ACCT 551 Module 4

Analysis and Interpretation of Profitability Balance sheets and income statements for 3M Company follow.

Net sales	$26,662	$23,123	$25,269
Operating expenses
Cost of sales	13,831	12,109	13,379
Selling, general and administrative expenses	5,479	4,907	5,245
Research, development and related expenses	1,434	1,293	1,404
Loss/(gain) from sale of business	--	--	23
Total operating expenses	20,744	18,309	20,051
Operating income	5,918	4,814	5,218
Interest expenses and income
Interest expense	201	219	215
Interest income	(38)	(37)	(105)
Total interest expense	163	182	110
Income before income taxes	5,755	4,632	5,108
Provision for income taxes	1,592	1,388	1,588
Net income including noncontrolling interest	4,163	3,244	3,520
Less: Net income attributable to noncontrolling interest	78	51	60
Net income	$ 4,085	$ 3,193	$ 3,460

Assets
Current Assets
Cash and cash equivalents	$ 3,377	$ 3,040
Marketable securities-current	1,101	744
Accounts receivable-net	3,615	3,250
Inventories
Finished goods	1,476	1,255
Work in process	950	815
Raw materials and supplies	729	569
Total inventories	3,155	2,639
Other current assets	967	1,122
Total current assets	12,215	10,795
Marketable securities-noncurrent	540	825
Investments	146	103
Property, plant and equipment	20,253	19,440
Less: Accumulated depreciation	(12,974)	(12,440)
Property, plant and equipment-net	7,279	7,000
Goodwill	6,820	5,832
Intangible assets-net	1,820	1,342
Prepaid pension benefits	74	78
Other assets	1,262	1,275
Total assets	$ 30,156	$ 27,250
Liabilities
Current liabilities
Short-term borrowings and current portion of long-term debt	$ 1,269	$ 613
Accounts payable	1,662	1,453
Accrued payroll	778	680
Accrued income taxes	358	252
Other current liabilities	2,022	1,899
Total current liabilities	6,089	4,897
Long-term debt	4,183	5,097
Pension and postretirement benefits	2,013	2,227
Other liabilities	1,854	1,727
Total liabilities	14,139	13,948
Equity
3M Company shareholders' equity: Common stock, par value $.01 per share;	9	9
Additional paid-in capital	3,468	3,153
Retained earnings	25,995	23,753
Treasury stock	(10,266)	(10,397)
Accumulated other comprehensive income (loss)	(3,543)	(3,754)
Total 3M Company shareholders' equity	15,663	12,764
Noncontrolling interest	354	538
Total equity	16,017	13,302
Total liabilities and equity	$ 30,156	$ 27,250

(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

($ millions)

(b) Compute net operating assets (NOA) for 2010 and 2009. Treat noncurrent Investments as a nonoperating item.

2010 NOA =

Answer

($ millions)

2009 NOA =

Answer

($ millions)

(c) Compute 3M's RNOA, net operating profit margin (NOPM) and net operating asset turnover (NOAT) for 2010. (Round your answers to two decimal places. Do not round until your final answer. Do not use NOPM x NOAT to calculate RNOA.)

2010 RNOA =

Answer

%

2010 NOPM =

Answer

%

2010 NOAT =

Answer

(d) Compute net nonoperating obligations (NNO) for 2010 and 2009.

2010 NNO =

Answer

($ millions)

2009 NNO =

Answer

($ millions)

(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) What is the nonoperating return component of ROE for 2010? (Round your answers to two decimal places.)

2010 nonoperating return =

Answer

%

(g) Which of the following statements reflects the best inference we can draw from the difference between 3M's ROE and RNOA?

ROE > RNOA implies that 3M has taken on too much financial leverage.ROE > RNOA implies that 3M is able to borrow money to fund operating assets that yield a return greater than its cost of debt.

ROE > RNOA implies that 3M's equity has grown faster than its NOA.ROE > RNOA implies that 3M has increased its financial leverage during the period.

Question 2

Partially correct 0.56 points out of 5.00 Flag question

Question text

Analysis and Interpretation of Profitability Balance sheets and income statements for Target Corporation follow.

Sales	$ 61,471	$ 57,878	$ 51,271
Credit card revenues	1,896	1,612	1,349
Total revenues	63,367	59,490	52,620
Cost of sales	41,895	39,399	34,927
Selling, general and administrative expenses	13,704	12,819	11,185
Credit card expenses	837	707	776
Depreciation and amortization	1,659	1,496	1,409
Earnings before interest and income taxes	5,272	5,069	4,323
Net interest expense	647	572	463
Earnings before income taxes	4,625	4,497	3,860
Provisions for income taxes	1,776	1,710	1,452
Net earnings	$ 2,849	$ 2,787	$ 2,408

Assets
Cash and cash equivalents	$ 2,450	$ 813
Credit card receivables	8,054	6,194
Inventory	6,780	6,254
Other current assets	1,622	1,445
Total current assets	18,906	14,706
Property and equipment
Land	5,522	4,934
Buildings and improvements	18,329	16,110
Fixtures and equipment	3,858	3,553
Computer hardware and software	2,421	2,188
Construction-in-progress	1,852	1,596
Accumulated depreciation	(7,887)	(6,950)
Property and equipment, net	24,095	21,431
Other noncurrent assets	1,559	1,212
Total assets	$ 44,560	$ 37,349
Liabilities and shareholders' investment
Accounts payable	$ 6,721	$ 6,575
Accrued and other current liabilities	3,097	3,180
Current portion of long-term debt and notes payable	1,964	1,362
Total current liabilities	11,782	11,117
Long-term debt	15,126	8,675
Deferred income taxes	470	577
Other noncurrent liabilities	1,875	1,347
Shareholders' investment
Common stock	68	72
Additional paid-in-capital	2,656	2,387
Retained earnings	12,761	13,417
Accumulated other comprehensive income (loss)	(178)	(243)
Total shareholders' investment	15,307	15,633
Total liabilities and shareholders' equity	$ 44,560	$ 37,349

(a) Compute Target's quick ratio and current ratio for 2008 and 2007.(Round your answers to two decimal places.)

