P1: OTA/XYZ JWBT510-fm P2: ABC JWBT510-Fridson May 23, 2011 ib 7:24 Printer: Yet to Come P1: OTA/XYZ JWBT510-fm P2: ABC JWBT510-Fridson May 23, 2011 7:24 Printer: Yet to Come Additional Praise for Financial Statement Analysis, Fourth Edition “This is an illuminating and insightful tour of financial statements, how they can be used to inform, how they can be used to mislead, and how they can be used to analyze the financial health of a company.” —Jay O Light, Dean Emeritus, Harvard Business School “Financial Statement Analysis should be required reading for anyone who puts a dime to work in the securities markets or recommends that others the same.” —Jack L Rivkin, Director, Neuberger Berman Mutual Funds and Idealab “Fridson and Alvarez provide a valuable practical guide for understanding, interpreting, and critically assessing financial reports put out by firms Their discussion of profits—‘quality of earnings’—is particularly insightful given the recent spate of reporting problems encountered by firms I highly recommend their book to anyone interested in getting behind the numbers as a means of predicting future profits and stock prices.” —Paul Brown, Associate Dean, Executive MBA Programs, Leonard N Stern School of Business, New York University “Let this book assist in financial awareness and transparency and higher standards of reporting, and accountability to all stakeholders.” —Patricia A Small, Treasurer Emeritus, University of California; Partner, KCM Investment Advisors “This book is a polished gem covering the analysis of financial statements It is thorough, skeptical, and extremely practical in its review.” —Daniel J Fuss, Vice Chairman, Loomis, Sayles & Company, LP ia P1: OTA/XYZ JWBT510-fm P2: ABC JWBT510-Fridson May 23, 2011 ib 7:24 Printer: Yet to Come P1: OTA/XYZ JWBT510-fm P2: ABC JWBT510-Fridson May 23, 2011 7:24 Printer: Yet to Come Financial Statement Analysis Workbook i P1: OTA/XYZ JWBT510-fm P2: ABC JWBT510-Fridson May 23, 2011 7:24 Printer: Yet to Come Founded in 1807, John Wiley & Sons is the oldest independent publishing company in the United States With offices in North America, Europe, Australia and Asia, Wiley is globally committed to developing and marketing print and electronic products and services for our customers’ professional and personal knowledge and understanding The Wiley Finance series contains books written specifically for finance and investment professionals as well as sophisticated individual investors and their financial advisors Book topics range from portfolio management to e-commerce, risk management, financial engineering, valuation and financial instrument analysis, as well as much more For a list of available titles, visit our Web site at www.WileyFinance.com ii P1: OTA/XYZ JWBT510-fm P2: ABC JWBT510-Fridson May 23, 2011 7:24 Printer: Yet to Come Financial Statement Analysis Workbook Step-by-Step Exercises and Tests to Help You Master Financial Statement Analysis Fourth Edition MARTIN FRIDSON FERNANDO ALVAREZ John Wiley & Sons, Inc iii P1: OTA/XYZ JWBT510-fm P2: ABC JWBT510-Fridson May 27, 2011 4:5 Printer: Yet to Come Copyright c 2011 by Martin Fridson and Fernando Alvarez All rights reserved Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 646-8600, or on the Web at www.copyright.com Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose No warranty may be created or extended by sales representatives or written sales materials The advice and strategies contained herein may not be suitable for your situation You should consult with a professional where