Preparation of income statement for Sandifer Manufacturing Company.
|
Particular |
Amount |
|
Revenue |
$ 4,500,000 |
|
Less : Cost of goods sold |
$ 3,375,000 |
|
Gross Profit |
$ 112,500 |
|
Less : Operating Expenses |
$ 450,000 |
|
Operating Profit |
$ $ 675,000 |
|
Less : Tax Liability at 30% |
$ 202,500 |
|
Net Profit |
$ 472,500 |
Net profit of the firm for the year is $ 472,000. Net profit of the company is the ultimate profit which is left after paying all the direct and indirect expenses and tax liability of the company. The net profit can be used either to distribute dividend or for the extension of the company. The extension of company can be referred as purchasing assets or starting new production line or it can be used to increase the liquidity of the company for the next year. The dividend distribution is must so some part of it has to be distributed as dividend to the shareholder as they are expecting some return from their investment in the company.
The gross profit is calculated first and then after that all the other profits are derived after making necessary subtraction and addition to the gross profit (Mathuva, 2015). The Gross Profit is derived after subtracting all the expenses related expenses like raw material cost and their ancillary expenses from the sales made in the year both credit and cash. Therefore cost of goods sold is subtracted from sales to calculate Gross profit. In the above case Gross profit is $ 112,500.
Operating profit is calculated from Gross profit after subtracting all the other expenses that are related to business such as electricity, depreciation, loss on investments and others. It means the profit available before tax (Wales, et. al., 2013).
Net profit is the ultimate profit that is distributed to the shareholders or preference share holders after providing tax at the applicable tax rate. This profit does not include any expenses at it is the last stage of calculating profit.
|
Particular |
Amount |
Analysis |
|
Revenue |
$ 4,500,000 |
100% |
|
Less : Cost of goods sold |
$ 3,375,000 |
75% of Sales |
|
Gross Profit |
$ 112,500 |
Gross profit rate 25% |
|
Less : Operating Expenses |
$ 450,000 |
10% of sales |
|
Operating Profit |
$ $ 675,000 |
Operating profit rate 15% |
|
Less : Tax Liability at 30% |
$ 202,500 |
|
|
Net Profit |
$ 472,500 |
10.5% Net profit rate |
From the above information it can be derived that the Sandifer Manufacturing Company is earning net profit at a rate of 10.5% from the revenue made throughout the year. The company is earning a suitable rate of return over the turnover by operating in a manufacturing industry. The gross profit percentage of the year is 25% and the operating profit percentage is 15%. The main part of expense includes cost of goods sold which is 75% percentage of the total turnover.
In the above solution profit available for distribution for dividend is $ 472,500
If the company is proposing to invest $ 50,000 back to its firm than the profit available for the shareholder as dividend will be as follows:
|
Particular |
Amount |
|
Net profit |
$ 472,500 |
|
Less : Retained earnings |
$ 50,000 |
|
Profit available for equity shareholders |
$ 422,500 |
|
Particular |
Amount |
|
Old Current ratio |
2 |
|
New Current Assets |
$ 10,000,000 |
|
Current Liabilities |
$ 6,000,000 |
|
New Current Ratio |
1.667 |
The liquidity can be checked by comparing the liquid ratio of King Carpet Company with the liquid ratios of other company. If the liquid ratio is more than the liquid ratio of other companies in the market than the King Carpet Company is more liquid than other companies, but if this ratio is less than ratio of other companies than the liquidity is less than other companies in the market.
Computation of company’s operating profit and net profit.
|
Particular |
Amount |
|
Sales |
$ 65,000,000 |
|
Operating Profit |
$ 7,800,000 |
|
Interest on liabilities |
$ 1,200,000 |
|
Less : Profit before tax |
$ 6,600,000 |
|
Less : Tax expenses |
$ 1,980,000 |
|
Profit after tax (Net profit ) |
$ 4,620,000 |
Formula Return on assets = Net Profit / Total assets
= ($ 4,620,000 / 42,000,000) * 100
= 11%
Formula for Return on Equity = Net Profit / Total Equity
= ($ 4,620,000 / $ 22,000,000) * 100
= 21%
These ratios measure the profitability of the company. The capacity of the company to pay back on the amount invested in the company (Bradford, et. al., 2013).
Formula for calculation of compound interest :
Amount = P (1 + R/100) n
75,000 = 50,000 (1 + 7 / 100) n)
1.5 = (1 + .07) n
1.5 = (1 .07) n
Number of year using the future value table is 6 years. It will take 6 years for $ 50,000 to grow into $ 75,000 at 7% rate.
