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TUTORIAL ACTIVITES
Tutorial Activities
Week Topics scheduled Chap(s)
(Questions)
Chap 3&4: SQ: 3.1, 3.3, 4.1, 4.3
3 Firm Financial Performance Evaluation 3&4 SP: 4.6, 4.8, 4.20, and 4.23
Chap 3
The primary distinction between these two statements is that the balance
sheet shows the financial condition of a firm at a given date, whereas the
income statement deals with the revenue and expenses of the firm incurred
during a specified period of time.
3–3 Interest expense is the cost of borrowing money from a banker or another
lender. There is typically a fixed interest rate so that the interest expense is
computed as the interest rate times the amount borrowed. If we borrow
$500,000 at an interest rate of 12% per annum (p.a.), then our interest
expense will be $60,000 p.a.
While interest is paid for the use of debt capital, dividends are paid to the
firm’s shareholders. Preference shares typically have a fixed dividend rate, so
that the preference shareholder gets a constant dividend each year. Ordinary
shareholders, on the other hand, usually receive dividends only if
management decides to pay a dividend instead of reinvesting the firm’s
profits. However, typically once a dividend has been paid to ordinary
shareholders, management is reluctant to decrease it or cease paying a
dividend.
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Solutions to Study Problems
The income statement (page 42)
3–1 (Working with the income statement) To find the net profit, we must
subtract all of the relevant expenses from the revenues: cost of goods sold,
operating expenses, interest and taxes Following the template from
Checkpoint 3.1, we find the following for Sandifer Manufacturing Company:
notes
Sales $4 500 given
000
Cost of goods sold (3 375 000) given
Gross profit 1 125 000
Operating expenses
Depreciation expenses (150 given
000)
Other operating (300
expenses 000)
Total operating expenses (450 000) given
Operating profit (EBIT) 675 000
3–3 (Working with the income statement) Marifield Steel Fabrication earned a
net profit of $500 000, then paid out a dividend of $300 000. This left $500
000 – $300 000 = $200 000 to be retained by the firm to finance growth.
However, earnings per share is based on net profit, not reinvested earnings.
Thus, the firm’s EPS is:
Chap 4
Solutions to Study Questions
4-1 Financial statements of firms are analysed both within the firm and by the
firm’s external constituents. Internal financial analysis is performed by a
firm’s own employees, while external financial analysis is performed by
bankers and investors outside the firm.
Internal financial analyses are done for one or more of the following reasons:
2
to evaluate the performance of employees and determine their pay
raises and bonuses
to compare the financial performance of the firm’s different divisions
to prepare financial projections, such as those associated with the
launch of a new product
to evaluate the financial performance of the firm’s competitors and
determine how the firm might improve its own operations
to evaluate the financial well-being of an important supplier so that if
the supplier is facing the risk of failure the firm can move quickly to
line up alternative sources of supply
to determine the credit worthiness of new customers.
banks and other lenders who are trying to decide whether to lend
money to the company
suppliers trying to decide whether to grant credit to the company
credit-rating agencies who are trying to determine the firm’s
creditworthiness
professional analysts who work for investment companies that may be
considering investing in the firm or advising others about investing
individual investors trying to decide whether to invest in the company.
4-3 Five basic questions used to discuss financial statement analysis are:
How liquid is the firm? (Will it be able to pay its bills as they come
due?)
How has the firm financed the purchase of its assets?
How efficient has the firm’s management been in utilizing its assets to
generate sales?
Has the firm earned adequate returns on its investments?
Are the firm’s managers creating value for shareholders?
(b)
3
4-8 Profitability analysis
Sales $8000
Total asset turnover = = = 1.00
Total assets $8000
4
Operating profit or EBIT $1700
Operating profit margin = = = 21.3%
Sales $8000
Accounts receivable
Average collection period =
Annual credit sales/365 days
$2000
= = 91.3 days
$8000 / 365
Sales $8000
Fixed assed turnover = = = 1.78 times
Net plant and equipment $4500