appropriate Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002 Wiley also publishes its books in a variety of electronic formats Some content that appears in print may not be available in electronic books For more information about Wiley products, visit our web site at www.wiley.com ISBN 978-0-470-64003-6 (paperback); ISBN 978-1-118-09749-6 (ebk); ISBN 978-1-118-09747-2 (ebk); ISBN 978-1-118-09748-9 (ebk) Printed in the United States of America 10 iv P1: OTA/XYZ JWBT510-fm P2: ABC JWBT510-Fridson May 23, 2011 7:24 Printer: Yet to Come In memory of my father, Harry Yale Fridson, who introduced me to accounting, economics, and logic, as well as the fourth discipline essential to the creation of this book—hard work! M F For Shari, Virginia, and Armando F A v P1: OTA/XYZ JWBT510-fm P2: ABC JWBT510-Fridson May 23, 2011 vi 7:24 Printer: Yet to Come P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 12:7 Printer: Yet to Come 179 Computational Exercises Case Big Time Corp.’s sales increase by 16.0 percent between Year and Year Small Change, a smaller, privately owned company in the same industry, also achieves 16.0 percent year-over-year sales growth Suppose now that at the end of Year 1, Big Time acquires Small Change with shares of its own stock The Big Time income statements under this assumption (“Acquisition Scenario”) show a 21.5 percent sales increase between Year and Year On the face of it, a company growing at 21.5 percent a year is sexier than one growing at only 16.0 percent a year Observe, however, that Big Time’s profitability, measured by net income as a percentage of sales, does not improve as a result of the acquisition Combining two companies with equivalent profit margins of 3.0 percent produces a larger company that also earns 3.0 percent on sales Shareholders not gain anything in the process, as the figures below demonstrate If Big Time decides not to acquire Small Change, its number of shares outstanding remains at 125.0 million The earnings increase from $150.0 million in Year to $174.0 million in Year raises earnings-per-share from $1.20 to $1.39 With the price-earnings multiple at 24 percent times, equivalent to the average of the company’s industry peers, Big Time’s stock price rises from $28.80 to $33.41 a share In the Acquisition Scenario, on the other hand, Big Time pays its industry-average earnings multiple of 24 times for Small Change, for a total acquisition price of $171.1 million At Big Time’s Year share price of $28.80, the purchase therefore requires the issuance of $5.9 million shares With the addition of Small Change’s net income, Big Time earns $182.3 million in Year Dividing that figure by the increased number of shares outstanding (130.9 million) produces earnings per share of $1.39 At a priceearnings multiple of 24 times, Big Time is worth $33.41 a share, precisely the price calculated in the Non-Acquisition Scenario The mere increase in annual sales growth from 16.0 percent to 21.5 percent has not benefited shareholders, whose shares increase in value by 16 percent whether Big Time acquires Small Change or not Acquisitions Driven by P/E Multiples Big Time Corp and Small Change Inc Debt Equity Big Time Annual Coupon Rate for Debt $1,000.00 $1,000.00 $1,160.00 $1,160.00 32.00 25.00 $ 37.60 $ 29.00 $1,000.00 $1,000.00 1,032.00 10% (Continued) P1: TIX/b JWBT510-c06 P2: c/d QC: e/f T1: g JWBT510-Fridson Small Change Annual Coupon Rate for Debt 15% ($000.000 Omitted) May 21, 2011 12:7 Non-Acquisition Scenario Big Time Corp Year Year Acquisition Scenario Small Change Inc Year Printer: Yet to Come Year Big Time Corp Year