University of Alexandria

Faculty of Business
Executive MBA Program – Spring, 2024

“Take Home Exercises”

on “Financial Reporting”

Submitted To
Dr. Mohamed Tahoon

Course Title: Financial Reporting

Submitted By: Nahla Aly Fouad Kamal Abo Harga
Cohort: C29

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➢ Chapter (7):
Long-Term Debt-Paying Ability:
❖ Question (P 7-3):
Net income before interest and tax
a) Compute the times interest earned =
Interest Expenses+Capitalized interest

36 +16
= = 3.25 times per year
16
b) Fixed Charge Coverage =
1
Net income before interest & tax +Interest portion of rental (36+16)+( 𝑋 150)
3
= 1
Interest Expenses+Capitalized interest+Interest portion of rental 16+( 𝑋 50)
3
102
= = 1.55 times per year
66

❖ Question (P 7-4):
Total liabilities 174,979
a) Compute the debt ratio = = = 41.2%
Total Assets 424,201

Total liabilities 174,979

b) Debt/equity ratio = = = 70.2%
Stockholders′ equity 249,222

Total liabilities
c) Ratio of total debt to tangible net worth =
Tangible net worth

174,979
= = 70.9%
249,222−2,324

d) The amount of debt that Kaufman company has financed over

41% of its assets by the use of funds from outside creditors, the
debt/equity ratio and the debt to tangible net worth ratio are over
70%. Whether these ratios are reasonable depends upon the
stability of earnings and comparison with previous years.

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 ❖ Question (P 7-5):

Ratio Times Interest Debt/equity Debt to tangible

Debt Ratio
Transaction Earned ratio net worth
A) - ve + ve + ve + ve
B) - ve + ve + ve + ve
C) 0 + ve + ve + ve
D) 0 0 0 0
E) + ve - ve - ve - ve
F) 0 0 0 0
G) 0 - ve - ve - ve
H) + ve - ve - ve - ve
I) + ve - ve - ve - ve
J) + ve - ve - ve - ve

❖ Question (P 7-9):
a) Compute the following ratios for each company:
1- Times interest earned
Net income before interest and tax 95,000
Times interest earned= = 10,000 = 9.5 times
Interest Expenses+Capitalized interest

Net income before interest and tax 170,000

Times interest earned= = 32,000
=5.3 times
Interest Expenses+Capitalized interest

2- Debt ratio
Total liabilities 160,000
Debt ratio = = = 44.9%
Total Assets 356,000

Total liabilities 575,000

Debt ratio = = = 58.4%
Total Assets 985,000

3- Debt/equity ratio
Total liabilities 160,000
Debt/equity ratio = = = 81.6%
Stockholders′ equity 196,000

Total liabilities 575,000

Debt/equity ratio = = = 140.2%
Stockholders′ equity 410,000

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 4- Debt to tangible net worth
Total liabilities
Debt to tangible net worth =
Tangible net worth −Intangibles

160,000
= = 86.5%
196,000−11,000

Total liabilities
Debt to tangible net worth =
Tangible net worth −Intangibles

575,000
= = 147.4%
410,000−20,000

b) No, Barker company has 5.3 times which is less than the average 7.2
times which means that has less than average of coverage of its
interest and also has much higher-than-average debt/equity ratio and
debt to tangible net worth ratio.

c) Allen company better times interest earned, debt ratio, debt/equity

ratio and debt to tangible net worth

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➢ Chapter (8):
Profitability:

❖ Question (P 8-2):
1) Cost of goods sold for 2012
COGS
Inventory turnover = = 3.5
Average inventory

COGS
3.5 = (180,000+200,000)
2

COGS = 190,000 x 3.5 = $665,000

2) Net Credit Sales for 2012:

Net credit sales
Receivable turnover = = 8.8
Average gross AR

Net credit sales

8.8 = (126,000+72,500)
2

Net credit sales = 99,250 x 8.8 = $873,400

3) Net income for 2012:

Net income
Return on Equity = = 0.24
Average total equity

Net income
0.24 = (400,000+113,500+400,000+101,000)
2

Net income = 507,250 x 0.24 = $121,740

4) Total assets at 31 Dec 2012:

Net income
Return on Assets = = 0.20
Average total assets

Net income
0.20 = (605,000+assets) = $612,400
2

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 ❖ Question (P 8-3):

Items Amounts
Earnings before interest and tax $245,000
Interest (750,000 x 6%) $45,000
Earning before tax $200,000
Tax 80,000
Net income $120,000
Preferred dividends 15,000
Income available to common $105,000
Net income 120,000
1) Return on Assets = = = 4%
Average total assets 3,000,000

Net income 120,000

2) Return on total equity = = = 6.67%
Average total equity 1,800,000

120,000−15,000
3) Return on common equity = = 7%
1,500,000

Net income before interest and tax 245,000

4) Times interest earned= = 45,000
= 5.44 times/year
Interest Expenses

❖ Question (P 8-5):
a) How did 2011 net sales compare with 2010?
Net sales of 2011 1,589,150
= = 1.22%
Net sales of 2010 1,294,966

b) How did 2011 net earnings compare with 2010?

