Finance Masters

Constructing and Assessing Income Statements Using Percentage-of Completion
On March 15, 2012, Frankel Construction contracted to build a shopping center at a contract price of $120 million. The schedule of expected (which equals actual) cash collection and contract costs follow ($ millions):

Year	Cash Collections	Cost Incurred
2012	$ 30	$ 25
2013	50	20
2014	40	40
Total	$ 120	$ 85

(a) Calculate the amount of revenue, expense, and net income for each of the three years 2012 through 2014 using the percentage-of-completion revenue recognition method. Rounding instructions: Round percentages to the nearest whole number. Use rounded percentages for remaining calculations. Round revenue and income to the nearest whole number.

Percentage of Completion Method

Year

Costs incurredQuestion 2

Compute NOPAT Using Tax Rates from Tax Footnote The income statement for The TJX Companies, Inc., follows.

THE TJX COMPANIES, INC. Consolidated Statements of Income
Fiscal Year Ended ($ thousands)	January 27, 2007
Net sales	$17,404,637
Cost of sales, including buying and occupancy costs	13,213,703
Selling, general and administrative expenses	2,923,560
Provision (credit) for computer intrusion related costs	4,960
Interest expense (revenue), net	15,566
Income from continuing operations before provision for income taxes	1,246,848
Provision for income taxes	470,092
Income from continuing operations	776,756
Gain/(loss) from discontinued operations, net of income taxes	(38,717)
Net income	$ 738,039

U.S. federal statutory income tax rate	35.0%
Effective state income tax rate	4.0%
Impact of foreign operation	-0.4%
All other	-0.9%
Worldwide effective income tax rate	37.7%

Compute TJX’s NOPAT for 2007 using its income tax footnote disclosure. (The Federal and State tax rate for 2007 as reported by TJX’s tax footnote is: 39.0%). Round to the nearest whole number. 2007 NOPAT = $Answer

Question 3

Analysis and Interpretation of Profitability Balance sheets and income statements for Nordstrom, Inc. follow. Refer to these financial statements to answer the requirements.

NORDSTROM, INC. Consolidated Statements of Earnings
For Fiscal Years Ended ($ millions)	2010	2009	2008
Sales	$ 8,258	$ 8,272	$ 8,828
Credit card revenues	369	301	252
Total revenues	8,627	8,573	9,080
Cost of sales and related buying and occupancy costs	(5,328)	(5,417)	(5,526)
Selling, general and administrative expenses
Retail	(2,109)	(2,103)	(2,130)
Credit	(356)	(274)	(177)
Earnings before interest and income taxes	834	779	1,247
Net interest expense	(138)	(131)	(74)
Earnings before income taxes	696	648	1,173
Income tax expense	(255)	(247)	(458)
Net earnings	$ 441	$ 401	$ 715

NORDSTROM, INC. Consolidated Balance Sheets
($ millions)	January 30, 2010	January 31, 2009
Assets
Current Assets
Cash and cash equivalents	$ 795	$ 72
Accounts receivable, net	2,035	1,942
Merchandise inventories	898	900
Current deferred tax assets, net	238	210
Prepaid expenses and other	88	93
Total current assets	4,054	3,217
Land, buildings and equipment, net	2,242	2,221
Goodwill	53	53
Other assets	230	170
Total assets	$ 6,579	$ 5,661
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable	$ 726	$ 563
Accrued salaries, wages and related benefits	336	214
Other current liabilities	596	525
Current portion of long-term debt	356	299
Total current liabilities	2,014	1,601
Long-term debt, net	2,257	2,214
Deferred property incentives, net	469	435
Other liabilities	267	201
Shareholders’ equity
Common stock, no par value	1,066	997
Retained earnings	525	223
Accumulated other comprehensive income (loss)	(19)	(10)
Total shareholders’ equity	1,572	1,210
Total liabilities and shareholders’ equity	$ 6,579	$ 5,661

(a) Compute net operating profit after tax (NOPAT) for 2010. Assume that the combined federal and statutory rate is: 37.0%. (Round your answer to the nearest whole number.) 2010 NOPAT = $Answer

(b) Compute net operating assets (NOA) for 2010 and 2009. 2010 NOA = $Answer

2009 NOA = $Answer

(c) Compute RNOA, net operating profit margin (NOPM), and net operating asset turnover (NOAT) for 2010. Do not use NOPM x NOAT to calculate RNOA. (Do not round until final answers. Round to two decimal places.) 2010 RNOA = Answer

% 2010 NOPM = Answer

% 2010 NOAT = Answer

(d) Compute net operating obligations (NNO) for 2010 and 2009. 2010 NNO = $Answer

2009 NNO = $Answer

(e) Compute return on equity (ROE) for 2010. (Round your answers to two decimal places. Do not round until your final answer.) 2010 ROE = Answer

(f) Infer the nonoperating return component of ROE for 2010. (Use answers from above to calculate. Round your answer to two decimal places.) 2010 nonoperating return = Answer

(g) Comment on the difference between ROE and RNOA. Which of the following statements best describes the inference from the difference between Nordstrom’s ROE and RNOA?

