Controllership HW 6

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Questions

Module 6
Homework Assignment
Use the information given in the green tabs to solve the questions below
(answers in yellow, and show formulas used when applicable.)
1) Calcluate the following profitablility ratios:
2010 2009 Formulas
a) Percent return on net sales
b) Percent return on assets employed
i) What does the percent return on net sales indicate?
ii) What does the percent return on assets employed indicate?
iii) What does the change from 2009 to 2010 in the percent return on assets mean for the company?
2) The CFO wants a projection for 2011 showing a net profit margin of 25%.
What changes would have to happen for the net profit to increase?
3) What was the long term debt to equity ratio in 2009.
2009 Formulas
Ratio of Long Term Debt To Equity
What does this mean?
What is better a higher or lower ratio?
4) What are liquidity measures?
Choose two ratios that assist in the determination of these measures.
(show the answers for both year as well as the formula) - (hint see page 360-361 of text)
2010 2009 Formulas
Ratio #1
Ratio #2
5) What are debt service (coverage) ratios
What is the formula to use
to determine debt service coverage
6) The two purple tabs show the breakdown of each division in this company.
What types of items might you decide to "trend" based on the information shown.
(ie, if sales in one division declined from one year to the next, what kinds of trends might you want to
start paying attention to. -- hint page 373 and 374)
7) Describe at least two things that could happen within this company that would make it necessary for
the controller to dig into the numbers and provide a write up to management.
(for instance, the controller might notice that inventory has shrunk by over 50% what
might he look for in the numbers and what ratios might he use to check things before alerting management)

Income Statement

Newton Inc
Statement of Income
12/31/10 12/31/09
Revenues $ 18,000,000 $ 17,650,000
Rental Income - -
Total Revenues 18,000,000 17,650,000
Cost of Revenues 10,983,333 10,502,000
Gross Profit 7,016,667 7,148,000
Selling, General and Administrative Expenses 3,000,000 3,000,000
Income from Operations 4,016,667 4,148,000
Other Income (Expense):
Interest Expense (16,000) (17,000)
Interest Income 36,000 36,000
Gain (Loss) from Foreign Currency Exchange - -
Total Other Income (Expense) 20,000 19,000
Total Income (loss) before Provision for Income Taxes 4,036,667 4,167,000
Provision for Income Taxes (1,009,167) (1,041,750)
Net Income $ 3,027,500 $ 3,125,250
Other Comprehensive Income:
Foreign Currency Translation Adjustment 0 0
Comprehensive Income 3027500.25 3125250

Bal. Sheet. Retain. Earnings

Newton Inc
Balance Sheet
12/31/10
12/31/2010 12/31/2009
Assets
Current Assets:
Cash and Equivalents $ 1,389,781 $ 500,000
Accounts Receivable, Net 350,000 350,000
Inventory 475,000 400,000
Prepaid Expenses and Other Current Assets 27,500 27,500
Total Current Assets 2,242,281 1,277,500
Property and Equipment, Net 1,279,000 1,179,000
Other Assets 100,000 100,000
- -
Total Assets $ 3,621,281 $ 2,556,500
Liabilities and Stockholders' Equity
Current Liabilities: $ 0
Current Maturities of Long-Term Debt $ 686,211 $ 485,000
Accrued Other 26,842 27,842
Accounts Payable 350,000 250,000
Accrued Expenses 27,500 27,500
Total Current Liabilities 1,090,553 790,342
Long-Term Debt, Net of Current Maturities 475,000
Accrued Other Long Term 45,000 45,000
- -
Total Liabilities 1,135,554 1,310,343
- -
Shareholders' Equity:
Common Stock ( .50 par) 885,000 885,000 1,770,000 shares outstanding
Retained Earnings 1,744,728 505,158
- -
2,629,727 1,390,157
Less: Treasury Stock 144,000 144,000
Total Stockholders' Equity 2,485,727 1,246,157
Total Liabilities and Stockholders' Equity $ 3,621,281 $ 2,556,500
-
Statement of Retained Earnings
for the Year Ended 2009
Beginning Retained Earnings, January 1 (2,000,000)
Plus Net Income 3,125,250
1,125,250
Less Dividends (620,092)
Ending Retained Earnings 12/31/09 505,158 -
Statement of Retained Earnings
for the Year Ended 2010
Beginning Retained Earnings, January 1 505,158
Plus Net Income 3,027,500
3,532,658
Less Dividends (1,787,930)
Ending Retained Earnings 12/31/10 1,744,728

IS per Division 2010

Newton Inc
Statements of Income Per Division
YTD 12/31/10
Shoes Clothing Accessories Total
Revenues $ 10,500,000 $ 5,000,000 $ 2,500,000 $ 18,000,000
- - -
Total Revenues 10,500,000 5,000,000 2,500,000 18,000,000
Cost of Revenues 8,050,000 1,933,333 1,000,000 10,983,333
Gross Profit 2,450,000 3,066,667 1,500,000 7,016,667
Selling, General and Administrative Expenses 1,000,000 1,000,000 1,000,000 3,000,000
Income from Operations 1,450,000 2,066,667 500,000 4,016,667
Other Income (Expense):
Interest Expense (16,000) - - (16,000)
Interest Income 12,000 12,000 12,000 36,000
- - -
Total Other Income (Expense) (4,000) 12,000 12,000 20,000
Income Before Provision for Income Taxes 1,446,000 2,078,667 512,000 - 4,036,667
Provision for Income Taxes 361,500 519,667 128,000 - 1,009,167
Income 1,084,500 1,559,000 384,000 3,027,500
- - - -
Net Income $ 1,084,500 $ 1,559,000 $ 384,000 $ 3,027,500
$ 1,084,500 $ 1,559,000 $ 384,000 $ 3,027,500

IS per Division 2009

Newton Inc
Statements of Income Per Division
YTD 12/31/09
Shoes Clothing Accessories Total
Revenues $ 9,500,000 $ 5,500,000 $ 2,650,000 $ 17,650,000
- - -
Total Revenues 9,500,000 5,500,000 2,650,000 17,650,000
Cost of Revenues 7,280,000 2,157,000 1,065,000 10,502,000
Gross Profit 2,220,000 3,343,000 1,585,000 7,148,000
Selling, General and Administrative Expenses 1,000,000 1,000,000 1,000,000 3,000,000
Income from Operations 1,220,000 2,343,000 585,000 4,148,000
Other Income (Expense):
Interest Expense (17,000) - - (17,000)
Interest Income 12,000 12,000 12,000 36,000
- - -
Total Other Income (Expense) (5,000) 12,000 12,000 19,000
Income Before Provision for Income Taxes 1,215,000 2,355,000 597,000 - 4,167,000
Provision for Income Taxes 303,750 588,750 149,250 - 1,041,750
Income 911,250 1,766,250 447,750 3,125,250
- - - -
Net Income $ 911,250 $ 1,766,250 $ 447,750 $ 3,125,250
$ 911,250 $ 1,766,250 $ 447,750 $ 3,125,250

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