362 | 906 | |
Operating assets | $33,997 | $34,960 | |
Total liabilities | $29,768 | $30,966 | |
Less Short-term borrowings and capital leases | 429 | 1,165 | |
Less Long-term borrowings and capital leases | 8,107 | 7,642 | |
Operating liabilities | $21,232 | $22,159 | |
Net operating assets (NOA) | $12,765 | $12,801 |
Topic: Use financial statements to compute ROE and disaggregate into operating and non-operating components.
LO: 1, 4, 5, 6
4. Income statements and balance sheets follow for Microsoft Corporation. Refer to these financial statements to answer the requirements.
MICROSOFT CORPORATION Income Statements For the years ended June 30, | ||
(in millions) | 2016 | 2015 |
Revenue | ||
Product | $61,502 | $75,956 |
Service | 23,818 | 17,624 |
Total revenue | 85,320 | 93,580 |
Cost of revenue | ||
Product | 17,880 | 21,410 |
Service and other | 14,900 | 11,628 |
Total cost of revenue | 32,780 | 33,038 |
Gross margin | 52,540 | 60,542 |
Research and development | 11,988 | 12,046 |
Sales and marketing | 14,697 | 15,713 |
General and administrative | 4,563 | 4,611 |
Impairment, integration, and restructuring | 1,110 | 10,011 |
Operating income | 20,182 | 18,161 |
Other income (expense), net | (431) | 346 |
Income before taxes | 19,751 | 18,507 |
Provision for income taxes | 2,953 | 6,314 |
Net income | $16,798 | $ 12,193 |
Continued next page
MICROSOFT CORPORATION Balance Sheet As of June 30, | ||
(in millions) | 2016 | 2015 |
Current assets: | ||
Cash and cash equivalents | $ 6,510 | $ 5,595 |
Short-term investments | 106,730 | 90,931 |
Accounts receivable, net | 18,277 | 17,908 |
Inventories | 2,251 | 2,902 |
Other current assets | 5,892 | 5,461 |
Total current assets | 139,660 | 122,797 |
Property and equipment, net | 18,356 | 14,731 |
Equity and other investments | 10,431 | 12,053 |
Goodwill | 17,872 | 16,939 |
Intangible assets, net | 3,733 | 4,835 |
Other long-term assets | 3,642 | 3,117 |
Total assets | $193,694 | $174,472 |
Current liabilities: | ||
Accounts payable | $ 6,898 | $ 6,591 |
Short-term debt | 12,904 | 4,985 |
Current portion of long-term debt | 0 | 2,499 |
Accrued compensation | 5,264 | 5,096 |
Income taxes | 580 | 606 |
Short-term unearned revenue | 27,468 | 23,223 |
Other current liabilities | 6,243 | 6,647 |
Total current liabilities | 59,357 | 49,647 |
Long-term debt | 40,783 | 27,808 |
Long-term unearned revenue | 6,441 | 2,095 |
Deferred income taxes | 1,476 | 1,295 |
Other long-term liabilities | 13,640 | 13,544 |
Total liabilities | 121,697 | 94,389 |
Stockholders' equity: | ||
Common stock and paid-in capital | 68,178 | 68,465 |
Retained earnings | 2,282 | 9,096 |
Accumulated other comprehensive income | 1,537 | 2,522 |
Total stockholders' equity | 71,997 | 80,083 |
Total liabilities and stockholders' equity | $193,694 | $ 174,472 |
Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.
b. Compute net operating assets (NOA) for 2016 and 2015. Assume Equity and other investments are operating assets.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Net operating assets are $26,720 million in 2014.
d. Compute return on equity (ROE) for 2016 and 2015. (Stockholders’ equity in 2014 is $89,784 million.)
e. What is nonoperating return component of ROE for 2016 and 2015?
f. Comment on the difference between ROE and RNOA. What inference do you draw from this comparison?
a. | ($ millions) | 2016 | 2015 |
Operating income | $ 20,182 | $ 18,161 | |
Provision for income taxes | (2,953) | (6,314) | |
Tax shield on nonoperating items | (159) | 128 | |
NOPAT | $ 17,070 | $ 11,975 |
b. | ($ millions) | 2016 | 2015 |
Total assets | $193,694 | $174,472 | |
Less cash and cash equivalents | 6,510 | 5,595 | |
Less short-term investments | 106,730 | 90,931 | |
Operating assets | 80,454 | 77,946 | |
Total liabilities | 121,697 | 94,389 | |
Less short-term debt | 12,904 | 4,985 | |
Less long-term debt | 40,783 | 30,307 | |
Operating liabilities | 68,010 | 59,097 | |
Net operating assets (NOA) | $ 12,444 | $ 18,849 | |
Topic: Use financial statements to compute RNOA and disaggregate into components of profitability and asset turnover
LO: 1, 4, 5, 6
5. Income statements and balance sheets follow for The New York Times Company. Refer to these financial statements to answer the requirements.
