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 companys 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 on Assets

Definition [Net Income + Interest *(1-Tax Rate)] Total Assets

20*0[$378,7 82+ $105,165 *(1-.4394)] $4,433,448 $378,782 $2,182,869 =0.098 7 =9.87 % =0.173 5 = 17.35 %

20x1[$328,77 3 -$102,791 *(1-.4551)] = 00797 $4,826,512 $328,773 $2,320,620 = 7.97 = 0.1417 =14.17%

2. Return on Equity

Net Income Shareholders Equity

3. Gross Margin Percentage Gross Margin Net Sales Revenue 4. Return on Sales Net Income Net Sales Revenue 5. Asset Turnover 6. Days Cash Sales Revenue Total Assets Cash Cash Expenses /365 $1,649,780 $6,577,480 $378,782 $6,577,480 $6,577,480 $4,433,448 $23,952 ($6,198,698 $101,198)/3 65 $687,325 = 0.250 8 = 5.76% = 0.057 6 = 5.76% = 1.48 times = 1.43 Days $1,931,438 $7,622,677 $328,773 $7,622,677 $7,622,677 $4,826,512 $28,912 ($7,293,904$115,974)/36 5 $756,152 = 0.2534 = 4.31% = 0.0431 = 4.31% = 1.58 times = 1.47 Days

7. Days Receivable

Accounts Receivable

=38.1

= 36.2

s Sales/365 8. Days Inventories Cost of Sales / 365 9. Inventory Turnover Cost of Sales/365 1 Current 0 Ratio Current Assets Current Liabilities 1 Acid-Test 1 Ratio Monetary Current Assets Current Liabilities $1,225,402 $2,013,846 = 1.53 $1,317,751 $711,277 = 0.54 $1,317,751 $1,625,218 $1,625,218 $785,064 = 0.48 Times $1,244,912 $2,106,116 = 1.30 times Cost of Sales $2,573,350 /365 $2,573,350 Days = 2.10 $2,803,623/3 65 $2,803,623 Days = 2.25 Inventory $6,577,480/ 365 $1,225,402 Days = 173.8 $7,622,677/3 65 $1,244,912 Days = 162.1

1 Debt/ 2 Capitalizati on Ratio

Noncurrent Liabilities (Noncurrent Liabilites + Shareholders Equity) Pretax Operating Profit

$932,828 =0.29 94 $932,828+ $2,182,869

= 29.94 %

$880,674 = 0.2751 $880,674 $2,320,620 =27.51%

1 Times 3 Interest

$675,659= $105,165

$603,331+ $102,791 = 7.42 times $102,791 =6.87 Times

Earned

+ Interest Interest