Question

Selected data from the financial statements of Italian Marble Co. and Brazil Stone Products for the year just ended follow. Assume that for both companies, dividends declared were equal in amount to net earnings during the year, and therefore stockholders' equity did not change. The two companies are in the same line of business. Total liabilities Total assets Sales (all on credit) Average inventory Average receivables Gross profit as a percentage of sales Operating expenses as a percentage of sales Net income as a percentage of sales Italian Marble Co. $ 200,000 800,000 1,910,000 240,000 200,000 Brazil Stone Products $ 100,000 400,000 1,240,000 140,000 100,000 305 400 360 258 58 a. Compute the net income for each company. b. Compute the net income as a percentage of stockholders' equity for each company. c. Compute the accounts receivable turnover for each company. d. Compute the inventory turnover for each company. e. Which company is in a stronger financial position?

Answer 1

Answer (a):

Italian Brazil Stone Marble Co. Products $57,300 $62,000 Net Income

Working:

Italian Marble Co. Net Income = Sales * Net Income as percentage of sales = 1910000 * 3% = $57,300

Brazil Stone Products Net Income = 1240000 * 5% = $62,000

Answer (b):

Italian Brazil Stone Marble Co. Products 9.55% 20.67% Net Income as % of Equity

Working:

Italian Marble Co. Equity = Total assets - Total liabilities = 800000 - 200000 = $600,000

Brazil Stone Products Equity = Total assets - Total liabilities = 400000 - 100000 = $300,000

Italian Marble Co. Net Income as % of equity = Net Income / Equity = 57300 / 600000 = 9.55%

Brazil Stone Products Net Income as % of equity = Net Income / Equity = 62000 / 300000 = 20.67%

Answer (c):

Italian Brazil Stone Marble Co. Products Account receivable turnover 9.55 12.40

Working:

Italian Marble Co. account receivable turnover = Credit sales / Average receivables = 1910000 / 200000 = 9.55

Brazil Stone Products Equity account receivable turnover = Credit sales / Average receivables = 1240000 / 100000 = 12.40

Answer (d):

Italian Brazil Stone Marble Co. Products 4.78 6.20 Inventory turnover

Working:

Italian Marble co. cost of goods sold = Sales * (1 - Gross profit %) = 1910000 * (1 - 40%) = $1,146,000

Brazil Stone Products cost of goods sold = Sales * (1 - Gross profit %) = 1240000 * (1 - 30%) = $868,000

Italian Marble Co. inventory turnover = Cost of goods sold / Average inventory = 1146000 / 240000 = 4.78

Brazil Stone Products Equity account receivable turnover = Credit sales / Average receivables = 868000 / 140000 = 6.20

Answer (e):

Brazil Stone Product is in financial stronger position.

It has better profitability and asset management ratios.

It has ROE of 20.67% as compared to Italian Marble Co's ROE of 9.55%. It also has higher Net profit as % of sales.

It has higher receivable turnover and inventory turnover as compared to receivable turnover and inventory turnover of Brazil Stone Products.