The New York Times Company Consolidated Statements of Income | ||
Fiscal year ended | ||
(in thousands) | Dec. 29, 2016 | Dec. 30, 2015 |
Revenues | ||
Circulation | $ 880,543 | $ 851,790 |
Advertising | 580,732 | 638,709 |
Other | 94,067 | 88,716 |
Total revenues | 1,555,342 | 1,579,215 |
Production costs | ||
Wages and benefits | 363,051 | 354,516 |
Raw materials | 72,325 | 77,176 |
Other | 192,728 | 186,120 |
Total production costs | 628,104 | 617,812 |
Selling, general and administrative costs | 721,083 | 713,837 |
Depreciation and amortization | 61,723 | 61,597 |
Total operating costs | 1,410,910 | 1,393,246 |
Restructuring charge | 14,804 | 0 |
Multiemployer pension plan withdrawal expense | 6,730 | 9,055 |
Pension settlement charges | 21,294 | 40,329 |
Early termination charge | 0 | 0 |
Operating profit | 101,604 | 136,585 |
Loss from joint ventures | (36,273) | (783) |
Interest expense, net | 34,805 | 39,050 |
Income from continuing operations before income taxes | 30,526 | 96,752 |
Income tax expense/(benefit) | 4,421 | 33,910 |
Income from continuing operations | 26,105 | 62,842 |
Loss from discontinued operations, net of income taxes | (2,273) | 0 |
Net income | 23,832 | 62,842 |
Net loss attributable to the noncontrolling interest | 5,236 | 404 |
Net income attributable to The New York Times Company common stockholders | $29,068 | $63,246 |
Continued next page
The New York Times Company Consolidated Balance Sheets | ||
As of | ||
(in thousands) | Dec. 29, 2016 | Dec. 30, 2015 |
Cash and cash equivalents | $ 100,692 | $ 105,776 |
Short-term investments | 449,535 | 507,639 |
Accounts receivable, net | 197,355 | 207,180 |
Prepaid assets | 15,948 | 19,430 |
Other current assets | 32,648 | 22,507 |
Total current assets | 796,178 | 862,532 |
Long-term marketable securities | 187,299 | 291,136 |
Investments in joint ventures | 15,614 | 22,815 |
Property plant and equipment, net | 596,743 | 632,439 |
Goodwill | 134,517 | 109,085 |
Deferred income taxes | 301,342 | 309,142 |
Miscellaneous assets | 153,702 | 190,541 |
Total assets | $2,185,395 | $2,417,690 |
Accounts payable | $ 104,463 | $ 96,082 |
Accrued payroll and other related liabilities | 96,463 | 98,256 |
Unexpired subscriptions | 66,686 | 60,184 |
Current portion of long-term debt | 0 | 188,377 |
Accrued expenses and other | 131,125 | 120,686 |
Total current liabilities | 398,737 | 563,585 |
Long-term debt and capital lease obligations | 246,978 | 242,851 |
Pension benefits obligation | 558,790 | 627,697 |
Postretirement benefits obligation | 57,999 | 62,879 |
Other | 78,647 | 92,223 |
Total other liabilities | 942,414 | 1,025,650 |
Stockholders’ equity | ||
Common stock of $0.10 par value | ||
Class A common stock | 16,921 | 16,826 |
Class B convertible stock | 82 | 82 |
Additional paid-in capital | 149,928 | 146,348 |
Retained earnings | 1,331,911 | 1,328,744 |
Common stock held in treasury, at cost | (171,211) | (156,155) |
Accumulated other comprehensive loss, net of tax | (479,816) | (509,094) |
Total New York Times Company stockholders’ equity | 847,815 | 826,751 |
Noncontrolling interest | (3,571) | 1,704 |
Total stockholders’ equity | 844,244 | 828,455 |
Total liabilities and stockholders’ equity | $2,185,395 | $2,417,690 |
Continued next page
Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Comment on the year-over-year change. Net operating assets are $397,299 thousand in 2014.
d. Disaggregate RNOA into profitability and asset turnover components (NOPM and NOAT, respectively). What explains the year-over-year change in RNOA?
a. | (in thousands) | 2016 | 2015 |
Income from operations | $101,604 | $136,585 | |
Income/(loss) from joint ventures | (36,273) | (783) | |
Provision for income taxes | (4,421) | (33,910) | |
Tax shield on nonoperating items | (12,878) | (14,449) | |
NOPAT | $ 48,032 | $87,443 |
b. | (in thousands) | 2016 | 2015 |
Total assets | $2,185,395 | $2,417,690 | |
Less Cash and cash equivalents | (100,692) | (105,776) | |
Less Short-term marketable securities | (449,535) | (507,639) | |
Less Long-term marketable securities | (187,299) | (291,136) | |
Operating assets | 1,447,869 | 1,513,139 | |
Total current liabilities | 398,737 | 563,585 | |
Less Current portion of long-term debt | 0 | (188,377) | |
Plus Pension benefits obligation | 558,790 | 627,697 | |
Plus Postretirement benefits obligation | 57,999 | 62,879 | |
Plus Other liabilities | 78,647 | 92,223 | |
Operating liabilities | 1,094,173 | 1,158,007 | |
Net operating assets (NOA) | $353,696 | $355,132 |
Topic: Use financial statements to compute RNOA and disaggregate into components of profitability and asset turnover
LO: 7
6. Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.