Year Sales $5,000.00 $5,800.00 $238.10 $276.20 $5,000.00 $6,076.20 Cost and Expenses Cost of Goods Sold 3,422.70 3,970.30 160.60 186.30 $3,422.70 4,156.60 Selling, General, and Administrative Expenses 1,250.00 $1,450.00 61.90 71.80 $1,250.00 1,521.80 Interest Expense 100.00 116.00 4.80 5.60 $ 100.00 121.60 Total Costs and Expenses 4,772.70 5,536.30 227.30 263.70 $4,772.70 5,800.00 Income before Income Tax Expenses 227.30 263.70 10.80 12.50 $ 227.30 276.20 Income Taxes 77.30 89.60 3.70 4.30 77.30 93.90 Net Income $ 150.00 $ 174.00 $ 7.10 8.30 $ 150.00 $ 182.30 Year-over-Year Sales Increase 16.00% 16.00% 21.50% Net Income as a Percentage of Sales 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% Shares Outstanding (million) 125.00 125.00 125.00 130.90 Earnings per Share $ 1.20 $ 1.39 $ 11.20 $ 1.39 Price-Earnings Multiple (times) 24.00 24.00 24.00 24.00 24.00 24.00 Price per Share $ 28.80 $ 33.41 $ 28.80 $ 33.41 Year-over-Year Increase 16.00% 16.00% Market Capitalization $3,600.40 $4,176.50 $171.10 $198.40 $3,600.40 $4,374.90 Year-over-Year Increase 16.00% 16.00% 22.00% Debt/Equity Ratio 27.80% 27.80% 18.70% 18.70% 27.80% 23.60% Acquisition Price $171.10 Number of Shares 5.90 taxrate 34% growth_rate 16% industry_PE_ mult 24 180 P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 12:7 Printer: Yet to Come 181 Computational Exercises STOCK PRICES AND GOODWILL Case The shares of Amalgamator and Consolidator are both trading at multiples of 2.5 times book value per share Shareholders’ equity is $200 million at Amalgamators and $60 million at Consolidator Amalgamator uses stock held in its treasury to acquire Consolidator for $263 million The purchase price represents a premium of 75 percent above the prevailing market price Prior to the acquisition, Amalgamator’s ratio of total assets to total liabilities is 1.25 times, while the comparable figure for Consolidator is 1.18 times The total-assets-to-total-liabilities ratio after the deal is 1.41 times By paying a premium to Consolidator’s tangible asset value, Amalgamator creates $203 million of goodwill Case As the scene opens, an explosive stock market rally has driven up both companies’ shares to 4.5 times book value The ratio of total assets to total liabilities, however, remains at 1.25 times for Amalgamator and 1.18 times for Consolidator As in Case 1, Amalgamator pays a premium of 75 percent above the prevailing market price to acquire Consolidator The premium is calculated on a higher market capitalization, however Consequently, the purchase price rises from $263 million to $473 million Instead of creating $203 million of goodwill, the acquisition gives rise to a $413 million intangible asset Somehow, putting together a company boasting a 1.25 times ratio with another sporting a 1.18 times ratio has produced an entity with a ratio of 1.59 times Now, let us exclude goodwill in calculating the ratio of assets to liabilities Amalgamator’s ratio of tangible assets to total liabilities following its acquisition of Consolidator is 1.23 times in both Case and Case This is the outcome that best reflects economic reality United United Combined Amalgamators Consolidators Purchase Companies Corporation Inc Price Pro Forma* Case Tangible Assets Intangible Assets (Goodwill) 1,000 400 1,400 0 203 (Continued) P1: TIX/b P2: c/d JWBT510-c06 QC: e/f JWBT510-Fridson T1: g May 21, 2011 182 12:7 Printer: Yet to Come FINANCIAL STATEMENT ANALYSIS WORKBOOK United United Combined Amalgamators Consolidators Purchase Companies Corporation Inc Price Pro Forma* Total Assets Liabilities Shareholders’ Equity (SE) Total Liabilities and SE 1,000 800 400 340 200 60 1,000 400 1,603 1,140 263 Premium 75% 463 1,603 Multiple Total Assets/ Total Liabilities Tangible Assets/ Total Liabilities Market Capitalization Case Tangible Assets Intangible Assets (Goodwill) Total Assets 1.25 1.18 1.41 1.25 1.18 1.23 500 150 1,156 1,000 400 1,400 1,000 400 413 1,813 800 340 1,140 200 60 1,000 400 2.5 Premium 75% Liabilities Shareholders’ Equity (SE) Total Liabilities and SE 473 673 1,813 Rally Multiple 4.5 Total Assets/ Total Liabilities Tangible Assets/ Total Liabilities Market Capitalization 1.25 1.18 1.59 1.25 1.18 1.23 900 270 3,026 *Ignores possible impact of EPS dilution P1: TIX/b P2: c/d JWBT510-c06 QC: e/f JWBT510-Fridson T1: g May 21, 2011 12:7 Printer: Yet to Come 183 Computational Exercises Case The shares of Amalgamator and Consolidator are both trading at multiples of 1.5 times book value per share Shareholders’ equity is $400 million at Amalgamators and $260 million at Consolidator Amalgamator uses stock held in its treasury to acquire Consolidator for $527 million The purchase price represents a premium of 35.00 percent above the prevailing market price Prior to the acquisition, Amalgamator’s ratio of total assets to total liabilities is 1.50 times, while the comparable figure for Consolidator is 1.76 times The total-assets-to-total-liabilities ratio after the deal is 1.81 times By paying a premium to Consolidator’s tangible asset value, Amalgamator creates $267 million of goodwill Case As the scene opens, an explosive stock market rally has driven up both companies’ shares to 3.5 times book value The ratio of total assets to total liabilities, however, remains at 1.50 times for Amalgamator and 1.76 times for Consolidator As in Case 3, Amalgamator pays a premium of 35.00 percent above the prevailing market price to acquire Consolidator The premium is calculated on a higher market capitalization, however Consequently, the purchase price rises from $527 million to $1,229 million Instead of creating $267 million of goodwill, the acquisition gives rise to a $969 million intangible asset Somehow, putting together a company boasting a 1.50 times ratio with another sporting a 1.76 times ratio has produced an entity with a ratio of 2.43 times Now, let us exclude goodwill in calculating the ratio of assets to liabilities Amalgamator’s ratio of tangible assets to total liabilities following its acquisition of Consolidator is 1.58 times in both Case and Case This is the outcome that best reflects economic reality United United Combined Amalgamators Consolidators Purchase Companies Corporation Inc Price Pro Forma* Case Tangible Assets Intangible Assets (Goodwill) Total Assets 1,200 600 1,800 1,200 600 266.5 2,067 (Continued) P1: TIX/b P2: c/d JWBT510-c06 QC: e/f JWBT510-Fridson T1: g May 21, 2011 184 12:7 Printer: Yet to Come FINANCIAL STATEMENT ANALYSIS WORKBOOK United United Combined Amalgamators Consolidators Purchase Companies Corporation Inc Price Pro Forma* Liabilities Shareholders’ Equity (SE) Total Liabilities and SE 800 340 400 260 1,200 600 1,140 527 Premium 35% 927 2,067 Multiple 1.5 Total Assets/ Total Liabilities Tangible Assets/ Total Liabilities Market Capitalization Case Tangible Assets Intangible Assets (Goodwill) Total Assets 1.5 1.76 1.81 1.5 1.76 1.58 600 390 1,390 1,200 600 1,800 1,200 600 969 2,769 800 340 1,140 400 260 1,200 600 Premium 35% Liabilities Shareholders’ Equity (SE) Total Liabilities and SE 1,229 1,629 2,769 Rally Total Assets/ Total Liabilities Tangible Assets/ Total Liabilities Market Capitalization 1.5 1.76 