ROE>RNOA implies that Nordstrom’s equity has grown faster than its NOA. The faster increase of equity compared to NOA allows higher dividends to be paid to Nordstrom’s stockholders.

ROE>RNOA implies that Nordstrom is able to borrow money to fund operating assets that yield a return greater than its cost of debt. The excess accrues to the benefit of Nordstrom’s stockholders.

ROE>RNOA implies that Nordstrom has taken on too much financial leverage. The high financial leverage results in a higher interest rate on Nordstrom’s debt, therefore the cost of debt is greater.

ROE>RNOA implies that Nordstrom has increased its financial leverage during the period. The increase in financial leverage also increases Nordstrom’s risk, therefore increasing the expected ROE by Nordstrom’s stockholders.

Question 4

Interpreting Foreign Currency Translation Disclosure Bristol-Myers Squibb (BMY) reports the following table in its 10-K report relating to the change in sales from 2007 to 2008.

	Analysis of % Change
	Total Change	Volume	Price	Foreign Exchange
U.S. net sales	16%	9%	7%	—
Foreign net sales	10%	4%	1%	5%
Total net sales	13%	7%	4%	2%

(a) Includes Puerto Rico. (b) Includes Russia and Turkey. (c) Includes Japan, China, Canada, Australia and Brazil, among other countries.

Hint: Do not enter any negative signs with your answers.

(a) By what percentage did U.S. net sales change during the year? How much of this change is attributable to volume versus price change? 2008 change in U.S. net sales: Answer by Answer

% Volume change: Answer by Answer

% Price change: Answer by Answer

% Exchange rate: Answer by Answer

% (b) By what percentage did foreign net sales change during the year? How much of this change is attributable to volume versus price change? 2008 change in foreign net sales: Answer by Answer

% Volume change: Answer by Answer

% Price change: Answer by Answer

% Exchange rate: Answer by Answer

% (c) Is the change in total net sales equal to the average of the changes in U.S. and foreign net sales? What does this imply?

Yes, U.S. sales increase by 16 percent, and foreign sales increase by 10 percent, for an average increase of 13%. This implies that U.S. sales are much larger than foreign sales.

Yes, U.S. sales increase by 16 percent, and foreign sales increase by 10 percent, for an average increase of 13%. This implies that U.S. sales are much smaller than foreign sales.

Yes, U.S. sales increase by 16 percent, and foreign sales increase by 10 percent, for an average increase of 13%. This implies that U.S. sales and foreign sales are fairly close in dollar terms.

No, the change in net sales is not equal to the average of the changes in U.S. and foreign net sales because foreign sales are much larger than U.S. sales.

Question 5

Constructing and Assessing Income Statements Using Percentage-of Completion On March 15, 2012, Frankel Construction contracted to build a shopping center at a contract price of $120 million. The schedule of expected (which equals actual) cash collection and contract costs follow ($ millions):

Year	Cash Collections	Cost Incurred
2012	$ 30	$ 25
2013	50	20
2014	40	40
Total	$ 120	$ 85

Percentage of Completion Method
Year	Costs incurred	Percent of total expected costs	Revenue recognized	Income
2012	$Answer	Answer %	$Answer	$Answer
2013	Answer	Answer %	Answer	Answer
2014	Answer	Answer %	Answer	Answer
	$85		$120	$35

(b) Which of the following statements best summarizes our conclusion about the usefulness of the percentage-of-completion method for this company?

The percentage -of-completion method is not useful because it does not provide information about the total revenues over the life of the project.

The percentage-of-completion method is an acceptable method under GAAP.

The percentage-of-completion method does not provide a good estimate of the revenue and income earned in each period.

The percentage -of-completion method is not useful because it is so dependent upon the completion estimate used by the company and can be easily manipulated.

Check

Question 2

Compute NOPAT Using Tax Rates from Tax Footnote

The income statement for The TJX Companies, Inc., follows.

THE TJX COMPANIES, INC.

Consolidated Statements of Income

Fiscal Year Ended ($ thousands)

January 27, 2007

Net sales

$17,404,637

Cos

t of sales, including buying and occupancy costs

13,213,703

Selling, general and administrative expenses

2,923,560

Provision (credit) for computer intrusion related costs

4,960

Interest expense (revenue), net

15,566

Income from continuing operations

before provision for income taxes

1,246,848

Provision for income taxes

470,092

Income from continuing operations

776,756

Gain/(loss) from discontinued operations, net of income taxes

(38,717)

Net income

$ 738,039

U.S. federal statutory income t

ax rate

35.0%

Effective state income tax rate

4.0%

Impact of foreign operation

–

0.4%

All other

–

0.9%

Worldwide effective income tax rate

37.7%

Compute TJX’s NOPAT for 2007 using its income tax footnote disclosure. (The Federal and

State tax rate for

2007 as reported by TJX’s tax footnote is: 39.0%). Round to the nearest whole

number.

2007 NOPAT = $Answer

Check

Question 3

Analysis and Interpretation of Profitability

Balance sh

eets and income statements for Nordstrom, Inc. follow. Refer to these financial

statements to answer the requirements.

Finance Masters

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