Snap-On Incorporated Consolidated Statements of Earnings | ||
(Amounts in millions) | For the fiscal year ended | |
2016 | 2015 | |
Net sales | $ 3,430.4 | $ 3,352.8 |
Cost of goods sold | (1,720.8) | (1,704.5) |
Gross profit | 1,709.6 | 1,648.3 |
Operating expenses | (1,054.1) | (1,053.7) |
Operating earnings before financial services | 655.5 | 594.6 |
Financial services revenue | 281.4 | 240.3 |
Financial services expenses | (82.7) | (70.1) |
Operating income from financial services | 198.7 | 170.2 |
Operating earnings | 854.2 | 764.8 |
Interest expense | (52.2) | (51.9) |
Other income (expense) -- net | (0.6) | (2.4) |
Earnings before income taxes and equity earnings | 801.4 | 710.5 |
Income tax expense | (244.3) | (221.2) |
Earnings before equity earnings | 557.1 | 489.3 |
Equity earnings, net of tax | 2.5 | 1.3 |
Net earnings | 559.6 | 490.6 |
Net earnings attributable to noncontrolling interests | (13.2) | (11.9) |
Net earnings attributable to Snap-on Incorporated | $ 546.4 | $ 478.7 |
Continued next page
Snap-On Incorporated Consolidated Balance Sheets | ||
Fiscal Year End | ||
(Amounts in millions) | 2016 | 2015 |
Cash and cash equivalents | $ 77.6 | $ 92.8 |
Trade and other accounts receivable - net | 598.8 | 562.5 |
Finance receivables - net | 472.5 | 447.3 |
Contract receivables - net | 88.1 | 82.1 |
Inventories - net | 530.5 | 497.8 |
Deferred income tax assets | 0.0 | 109.9 |
Prepaid expenses and other assets | 116.5 | 106.3 |
Total current assets | 1,884.0 | 1,898.7 |
Property and equipment - net | 425.2 | 413.5 |
Deferred income tax assets | 72.8 | 106.3 |
Long-term finance receivables - net | 934.5 | 772.7 |
Long-term contract receivables - net | 286.7 | 266.6 |
Goodwill | 895.5 | 790.1 |
Other intangibles - net | 184.6 | 195.0 |
Other assets | 39.9 | 44.0 |
Total assets | 4,723.2 | 4,486.9 |
Notes payable and current maturities of long-term debt | 301.4 | 18.4 |
Accounts payable | 170.9 | 148.3 |
Accrued benefits | 52.8 | 52.1 |
Accrued compensation | 89.8 | 91.0 |
Franchisee deposits | 66.7 | 64.4 |
Other accrued liabilities | 307.9 | 296.3 |
Total current liabilities | 989.5 | 670.5 |
Long-term debt | 708.8 | 861.7 |
Deferred income tax liabilities | 13.1 | 169.8 |
Retiree health care benefits | 36.7 | 37.9 |
Pension liabilities | 246.5 | 227.8 |
Other long-term liabilities | 93.4 | 88.5 |
Total liabilities | 2,088.0 | $ 2,056.2 |
Preferred stock | – | – |
Common stock | 67.4 | $ 67.4 |
Additional paid-in capital | 317.3 | 296.3 |
Retained earnings | 3,384.9 | 2,986.9 |
Accumulated other comprehensive income (loss) | (498.5) | (364.2) |
Treasury stock at cost | (653.9) | (573.7) |
Total shareholders’ equity attributable to Snap-on Inc. | 2,617.2 | 2,412.7 |
Noncontrolling interests | 18.0 | 18.0 |
Total shareholders’ equity | 2,635.2 | 2,430.7 |
Total liabilities and shareholders’ equity | $ 4,723.2 | $ 4,486.9 |
Continued next page
Required:
a. Compute net operating profit after tax (NOPAT) for 2016 and 2015. Assume that combined federal and state statutory tax rate is 37% for both fiscal years.
b. Compute net operating assets (NOA) for 2016 and 2015.
c. Compute return on net operating assets (RNOA) for 2016 and 2015. Comment on the year-over-year change. Net operating assets are $3,011.7 million in 2014.
d. Disaggregate RNOA into profitability and asset turnover components (NOPM and NOAT, respectively). Remember to include both net sales and financial services revenue in total revenue. What explains the year-over-year change in RNOA?
a. | (Amounts in millions) | 2016 | 2015 |
Income from operations | 854.2 | 764.8 | |
Equity in earnings (losses) of affiliates | 2.5 | 1.3 | |
Provision for income taxes | (244.3) | (221.2) | |
Tax shield on nonoperating items | (19.5) | (20.1) | |
NOPAT | 592.9 | 524.8 |
b. | (Amounts in millions) | 2016 | 2015 |
Operating assets (Total assets - Cash & cash equiv.) | $4,645.6 | $4,394.1 | |
Total liabilities | 2,088.0 | 2,056.2 | |
Nonoperating liabilities | 1,010.2 | 880.1 | |
Operating liabilities | 1,077.8 | 1,176.1 | |
Net operating assets (NOA) | $3,567.8 | $3,218.0 |
Topic: Use financial statements to compute FLEV and Spread and reconcile to ROE for two years
LO: 8
7. Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.
