Chapter 17, Problem 25P

To determine

(a)

The net profit for the year.

Answer to Problem 25P

The net profit for the year is $\$47.5\text{M}$.

Explanation of Solution

Calculation:

Calculate the total revenue.

$\text{Total}\text{Revenue}=\left(\text{Operating}\text{Revenue}\right)+\left(\text{Non}\text{Operating}\text{Revenue}\right)$         ...... (I).

Substitute $\$124\text{M}$ for Operating revenue and $\$36\text{M}$ for $\text{Non}\text{Operating}\text{Revenue}$ in Equation (I).

$\begin{array}{c}\text{Total}\text{Revenue}=\$124\text{M}+\$36\text{M}\\ =\$160\text{M}\end{array}$

Write the expression to calculate the total expenses.

$\text{Total}\text{Expenses}=\left(\text{Operating}\text{Expenses}\right)+\left(\text{Non}\text{Operating}\text{Expenses}\right)$         ...... (II)

Substitute $\$70\text{M}$ for Operating Expenses and $\$35\text{M}$ for Non Operating Expenses in Equation (II).

$\begin{array}{c}\text{Total}\text{Expenses}=\$70\text{M}+\$35\text{M}\\ =\$105\text{M}\end{array}$

Write the expression to calculate the profit before taxes.

$\text{Profit}\text{Before}\text{taxes}=\left(\text{Total}\text{Revenue}\right)-\left(\text{Total}\text{Expenses}\right)$         ...... (III).

Substitute $\$160\text{M}$ for $\text{Total}\text{Revenue}$ and $\$105\text{M}$ for Total Expenses.

$\begin{array}{c}\text{Profit}\text{Before}\text{taxes}=\$160\text{M}-\$105\text{M}\\ =\$55\text{M}\end{array}$

Calculate the profit after tax

$\begin{array}{c}\text{Profit}\text{after}\text{tax}=\$55\text{M}-\$7.5\text{M}\\ =\$47.5\text{M}\end{array}$.

Conclusion:

Thus, the net profit for the year is $\$47.5\text{M}$.

To determine

(b)

The income statement.

Answer to Problem 25P

The income statement table is shown below.

Particulars	Amount
Total Operating Revenue	$\$124$
Less: Total Operating Expense	$\$70$
Operating Revenue	$\$54$
Non-Operating Revenue and Expenses
Total Non-Operating Revenue	$\$36$
Less: Total Non-Operating Revenue	$\$35$
Non-Operating Revenue	$\$1$
Net Income Before taxes	$\$55$
Less: Income Taxes	$\$7.5$
Net Profit/(Loss)	$\$47.5$

Explanation of Solution

Calculation:

Make the Income Statement Table.

Particulars	Amount
Total Operating Revenue	$\$124$
Less: Total Operating Expense	$\$70$
Operating Revenue	$\$54$
Non-Operating Revenue and Expenses
Total Non-Operating Revenue	$\$36$
Less: Total Non-Operating Revenue	$\$35$
Non-Operating Revenue	$\$1$
Net Income Before taxes	$\$55$
Less: Income Taxes	$\$7.5$
Net Profit/(Loss)	$\$47.5$

Conclusion:

Thus, the Income Statement table is shown below.

Particulars	Amount
Total Operating Revenue	$\$124$
Less: Total Operating Expense	$\$70$
Operating Revenue	$\$54$
Non-Operating Revenue and Expenses
Total Non-Operating Revenue	$\$36$
Less: Total Non-Operating Revenue	$\$35$
Non-Operating Revenue	$\$1$
Net Income Before taxes	$\$55$
Less: Income Taxes	$\$7.5$
Net Profit/(Loss)	$\$47.5$

(c)

The interest coverage ratio and net profit ratio, whether the interest coverage ratio is acceptable or not.

The interest coverage ratio is $2.57$.

The net profit ratio is $98.96\%$.

Since, the Interest coverage ratio for an industrial firm should be at least $3$ but the obtained interest coverage ratio is less than $3$.

Hence it is not acceptable.

Calculation:

Write the expression to calculate the Total income.

