CheckPoint: Preparing an Income Statement
· Resources: Ch. 3 of Understanding Financial Statements; multistep_template.xls · Due Date: Day 5 [Individual forum]
· Complete Problem 3.10 on p. 109 (Ch. 3). Use the multistep_template.xls to prepare a multiple-step income statement. Then write a 200- to 300-word summary discussing the implications of profitability and net income of the company. The company has a good profit margin measured as 41.51% and also a good net profit margin measured as 9.5%. This means that company has a high percentage of non operating expenses which can be reduced to increase the net profit margin. The primary concern in the non operating expenses is selling expenses which are about 15.33% of sales. The company is expensing too much on selling but is not getting the desired result. The usual suspect in selling expenses is advertising which can be reduced to control the expenses. The company also do not have sufficient financial leverage in their capital structure. The financial leverage is calculated as EBIT / EBIT – Interest = 320000 / 304000 = 1.05. Considering the high tax rate of 40% to which the company is subject to, a high financial leverage could be employed by the company to magnify the returns to equity shareholders. But the care should be taken that financial leverage is not too high that they plunge the company into financial distress. The depreciation is also very less which points out to a key factor that either company is using old equipments or not having sufficient assets to support the operations. This might also be hindering the sales because company will not be able to produce as per the market demand.
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