Snap-On Incorporated Consolidated Statements of Earnings | |||
(Amounts in millions) | For the fiscal year ended | ||
2016 | 2015 | ||
Net sales | $ 3,430.4 | $ 3,352.8 | |
Cost of goods sold | (1,720.8) | (1,704.5) | |
Gross profit | 1,709.6 | 1,648.3 | |
Operating expenses | (1,054.1) | (1,053.7) | |
Operating earnings before financial services | 655.5 | 594.6 | |
Financial services revenue | 281.4 | 240.3 | |
Financial services expenses | (82.7) | (70.1) | |
Operating income from financial services | 198.7 | 170.2 | |
Operating earnings | 854.2 | 764.8 | |
Interest expense | (52.2) | (51.9) | |
Other income (expense) -- net | (0.6) | (2.4) | |
Earnings before income taxes and equity earnings | 801.4 | 710.5 | |
Income tax expense | (244.3) | (221.2) | |
Earnings before equity earnings | 557.1 | 489.3 | |
Equity earnings, net of tax | 2.5 | 1.3 | |
Net earnings | 559.6 | 490.6 | |
Net earnings attributable to noncontrolling interests | (13.2) | (11.9) | |
Net earnings attributable to Snap-on Incorporated | $ 546.4 | $ 478.7 | |
Continued next page
Snap-On Incorporated Consolidated Balance Sheets | ||
Fiscal Year End | ||
(Amounts in millions) | 2016 | 2015 |
Cash and cash equivalents | $ 77.6 | $ 92.8 |
Trade and other accounts receivable - net | 598.8 | 562.5 |
Finance receivables - net | 472.5 | 447.3 |
Contract receivables - net | 88.1 | 82.1 |
Inventories - net | 530.5 | 497.8 |
Deferred income tax assets | 0.0 | 109.9 |
Prepaid expenses and other assets | 116.5 | 106.3 |
Total current assets | 1,884.0 | 1,898.7 |
Property and equipment - net | 425.2 | 413.5 |
Deferred income tax assets | 72.8 | 106.3 |
Long-term finance receivables - net | 934.5 | 772.7 |
Long-term contract receivables - net | 286.7 | 266.6 |
Goodwill | 895.5 | 790.1 |
Other intangibles - net | 184.6 | 195.0 |
Other assets | 39.9 | 44.0 |
Total assets | 4,723.2 | 4,486.9 |
Notes payable and current maturities of long-term debt | 301.4 | 18.4 |
Accounts payable | 170.9 | 148.3 |
Accrued benefits | 52.8 | 52.1 |
Accrued compensation | 89.8 | 91.0 |
Franchisee deposits | 66.7 | 64.4 |
Other accrued liabilities | 307.9 | 296.3 |
Total current liabilities | 989.5 | 670.5 |
Long-term debt | 708.8 | 861.7 |
Deferred income tax liabilities | 13.1 | 169.8 |
Retiree health care benefits | 36.7 | 37.9 |
Pension liabilities | 246.5 | 227.8 |
Other long-term liabilities | 93.4 | 88.5 |
Total liabilities | 2,088.0 | $ 2,056.2 |
Preferred stock | – | – |
Common stock | 67.4 | $ 67.4 |
Additional paid-in capital | 317.3 | 296.3 |
Retained earnings | 3,384.9 | 2,986.9 |
Accumulated other comprehensive income (loss) | (498.5) | (364.2) |
Treasury stock at cost | (653.9) | (573.7) |
Total shareholders’ equity attributable to Snap-on Inc. | 2,617.2 | 2,412.7 |
Noncontrolling interests | 18.0 | 18.0 |
Total shareholders’ equity | 2,635.2 | 2,430.7 |
Total liabilities and shareholders’ equity | $ 4,723.2 | $ 4,486.9 |
Continued next page
Required:
a. Compute net nonoperating expenses (NNE) for 2016 and 2015. Assume that combined federal and state statutory tax rate is 37% for both fiscal years.
b. Compute net nonoperating obligations (NNO) for 2016 and 2015.
c. Compute Spread for 2016 and 2015. Return on net operating assets is 17.5% and 16.8% in 2016 and 2015, respectively. In 2014, net nonoperating obligations were $786.4 million.
d. Compute FLEV for 2016 and 2015. In 2014, net nonoperating obligations were $786.4 million and total shareholders’ equity was $2,225.3 million.
e. Calculate return on equity (ROE) for both years. Show that ROE = RNOA + (FLEV × Spread) x NCI ratio. Interpret the year-over-year change in ROE. (Hint: consider the changes in both FLEV and Spread.) In 2014, shareholders’ equity attributable to Snap-On was $2,207.8 and total shareholders’ equity was $2,225.3.
a. | (Amounts in millions) | 2016 | 2015 |
Interest expense | $52.2 | $51.9 | |
Other expenses (income) net | 0.6 | 2.4 | |
Nonoperating expense, before tax | 52.8 | 54.3 | |
Tax on nonoperating expense | (19.5) | (20.1) | |
Nonoperating expenses, after tax (NNE) | $33.3 | $34.2 | |
b. | (Amounts in millions) | 2016 | 2015 |
Notes payable and current maturities of long-term debt | $ 301.4 | $ 18.4 | |
Long-term debt | 708.8 | 861.7 | |
Less Nonoperating assets | (77.6) | (92.8) | |
Net nonoperating obligations (NNO) | $932.6 | $787.3 |
Topic: Use financial statements to compute ROE and disaggregate into operating and non-operating components.