$\text{Total}\text{Income}=\left(\text{Total}\text{Revenue}\right)-\left(\text{All}\text{Expense}\right)$         ...... (IV)

Substitute $\$160$ for Total Revenue and $\$70$ for All Expenses in Equation (IV).

$\begin{array}{c}\text{Total}\text{Income}=\$160-\$70\\ =\$90\end{array}$

Write the expression to calculate the Interest Coverage Ratio.

$\text{Interest}\text{Coverage}\text{Ratio}=\frac{\text{Total}\text{Income}}{\text{Interest}\text{Payment}}$         ...... (V)

Substitute $\$90$ for Total Income and $\$35$ for interest payment in Equation (V).

$\begin{array}{c}\text{Interest}\text{Coverage}\text{Ratio}=\frac{\text{\$90}}{\text{\$35}}\\ =2.57\end{array}$

Since, the Interest coverage ratio for an industrial firm should be at least $3$ but the obtained interest coverage ratio is less than $3$.

Hence it is not acceptable.

Write the expression to calculate the net profit ratio.

$\text{Net}\text{Profit}\text{Ratio}=\left(\frac{\text{Net}\text{Profit}}{\text{Net}\text{Sales}}\right)$         ...... (VI)

Substitute $\$47.5$ for Net Profit and $\$48$ for $\text{Net}\text{Sales}$ in Equation (VI).

$\begin{array}{c}\text{Net}\text{Profit}\text{Ratio}=\left(\frac{\text{\$47}\text{.5}}{\text{\$48}}\right)\\ =0.9896\\ =\left(0.9896\times 100\right)\%\\ =98.96\%\end{array}$.

Conclusion:

The interest coverage ratio is $2.57$.

The net profit Ratio is $98.96\%$.

Since, the Interest coverage ratio for an industrial firm should be at least $3$ but the obtained interest coverage ratio is less than $3$.

Hence it is not acceptable.

To determine

(c)

The interest coverage ratio and net profit ratio, whether the interest coverage ratio is acceptable or not.

Answer to Problem 25P

The interest coverage ratio is $2.57$.

The net profit ratio is $98.96\%$.

Since, the Interest coverage ratio for an industrial firm should be at least $3$ but the obtained interest coverage ratio is less than $3$.

Hence it is not acceptable.

Explanation of Solution

Calculation:

Write the expression to calculate the Total income.

$\text{Total}\text{Income}=\left(\text{Total}\text{Revenue}\right)-\left(\text{All}\text{Expense}\right)$         ...... (IV)

Substitute $\$160$ for Total Revenue and $\$70$ for All Expenses in Equation (IV).

$\begin{array}{c}\text{Total}\text{Income}=\$160-\$70\\ =\$90\end{array}$

Write the expression to calculate the Interest Coverage Ratio.

$\text{Interest}\text{Coverage}\text{Ratio}=\frac{\text{Total}\text{Income}}{\text{Interest}\text{Payment}}$         ...... (V)

Substitute $\$90$ for Total Income and $\$35$ for interest payment in Equation (V).

$\begin{array}{c}\text{Interest}\text{Coverage}\text{Ratio}=\frac{\text{\$90}}{\text{\$35}}\\ =2.57\end{array}$

Since, the Interest coverage ratio for an industrial firm should be at least $3$ but the obtained interest coverage ratio is less than $3$.

Hence it is not acceptable.

Write the expression to calculate the net profit ratio.

$\text{Net}\text{Profit}\text{Ratio}=\left(\frac{\text{Net}\text{Profit}}{\text{Net}\text{Sales}}\right)$         ...... (VI)

Substitute $\$47.5$ for Net Profit and $\$48$ for $\text{Net}\text{Sales}$ in Equation (VI).

$\begin{array}{c}\text{Net}\text{Profit}\text{Ratio}=\left(\frac{\text{\$47}\text{.5}}{\text{\$48}}\right)\\ =0.9896\\ =\left(0.9896\times 100\right)\%\\ =98.96\%\end{array}$.

Conclusion:

The interest coverage ratio is $2.57$.

The net profit Ratio is $98.96\%$.

Since, the Interest coverage ratio for an industrial firm should be at least $3$ but the obtained interest coverage ratio is less than $3$.

Hence it is not acceptable.