2008 current ratio = Answer

2007 current ratio =

Answer

2008 quick ratio =

Answer

2007 quick ratio =

Answer

(b) Compute Target's time interest earned and its liabilities-to-equity ratios for 2008 and 2007. (Round your answers to two decimal places.)

2008 times interest earned = Answer

2007 times interest earned =

Answer

2008 liabilities-to-equity =

Answer

2007 liabilities-to-equity =

Answer

Comment on any observed trends. Which of the following statements best describes any trend in Target's liabilities-to-equity ratios?

The decrease in Target's liabilities-to-equity ratio remained constant.Target's liabilities-to-equity ratio increased, reflecting the increased liability load.

Target's liabilities-to-equity ratio increased during the year primarily due to an increase in its equity.Target's liabilities-to-equity ratio decreased due to an increase in its equity.

Question 3

Partially correct 0.38 points out of 5.00 Flag question

Question text

Analysis and Interpretation of Profitability Balance sheets and income statements for Best Buy Co., Inc. follow.

Revenue	$ 50,272	$ 49,694	$ 45,015
Cost of goods sold	37,611	37,534	34,017
Restructuring charges - cost of goods sold	24	--	--
Gross Profit	12,637	12,160	10,998
Selling, general and administrative expenses	10,325	9,873	8,984
Restructuring charges	198	52	78
Goodwill and tradename impairment	--	--	66
Operating income	2,114	2,235	1,870
Other income (expense)
Investment income and other	51	54	35
Investment impairment	--	--	(111)
Interest expense	(87)	(94)	(94)
Earnings before income tax expense and equity in income of affiliates	2,078	2,195	1,700
Income tax expense	714	802	674
Equity in income of affiliates	2	1	7
Net earnings including noncontrolling interest	1,366	1,394	1,033
Net income attributable to noncontrolling interest	(89)	(77)	(30)
Net income attributable to Best Buy Co., Inc.	$ 1,277	$ 1,317	$ 1,003

Assets
Current assets
Cash and cash equivalents	$ 1,103	$ 1,826
Short-term investments	22	90
Receivables	2,348	2,020
Merchandise inventories	5,897	5,486
Other current assets	1,103	1,144
Total current assets	10,473	10,566
Property and equipment
Land and buildings	766	757
Leasehold improvements	2,318	2,154
Fixtures and equipment	4,701	4,447
Property under capital lease	120	95
	7,905	7,453
Less: Accumulated depreciation	4,082	3,383
Property and equipment, net	3,823	4,070
Goodwill	2,454	2,452
Tradenames, net	133	159
Customer relationships, net	203	279
Equity and other investments	328	324
Other noncurrent assets	435	452
Total assets	$ 17,849	$ 18,302
Liabilities and equity
Current liabilities
Accounts payable	$ 4,894	$ 5,276
Unredeemed gift card liabilities	474	463
Accrued compensation and related expenses	570	544
Accrued liabilities	1,471	1,681
Accrued income taxes	256	316
Short-term debt	557	663
Current portion of long-term debt	441	35
Total current liabilities	8,663	8,978
Long-term liabilities	1,183	1,256
Long-term debt	711	1,104
Equity
Best Buy Co., Inc. Shareholders' equity
Preferred stock, $1.00 par value	--	--
Common stock, $0.10 par value	39	42
Additional paid-in capital	18	441
Retained earnings	6,372	5,797
Accumulated other comprehensive income (loss)	173	40
Total Best Buy Co., Inc. shareholders' equity	6,602	6,320
Noncontrolling interest	690	644
Total equity	7,292	6,964
Total liabilities and equity	$ 17,849	$ 18,302

(a) Compute the following for Best Buy Co.. Hint: RNOA is 18.86% and NOPAT is $1,389. Rounding instructions: Do not round until your final answer. Round FLEV and NCI ratio four decimal places. Round Spread and NNEP two decimal places. Remember to use negative signs in answers when appropriate. 2011NNO (Net non-operating obligations) =Answer

($ millions)

2010NNO (Net non-operating obligations) =

Answer

($ millions)

2011NNE (Net non-operating expense) =

Answer

($ millions)

2011NNEP (Net nonoperating expense percent) =

Answer

%

2011FLEV =

Answer

2011Spread =

Answer

%

2011NCI ratio =

Answer

(b) Assume that Best Buy Co.'s return on equity (ROE) for 2011 is 19.76% and its return on net operating assets (RNOA) is 18.86%. Confirm computations to yield the relation: ROE = [RNOA + (FLEV X Spread)] X NCI ratio.

2011 ROE =

Answer

% = [

Answer

%+(

Answer

X

Answer

%)] X

Answer

(c) What do your computations of the nonoperating return in parts (a) and (b) imply about the company's use of borrowed funds

Best Buy is able to borrow funds and invest the proceeds in operating assets yielding a return in excess of the cost of its debt which results in a benefit to stockholders.

Best Buy is able to borrow funds, however, is unable to invest the proceeds in operating assets to yield a return in excess of the cost of its debt which results in a loss for stockholders.Best Buy is heavily debt financed and unable to earn a sufficient return with the proceeds to cover the cost of its debt, which results in a loss to stockholders.Best Buy is able to borrow fund and invest the proceeds in operating assets yielding a return in excess of the cost of its debt. However, it results in a loss to its stockholders.