Note to instructor: FLEV is negative because Microsoft holds significant levels of marketable securities and has little debt; thus, ROE is less than RNOA.
LO: 8
8. Income statements and balance sheets follow for Microsoft Corporation. Refer to these financial statements to answer the requirements.
MICROSOFT CORPORATION Income Statements For the years ended June 30, | ||
(in millions) | 2016 | 2015 |
Revenue | ||
Product | $61,502 | $75,956 |
Service | 23,818 | 17,624 |
Total revenue | 85,320 | 93,580 |
Cost of revenue | ||
Product | 17,880 | 21,410 |
Service and other | 14,900 | 11,628 |
Total cost of revenue | 32,780 | 33,038 |
Gross margin | 52,540 | 60,542 |
Research and development | 11,988 | 12,046 |
Sales and marketing | 14,697 | 15,713 |
General and administrative | 4,563 | 4,611 |
Impairment, integration, and restructuring | 1,110 | 10,011 |
Operating income | 20,182 | 18,161 |
Other income (expense), net | (431) | 346 |
Income before taxes | 19,751 | 18,507 |
Provision for income taxes | 2,953 | 6,314 |
Net income | $16,798 | $ 12,193 |
Continued next page
MICROSOFT CORPORATION Balance Sheet As of June 30, | ||
(in millions) | 2016 | 2015 |
Current assets: | ||
Cash and cash equivalents | $ 6,510 | $ 5,595 |
Short-term investments | 106,730 | 90,931 |
Accounts receivable, net | 18,277 | 17,908 |
Inventories | 2,251 | 2,902 |
Other current assets | 5,892 | 5,461 |
Total current assets | 139,660 | 122,797 |
Property and equipment, net | 18,356 | 14,731 |
Equity and other investments | 10,431 | 12,053 |
Goodwill | 17,872 | 16,939 |
Intangible assets, net | 3,733 | 4,835 |
Other long-term assets | 3,642 | 3,117 |
Total assets | $193,694 | $174,472 |
Current liabilities: | ||
Accounts payable | $ 6,898 | $ 6,591 |
Short-term debt | 12,904 | 4,985 |
Current portion of long-term debt | 0 | 2,499 |
Accrued compensation | 5,264 | 5,096 |
Income taxes | 580 | 606 |
Short-term unearned revenue | 27,468 | 23,223 |
Other current liabilities | 6,243 | 6,647 |
Total current liabilities | 59,357 | 49,647 |
Long-term debt | 40,783 | 27,808 |
Long-term unearned revenue | 6,441 | 2,095 |
Deferred income taxes | 1,476 | 1,295 |
Other long-term liabilities | 13,640 | 13,544 |
Total liabilities | 121,697 | 94,389 |
Stockholders' equity: | ||
Common stock and paid-in capital | 68,178 | 68,465 |
Retained earnings | 2,282 | 9,096 |
Accumulated other comprehensive income | 1,537 | 2,522 |
Total stockholders' equity | 71,997 | 80,083 |
Total liabilities and stockholders' equity | $193,694 | $ 174,472 |
Required:
a. Compute net nonoperating expenses (NNE) for 2016 and 2015. Assume that combined federal and state statutory tax rates are 37% for both years.
b. Compute net nonoperating obligations (NNO) for 2016 and 2015.
c. Compute Spread for 2016 and 2015. Return on net operating assets (RNOA) is 109.1% and 52.6% in 2016 and 2015, respectively. NNO were $(63,064) million in 2014.
d. Compute FLEV for 2016 and 2015. In 2014, net nonoperating obligations (assets) were $(63,064) million and shareholders’ equity was $89,784 million.
e. Calculate return on equity (ROE) for both years. Show that ROE = RNOA + (FLEV × Spread). Interpret the year-over-year change in ROE.
a. | Net nonoperating expense items after tax (NNE) = Other (income) expense X (1 - 0.37) |
2016 NNE: $431 x (1 – 0.37) = $272 million | |
2015 NNE: $(346) x (1 – 0.37) = $(218) million |
b. | 2016 | 2015 | |
Short-term debt | $12,904 | $4,985 | |
Long-term debt | 40,783 | 30,307 | |
Less Short-term investments | (106,730) | (90,931) | |
Less Cash and cash equivalents | (6,510) | (5,595) | |
Net nonoperating obligations | $(59,553) | $(61,234) | |
Topic: Use financial statements to calculate and interpret liquidity and solvency ratios
LO: 9
9. Income statements and balance sheets follow for Snap-On Incorporated. Refer to these financial statements to answer the requirements.