Formula for calculation of compound interest :
Amount = P (1 + R/100) n
Amount = 50,000 (1 + .07)10.25
Amount = 50,000 (2.105)
Amount = $ 105,250
At the end of 10.25 year $ 105,250 will be received.
Note: interest is compounded annually at the last of the year therefore .25 year is not taken into consideration.
Formula for calculation of compound interest :
Amount = P (1 + R/100) n
75,000 = 50,000 (1 + 3 / 100) n)
1.5 = (1 + .03) n
1.5 = (1 .03) n
Number of year using the future value table is 6 years. It will take 14 years for $ 50,000 to grow into $ 75,000 at 3% rate.
Formula for calculation of compound interest :
Amount = P (1 + R/100) n
75,000 = 50,000 (1 + 11 / 100) n)
1.5 = (1 + .11) n
1.5 = (1 .11) n
Number of year using the future value table is 6 years. It will take 4 years or it can be said those 3.5 years for $ 50,000 to grow into $ 75,000 at 11% rate.
The interest rate in the account is high than the sum will grow at increasing rate over the years, therefore the required amount can be saved within short time as compared to the accounts in which the rate of interest is low. Therefore it can be said that when the amount is same than the number of year will increase if the rate will decrease and vice versa. There is inverse relationship between the number of year and rate of interest (Whicher, et. al., 2011).
Calculation of amount to be invested by Sarah
Required amount = $ 2,000,000
Rate of interest = 4%
Time = 35 years
Formula of compound interest
Amount = P (1 + r / 100) n
2,000,000 = P (1 + 0.04)35
P = 2,000,000 / (4.104)
P = 487,330
Therefore, Sarah has to invest $ 487,330 today to get $ 2 million at the end of 35 year with the interest rate of 4%.
Calculation of years in which $ 487,330 will grow to $ 2 million at an interest rate of 14%.
Formula of compound interest
Amount = P (1 + r / 100) n
2,000,000 = 487,330 (1 + 0.14) n
2,000,000 / 487,330 = (1.14) n
4.10 = (1.14) n
N = 10 years
Sarah will be able to retire in 10 years if she can earn 14% and invest $ 487,330 today.
Calculation of rate of return
Rate of return = total reward / value of the investment at the time of purchase
Calculation of total reward
|
Particular |
Amount |
|
Value at purchase |
$ 5.75 |
|
Value at selling |
$ 2.24 |
|
Profit on sale |
( $ 3.51 ) |
|
Add : dividend received |
$ 0.35 |
|
Total reward |
( $ 3.16) |
Calculation of rate of return:
= (-3.16 / 5.75) * 100
= -55%
Rate of return is negative because there is loss.
Calculation of rate of return earned:
Rate of return = total reward / value of the investment at the time of purchase
Calculation of total reward
|
Particular |
Amount |
|
Value at purchase |
$ 6615.2 |
|
Value at selling |
$ 3510.4 |
|
Profit on sale |
( $ 3104.8 ) |
|
Add : dividend received (4% of purchase price) |
$ 264.608 |
|
Total reward |
( $ 2840.192 ) |
Calculation of rate of return:
= (-2840.192 / 6615.2) * 100
= -42%
Rate of return is negative because there is a loss.
Mathuva, D. (2015). The Influence of working capital management components on corporate profitability.
Wales, W. J., Parida, V., & Patel, P. C. (2013). Too much of a good thing? Absorptive capacity, firm performance, and the moderating role of entrepreneurial orientation. Strategic Management Journal, 34(5), 622-633.
Campello, M., Giambona, E., Graham, J. R., & Harvey, C. R. (2011). Liquidity management and corporate investment during a financial crisis. The Review of Financial Studies, 24(6), 1944-1979.
Adrian, T., & Shin, H. S. (2010). Liquidity and leverage. Journal of financial intermediation, 19(3), 418-437.
Arrow, K. J., & Kruz, M. (2013). Public investment, the rate of return, and optimal fiscal policy (Vol. 1). Routledge.
Bradford, W., Chen, C., & Zhu, S. (2013). Cash dividend policy, corporate pyramids, and ownership structure: Evidence from China. International Review of Economics & Finance, 27, 445-464.
Whicher, A., Raulik?Murphy, G., & Cawood, G. (2011). Evaluating design: Understanding the return on investment. Design Management Review, 22(2), 44-52.
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