Income Statement (2013-2015) 2013 2014 2015 Sales ............................................................. $4,269,871 $4,483,360 $5,021,643 Cost of goods sold ............................................................. 2,991,821 2,981,434 3,242,120 Gross Profit ............................................................. $1,278,050 $1,501,926 $1,779,523 Selling and administrative expense ............................................................. 865,450 1,004,846 1,175,100 Operating profit ............................................................. $412,600 $497,080 $604,423

Interest expense ............................................................. 115,300 122,680 126,241 Extraordinary loss ............................................................. __ __ 170,000 Net income before taxes ............................................................. 297,300 374,400 308,182 Taxes ............................................................. 104,100 131,300 107,864 Net income ............................................................. $ 193,200 $ 243,100 $ 200,318

Examine the income statement in Figure 1 above. Note that there was an extraordinary loss of $170,000 in 2015. This might have represented uninsured losses from a fire, a lawsuit settlement, etc. It probably does not represent a recurring event or affect the earnings capability of the firm. For that reason, the astute financial analyst might add back in the extraordinary loss to gauge the true operating earnings of the firm. Since it was a tax-deductible item, we must first multiply by (1-tax rate) before adding it back in.*

The tax rate was 35 percent for the year.

$170,000 Extraordinary loss_____.65_ (1-tax rate)

$110,500 After-tax addition to profits from eliminating the extraordinary loss from net income.

The more representative net income number for 2015 would now be:

Initially reported (Figure 1 above) $200,318

Adjustment for extraordinary loss being eliminated +110,500_

Adjusted net income $310,818

Note: This adjustment was made because the $170,000 deduction saved 35 percent of this amount in taxes. If we eliminate the $170,000, the tax benefit would also be eliminated. Thus, the firm would only benefit by 65 percent of $170,000, based on a 35 percent tax rate. The after-tax benefit of the tax adjustment for the extraordinary loss is $110,500.

A. Recompute the same ratios for 2015 using the adjusted net income figure of $310,818.

Selected Industry Ratios for 2015 1. Net income/Sales 4.51% 2a. Net income/Total Assets 5.10% 2b. Sales/Total Assets 1.33 x 3a. Net income/Stockholders Equity 9.80% 3b. Debt/Total Assets 0.48 4. Sales/Receivables 5.75 x 5. Sales/Inventory 3.01 x 6. Sales/Fixed Assets 3.20 x +