Snap-On Incorporated Consolidated Statements of Earnings | |||
(Amounts in millions) | For the fiscal year ended | ||
2016 | 2015 | ||
Net sales | $ 3,430.4 | $ 3,352.8 | |
Cost of goods sold | (1,720.8) | (1,704.5) | |
Gross profit | 1,709.6 | 1,648.3 | |
Operating expenses | (1,054.1) | (1,053.7) | |
Operating earnings before financial services | 655.5 | 594.6 | |
Financial services revenue | 281.4 | 240.3 | |
Financial services expenses | (82.7) | (70.1) | |
Operating income from financial services | 198.7 | 170.2 | |
Operating earnings | 854.2 | 764.8 | |
Interest expense | (52.2) | (51.9) | |
Other income (expense) -- net | (0.6) | (2.4) | |
Earnings before income taxes and equity earnings | 801.4 | 710.5 | |
Income tax expense | (244.3) | (221.2) | |
Earnings before equity earnings | 557.1 | 489.3 | |
Equity earnings, net of tax | 2.5 | 1.3 | |
Net earnings | 559.6 | 490.6 | |
Net earnings attributable to noncontrolling interests | (13.2) | (11.9) | |
Net earnings attributable to Snap-on Incorporated | $ 546.4 | $ 478.7 | |
Continued next page
Snap-On Incorporated Consolidated Balance Sheets | ||
Fiscal Year End | ||
(Amounts in millions) | 2016 | 2015 |
Cash and cash equivalents | $ 77.6 | $ 92.8 |
Trade and other accounts receivable - net | 598.8 | 562.5 |
Finance receivables - net | 472.5 | 447.3 |
Contract receivables - net | 88.1 | 82.1 |
Inventories - net | 530.5 | 497.8 |
Deferred income tax assets | 0.0 | 109.9 |
Prepaid expenses and other assets | 116.5 | 106.3 |
Total current assets | 1,884.0 | 1,898.7 |
Property and equipment - net | 425.2 | 413.5 |
Deferred income tax assets | 72.8 | 106.3 |
Long-term finance receivables - net | 934.5 | 772.7 |
Long-term contract receivables - net | 286.7 | 266.6 |
Goodwill | 895.5 | 790.1 |
Other intangibles - net | 184.6 | 195.0 |
Other assets | 39.9 | 44.0 |
Total assets | 4,723.2 | 4,486.9 |
Notes payable and current maturities of long-term debt | 301.4 | 18.4 |
Accounts payable | 170.9 | 148.3 |
Accrued benefits | 52.8 | 52.1 |
Accrued compensation | 89.8 | 91.0 |
Franchisee deposits | 66.7 | 64.4 |
Other accrued liabilities | 307.9 | 296.3 |
Total current liabilities | 989.5 | 670.5 |
Long-term debt | 708.8 | 861.7 |
Deferred income tax liabilities | 13.1 | 169.8 |
Retiree health care benefits | 36.7 | 37.9 |
Pension liabilities | 246.5 | 227.8 |
Other long-term liabilities | 93.4 | 88.5 |
Total liabilities | 2,088.0 | $ 2,056.2 |
Preferred stock | – | – |
Common stock | 67.4 | $ 67.4 |
Additional paid-in capital | 317.3 | 296.3 |
Retained earnings | 3,384.9 | 2,986.9 |
Accumulated other comprehensive income (loss) | (498.5) | (364.2) |
Treasury stock at cost | (653.9) | (573.7) |
Total shareholders’ equity attributable to Snap-on Inc. | 2,617.2 | 2,412.7 |
Noncontrolling interests | 18.0 | 18.0 |
Total shareholders’ equity | 2,635.2 | 2,430.7 |
Total liabilities and shareholders’ equity | $ 4,723.2 | $ 4,486.9 |
Continued next page
Required:
a. Compute the company’s current ratio and quick ratio for fiscal 2016 and 2015. Comment on any observed trend.
b. Compute the company’s times interest earned and liabilities-to-equity ratio for 2016 and 2015. Comment on any observed trend.
c. Summarize your findings in a conclusion about the company’s liquidity and solvency. Do you have any concerns about the company’s ability to meet its debt obligations?
Topic: Use financial statements to calculate and interpret liquidity and solvency ratios for two companies in the same industry
LO: 9
10. Income statements and balance sheets follow for Microsoft Corporation and Apple Inc. Refer to these financial statements to answer the requirements.