Net sales of 2011 138,204

= = 100.80%
Net sales of 2010 137,110

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c) Calculate the following for 2011 and 2010:
1)
• Net profit Margin in 2010

Net income after interest and tax 149,760

= = 1,294,966 = 11.56%
Net sales

• Net profit Margin in 2011

Net income after interest and tax 149,760

= = 1,589,150 = 9.39%
Net sales

2)
• Return on Assets in 2010

Net income after interest & tax 149,760

= = = 12.67%
Ending total assets 1,182,110

• Return on Assets in 2011

Net income after interest & tax 149,760

= = = 10.38%
Ending total assets 1,437,636

3)
• Total assets turnover in 2010

Net sales 1,294,966

= = = 1.10 times
Average total assets 1,182,110

• Total assets turnover in 2011

Net sales 1,589,150

= = = 1.11 times
Average total assets 1,437,636

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 4) DuPont analysis:
Return on assets = Net profit margin x Total assets turnover

2011: Return on assets = 9.39% x 1.11 = 10.42

2010: Return on assets = 11.56% x 1.10 = 12.72

5) Operating income margin:

Items 2011 2010

Net sales 1,589,150 1,294,966
Cost of product sold (651,390) (466,250)
R & D expenses (135,314) (113,100)
General & selling exp (526,680) (446,110)
Operating income 275,766 269,506
• 2010:
Operating income 269,506
Operating income = = = 20.81%
Net sales 1,294,966
• 2011:
Operating income 275,766
Operating income = = = 17.35%
Net sales 1,589,150

Operating income
6) Return on operating asstes =
Ending operating assets

• 2010:
269,506
Return on operating asstes = = 23.24%
1,159,666
• 2011:
275,766
Return on operating asstes = = 19.53%
1,411,686

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 Net sales
7) Operating asset turnover =
Ending operating assets

• 2010:
1,294,966
Operating asset turnover = = 1.12 times/year
1,159,666
• 2011:
1,589,150
Operating asset turnover = = 1.13 times/year
1,411,686

8) DuPont analysis:

Return on assets = Operating income margin x Operating assets turnover

2011: Return on assets = 17.35% x 1.13 = 19.61%

2010: Return on assets = 20.81% x 1.12 = 23.31%

9) Return on investmnet =

NI before minority share of earning and nonrecuring items+((Interest expenses)x (1 Tax rate))
Ending (long term liabilities)+Equity

Items 2007 2006

Net earnings before minority share 149,260 149,760
Interest exp. 18,768 11,522
Earning before tax 263,762 271,500
Provision for income tax 114,502 121,740
Tax rate 43.4% 44.8%
1- Tax rate 56.6% 55.2%
Interest exp. x (1 – tax rate) 10,623 6,360
Net earning before minority share + 159,883 156,120
interest expenses
Long-term debt and equity 1,019,420 933,232
Return on investment 15.7% 16.7%

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 10) Return on common equity
Net income after int.& tax − preferred dividends
=
ending common equity
2010:
137,110
• Return on common equity = = 19.03%
720,530
2011:
138,204
• Return on common equity = = 17.06%
810,292

d) The profit increased at 2011 more than at 2010 while equity decreased,
profitability also decreased and the turnover remain the same.

❖ Question (P 8-11):

Total
Ratio Retained
Net profit Stockholder’s
Transaction Earnings
Equity
A) 0 - ve 0
B) 0 0 0
C) +ve +ve +ve
D) 0 0 0
E) 0 -ve -ve
F) 0 0 -ve
G) 0 0 +ve
H) 0 0 +ve
I) -ve -ve -ve
J) +ve +ve +ve

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❖ Question (P 8-13):

No. Answer No. Answer

A) 4 I) 1
B) 5 J) 4
C) 3 K) 3
D) 2 L) 3
E) 2 M) 4
F) 4 N) 4
G) 1 O) 5
H) 4 P) 1

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