AMERBRAN COMPANY (B)

Question Nr. 1

Some companies included excise taxes in revenuesand then subtracted them below the gross margin line as a period cost (nonincome tax expense). Other companies ignored excise taxes altogehterin their statements, reflecting the view that the company was in effect an involuntary tax collector and that the taxes collected were neither revenues nor expenses to the firm. The pretax income reported by the two approaches in identical, but the absolute amount of revenues is inflated by the first approach, thus affecting the gross margin precentage (and any other ratio that involves revenues in its calculation.)

Amerbran Company collects excise taxes on tobacco products and uses the approach of including the excise taxes in revenues and subtracting them as an expense – but with the twist of treating the taxes as a product cost (pregross margin) rather than as a period cost. This approach results in the same absolute amount of gross margin as if the taxes were ignored altogether. However, it makes the company’s sales look greater by a significant amount: in 20x0, revenues excluding taxes would have been S4,223,130, or 36% percent lower than the amout reported. On the othe rhand, treating the taxes as a product cost below the gross marginline, in 20x0 the percentage would have been $4,004,130 /$6,577,480 = 60.9%; and with the taxesignored altogether the percentage would have been $1,649,780 /$4,223,130 =39.1%. As treated by Amerbran, the 20x0 gross margin percentage was 25.1%. Thus, one must speculate tha the company sees some advantage in trying to downplay its actual margin while at the same time overstating its size (revenues).

Question Nr. 2

It suggest that ratio analysis raises questions, but it seldom automaitcally answer them, and that some important query are only indirectly related to the ratios. The overriding query is why net income was down to 13% from 20x0 to 20xl while revenues (including excise taxes) were up 16 percent: this is directly reflected in the decreased net income percentage (return on sales) ratio. This profit margin query also at least indirectly relatesto the downward trend in interest coverage, ROA and ROE. Since the gross margin percentage actually increased slightly in 20xl, the explanation of the narrowed profit Margin must lie in SG&A expenses, w/c were 14.8 percent of sales in 20x0 but 17.4% in 20xl. The decline in the current and acid-test ratios may not be a concern, but rather may simply reflect better credit and inventory management (notice that collection period – days receivables-is down and inventory turnover is up). Financial leverage as measured by the debt/capitalization ratio has declined a bit, but even in 20x0 was at a relatively safe level for a firm of this basic stability.

AMERBRAN COMPANY (B)

1.Return onAssets

Definition [Net Income + Interest

*(1-Tax Rate)]

20*0[$378,782+$105,165*(1-.4394)] =0.0987

20x1[$328,773 -$102,791*(1-.4551)] = 00797

Total Assets $4,433,448 =9.87% $4,826,512 = 7.97

2. Return on Equity

Net Income $378,782 =0.1735 $328,773 = 0.1417

Shareholder’sEquity

$2,182,869 = 17.35% $2,320,620 =14.17%

3. GrossMarginPercentage Gross Margin $1,649,780 = 0.2508 $1,931,438 = 0.2534

Net Sales Revenue $6,577,480 = 5.76% $7,622,677 = 4.31%

4. Return on Sales

Net Income $378,782 = 0.0576 $328,773 = 0.0431

Net Sales Revenue $6,577,480 = 5.76% $7,622,677 = 4.31%

5. Asset Turnover

Sales Revenue $6,577,480 = 1.48 $7,622,677 = 1.58

Total Assets $4,433,448 times $4,826,512 times

6. Days Cash Cash $23,952 = 1.43 $28,912 = 1.47Cash Expenses

/365($6,198,698-

$101,198)/365Days ($7,293,904-

$115,974)/365Days

7. Days’Receivables

AccountsReceivable

$687,325 =38.1 $756,152 = 36.2

Sales/365 $6,577,480/365 Days $7,622,677/365 Days

8. Days’Inventories

Inventory $1,225,402 = 173.8 $1,244,912 = 162.1

Cost of Sales /365 $2,573,350 /365 Days $2,803,623/365 Days

9. InventoryTurnover

Cost of Sales $2,573,350 = 2.10 $2,803,623 = 2.25

Cost of Sales/365 $1,225,402 Times $1,244,912 times

1 Current Current Assets $2,013,846 $2,106,1160 Ratio = 1.53 = 1.30

Current Liabilities $1,317,751 $1,625,218

1 Acid-Test Monetary Current $711,277 $785,0641 Ratio Assets = 0.54 = 0.48

Current Liabilities $1,317,751 $1,625,218

1 Debt/ Noncurrent $932,828 $880,6742 Capitalization Liabilities =0.2994 = 0.2751Ratio (Noncurrent

Liabilites + Shareholder’s

Equity)

$932,828+$2,182,869

= 29.94% $880,674$2,320,620

=27.51%

1 Times Pretax Operating 3 Interest Profit $675,659=

$105,165$603,331+$102,791

Earned + Interest = 7.42 =6.87Interest times $102,791 Times