MICROSOFT CORPORATION Income Statements For the years ended June 30, | ||
(in millions) | 2016 | 2015 |
Revenue | ||
Product | $61,502 | $75,956 |
Service | 23,818 | 17,624 |
Total revenue | 85,320 | 93,580 |
Cost of revenue | ||
Product | 17,880 | 21,410 |
Service and other | 14,900 | 11,628 |
Total cost of revenue | 32,780 | 33,038 |
Gross margin | 52,540 | 60,542 |
Research and development | 11,988 | 12,046 |
Sales and marketing | 14,697 | 15,713 |
General and administrative | 4,563 | 4,611 |
Impairment, integration, and restructuring | 1,110 | 10,011 |
Operating income | 20,182 | 18,161 |
Dividends and interest income | 903 | 766 |
Interest expense | (1,243) | (781) |
Other income (expense), net | (91) | 361 |
Income before taxes | 19,751 | 18,507 |
Provision for income taxes | 2,953 | 6,314 |
Net income | $16,798 | $ 12,193 |
Continued next page
MICROSOFT CORPORATION Balance Sheet As of June 30, | ||
(in millions) | 2016 | 2015 |
Current assets: | ||
Cash and cash equivalents | $ 6,510 | $ 5,595 |
Short-term investments | 106,730 | 90,931 |
Accounts receivable, net | 18,277 | 17,908 |
Inventories | 2,251 | 2,902 |
Other current assets | 5,892 | 5,461 |
Total current assets | 139,660 | 122,797 |
Property and equipment, net | 18,356 | 14,731 |
Equity and other investments | 10,431 | 12,053 |
Goodwill | 17,872 | 16,939 |
Intangible assets, net | 3,733 | 4,835 |
Other long-term assets | 3,642 | 3,117 |
Total assets | $193,694 | $174,472 |
Current liabilities: | ||
Accounts payable | $ 6,898 | $ 6,591 |
Short-term debt | 12,904 | 4,985 |
Current portion of long-term debt | 0 | 2,499 |
Accrued compensation | 5,264 | 5,096 |
Income taxes | 580 | 606 |
Short-term unearned revenue | 27,468 | 23,223 |
Other current liabilities | 6,243 | 6,647 |
Total current liabilities | 59,357 | 49,647 |
Long-term debt | 40,783 | 27,808 |
Long-term unearned revenue | 6,441 | 2,095 |
Deferred income taxes | 1,476 | 1,295 |
Other long-term liabilities | 13,640 | 13,544 |
Total liabilities | 121,697 | 94,389 |
Stockholders' equity: | ||
Common stock and paid-in capital | 68,178 | 68,465 |
Retained earnings | 2,282 | 9,096 |
Accumulated other comprehensive income | 1,537 | 2,522 |
Total stockholders' equity | 71,997 | 80,083 |
Total liabilities and stockholders' equity | $193,694 | $ 174,472 |
Continued next page
Apple Inc. Consolidated Statement of Operations | ||
Fiscal year ended | ||
(in millions) | Sept. 24, 2016 | Sept. 26, 2015 |
Net sales | $ 215,639 | $ 233,715 |
Cost of sales | 131,376 | 140,089 |
Gross margin | 84,263 | 93,626 |
Operating expenses | ||
Research and development | 10,045 | 8,067 |
Selling, general and administrative | 14,194 | 14,329 |
Total operating expenses | 24,239 | 22,396 |
Operating income | 60,024 | 71,230 |
Interest and dividend income | 3,999 | 2,921 |
Interest expense | (1,456) | (733) |
Other expense, net | (1,195) | (903) |
Income before provision for income taxes | 61,372 | 72,515 |
Provision for income taxes | 15,685 | 19,121 |
Net income | $ 45,687 | $ 53,394 |
Apple Inc. Consolidated Balance Sheets | ||
As of | ||
(in thousands) | Sept. 24, 2016 | Sept. 26, 2015 |
Cash and cash equivalents | $ 20,484 | $ 21,120 |
Short-term investments | 46,671 | 20,481 |
Accounts receivable, net | 15,754 | 16,849 |
Inventories | 2,132 | 2,349 |
Other current assets | 21,828 | 28,579 |
Total current assets | 106,869 | 89,378 |
Long-term marketable securities | 170,430 | 164,065 |
Property plant and equipment, net | 27,010 | 22,471 |
Goodwill | 5,414 | 5,116 |
Acquired intangible assets, net | 3,206 | 3,893 |
Other assets | 8,757 | 5,422 |
Total assets | 321,686 | 290,345 |
Table continued next page
Table continued
Apple Inc. Consolidated Balance Sheets—continued | ||
As of | ||
(in thousands) | Sept. 24, 2016 | Sept. 26, 2015 |
Accounts payable | 37,294 | 35,490 |
Accrued expenses | 22,027 | 25,181 |
Deferred revenue | 8,080 | 8,940 |
Current portion of LT debt and short-term debt | 11,605 | 10,999 |
Total current liabilities | 79,006 | 80,610 |
Deferred revenue – non-current | 2,930 | 3,624 |
Long-term debt | 75,427 | 53,329 |
Other non-current liabilities | 36,074 | 33,427 |
Total liabilities | 193,437 | 170,990 |
Stockholders’ equity | ||
Common stock no par value | 31,251 | 27,416 |
Retained earnings | 96,364 | 92,284 |
Accumulated other comprehensive income (loss) | 634 | (345) |
Total stockholders’ equity | 128,249 | 119,355 |
Total liabilities and stockholders’ equity | $ 321,686 | $ 290,345 |
Required:
a. Compute the current ratio and quick ratio for both firms for fiscal 2016. Compare the ratios and determine which company is more liquid.
b. Compute the times interest earned and liabilities-to-equity ratios for both firms for fiscal 2016. Which company is more solvent?
c. Do you have any concerns about either company’s ability to meet its debt obligations? Explain.
Topic: Use financial statements to compute and interpret traditional DuPont ROE ratios.
LO: 2, 3
11. Use the following balance sheets and income statements for Valero Energy Corporation to answer the requirements.
Valero Energy Corporation and Subsidiaries Consolidated Statements of Income | ||
(Millions of Dollars) | 2016 | 2015 |
Operating revenues | $ 75,659 | $ 87,804 |
Costs and expenses: | ||
Cost of sales | 65,962 | 73,861 |
Refining expenses | (747) | 790 |
Retail expenses | 4,207 | 4,243 |
Ethanol expenses | 715 | 710 |
General and administrative expenses | 1,894 | 1,842 |
Depreciation and amortization expense | 56 | 0 |
Asset impairment losses | ||
Total costs and expenses | 72,087 | 81,446 |
Operating income | 3,572 | 6,358 |
Other income, net | 56 | 46 |
Interest and debt expense | (446) | (433) |
Income from continuing operations before income tax expense | 3,182 | 5,971 |
Income tax expense | 765 | 1,870 |
Net income (loss) | 2,417 | 4,101 |
Less: Net income (loss) attributable to noncontrolling interests | 128 | 111 |
Net income attributable to Valero Energy stockholders | 2,289 | 3,990 |
Continued next page
Valero Energy Corporation and Subsidiaries Consolidated Balance Sheets | ||
(Millions of Dollars) | 2016 | 2015 |
Cash and temporary cash investments | $ 4,816 | $ 4,114 |
Receivables, net | 5,901 | 4,464 |
Inventories | 5,709 | 5,898 |
Income taxes receivable | 58 | 218 |
Prepaid expenses and other | 316 | 204 |
Total current assets | 16,800 | 14,898 |
Property, plant and equipment, net | 26,472 | 26,703 |
Deferred charges and other assets, net | 2,901 | 2,626 |
Total assets | 46,173 | 44,227 |
Current portion of debt and capital lease obligations | 115 | 127 |
Accounts payable | 6,357 | 4,907 |
Accrued expenses | 694 | 554 |
Taxes other than income taxes | 1,084 | 1,069 |
Income taxes payable | 78 | 337 |
Total current liabilities | 8,328 | 6,994 |
Debt and capital lease obligations, less current portion | 7,886 | 7,208 |
Deferred income taxes | 7,361 | 7,060 |
Other long-term liabilities | 1,744 | 1,611 |
Total liabilities | 25,319 | 22,873 |
Common stock | 7 | 7 |
Additional paid-in capital | 7,088 | 7,064 |
Treasury stock | (12,027) | (10,799) |
Retained earnings | 26,366 | 25,188 |
Accumulated other comprehensive income (loss) | (1,410) | (933) |
Total Valero Energy stockholders’ equity | 20,024 | 20,527 |
Noncontrolling interest | 830 | 827 |
Total equity | 20,854 | 21,354 |
Total liabilities and stockholders’ equity | $ 46,173 | $ 44,227 |
Required:
a. Compute Valero’s return on equity (ROE) for 2016 and 2015. Valero Energy stockholders’ equity in 2014 was $20,677 million.
b. Compute the profit margin (PM), asset turnover (AT), and financial leverage (FL) components of the basic DuPont model. Show that ROE = PM × AT × FL for 2016. Total assets were $45,550 million in 2014. Which component(s) explain the year over year change in Valero’s ROE?
c. Compute adjusted return on assets (ROA) for 2016 and 2015. Assume a tax rate of 37% for both years.
Answers:
a. ROE = Net income attributable to Valero / Average Valero stockholders’ equity
2016: $2,289 / [($20,024 + $20,527) / 2] = 11.3%
2015: $3,990 / [($20,527 + $20,677) / 2] = 19.4%
b. PM = Net income / Revenue
2016: $2,289 / $75,659 = 3.0%
2015: $3,990 / $87,804 = 4.5%
AT = Revenue / Average total assets
2016: $75,659 / [($46,173 + $44,227) / 2] = 1.67
2015: $87,804 / [($44,227 + $45,550) / 2] = 1.96
FL = Average total assets / Average stockholders’ equity
2016: [($46,173 + $44,227) / 2] / [($20,024 + $20,527) / 2] = 2.23
2015: [($44,227 + $45,550) / 2] / [($20,527 + $20,677) / 2] = 2.18
ROE = 3.0% × 1.67 × 2.23 = 11.2% (0.1% difference due to rounding)
The decrease in ROE in 2016, from 19.3% to 11.2%, was due to a decrease in profit margin and asset turnover.
c. Adjusted ROA = (Net income + after tax interest expense) / Average total assets
2016: [$2,289 + ($446 × 63%)] / [($46,173 + $44,227) / 2] = 5.7%
2015: [$3,990 + ($433 × 63%)] / [($44,227 + $45,550) / 2] = 9.5%
Essay Questions
Topic: Factors Limiting Usefulness of Ratio Analysis
LO: 9
1. Discuss factors that limit the usefulness of financial accounting information for ratio analysis.
Topic: Conglomerates and Ratio Analysis
LO: 9
2. Ratio analysis is more complicated when a company is a conglomerate. Why?
Topic: Margin and Turnover
LO: 7
3. Explain the trade-off between net operating profit margin and net operating asset turnover.
Topic: Disaggregation of ROE
LO: 8
4. Explain how return on net operating assets (RNOA) and financial leverage (FLEV) affect Return on Equity (ROE). Is greater FLEV always better?
Topic: Liquidity
LO: 9
5. What is liquidity? Identify and discuss two ways to measure a company’s liquidity.
Topic: Solvency
LO: 9
6. What is solvency? Identify and discuss two ways a company’s solvency is measured.
Topic: Traditional ROE (DuPont) analysis compared to RNOA analysis
LO: 6
7. What is the difference between the traditional ROA measure (part of the traditional DuPont analysis) and the return on net operating assets (RNOA)?
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