2.43 1.5 1.76 1.58 1,400 910 5,700 *Ignores possible impact of EPS dilution 3.5 P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 12:7 Printer: Yet to Come 185 Computational Exercises PROJECTING INTEREST EXPENSE Colossal Chemical Corporation ($000,000 omitted) Long-Term Debt (Excluding current maturitites) Notes Payable Due Dates 2012 2013 Debentures Due Dates 2018 2020 Industrial Development Bonds 2023 2010 2011 Rate 12.000% 7.500% 82 56 44 80 12.500% 10.875% 55 120 55 120 5.875% 40 40 $353 $339 ($000,000 omitted) 2010 Amount 82 56 55 120 40 Total 2011 Average Amount Amount ÷2 = Outstanding 44 80 55 120 40 2 2 63 68 55 120 40 346 12.000% 7.500% 12.500% 10.875% 5.875% Average Amount of Total Long-Term Debt Outstanding Interest Charges on Long-Term Debt $34.935 = = = = = @Rate ÷ $346 Estimated Interest Charges on Long-Term = Debt = = = = = $ 7.560 $ 5.100 $ 6.875 $13.050 $ 2.350 $34.935 Embedded Cost of Long-Term Debt = 10.100% P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 186 12:7 Printer: Yet to Come FINANCIAL STATEMENT ANALYSIS WORKBOOK Colossal Chemical Corporation ($000,000 omitted) Long-Term Debt (Excluding current maturitites) Notes Payable Due Dates 2012 2013 Debentures Due Dates 2018 2020 Industrial Development Bonds 2023 2010 2011 Rate 9.500% 9.750% 96 65 65 90 11.880% 12.125% 50 90 60 90 5.125% 60 60 $361 $365 ($000,000 omitted) 2010 Amount 96 65 50 90 60 Total 2011 Average Amount Amount ÷2 = Outstanding 65 90 60 90 60 2 2 80.5 77.5 55 90 60 363 9.500% 9.750% 11.875% 12.125% 5.125% Average Amount of Total Long-Term Debt Outstanding Interest Charges on Long-Term Debt $35.723 = = = = = @Rate ÷ $363 Estimated Interest Charges on Long-Term = Debt = = = = = $ 7.648 $ 7.556 $ 6.531 $10.913 $ 3.075 $35.723 Embedded Cost of Long-Term Debt = 9.840% P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 12:7 Printer: Yet to Come 187 Computational Exercises Colossal Chemical Corporation ($000,000 omitted) Long-Term Debt (Excluding current maturitites) Notes Payable Due Dates 2012 2013 Debentures Due Dates 2018 2020 Industrial Development Bonds 2023 2010 2011 Rate 6.600% 5.750% 55 40 75 60 10.250% 9.125% 90 75 90 75 8.500% 80 80 $340 $380 ($000,000 omitted) 2010 Amount 55 40 90 75 80 Total 2011 Average Amount Amount ÷2 = Outstanding 75 60 90 75 80 2 2 65 50 90 75 80 360 6.600% 5.750% 10.250% 9.125% 8.500% Average Amount of Total Long-Term Debt Outstanding Interest Charges on Long-Term Debt $30.034 = = = = = @Rate ÷ $360 Estimated Interest Charges on Long-Term = Debt = = = = = $ 4.290 $ 2.875 $ 9.225 $ 6.844 $ 6.800 $30.034 Embedded Cost of Long-Term Debt = 8.340% P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 188 12:7 Printer: Yet to Come FINANCIAL STATEMENT ANALYSIS WORKBOOK SENSITIVITY ANALYSIS IN FORECASTING FINANCIAL STATEMENTS Impact of Changes in Selected Assumptions on Projected Income Statement Colossal Chemical Corporation Year Ended December 31, 2011 ($000,000 omitted) Sales Cost of goods sold Selling, general, and administrative expense Depreciation Research and development Total costs and expenses Operating Income Interest expense Interest (income) Earnings before Income Taxes Provision for Income Taxes Net Income Growth Sales 0% CGS as % of Sales 55% SG&A % of Sales 25% Taxrate 34% Base Case 1% Increase in Gross Margin 1% Decline in Tax Rate 5% Increase in Sales $2,110 1,161 $2,110 1,139 $2,110 1,161 $2,216 1,219 $ 528 121 $ 528 121 $ 528 121 $ 554 121 84 84 84 84 1,893 $ 217 34 (5) 1,872 $ 238 34 (5) 1,893 $ 217 34 (5) 1,977 $ 238 34 (5) $ 188 $ 64 $ 124 $ 209 $ 71 $ 138 $ 188 $ 62 $ 126 $ 209 $ 71 $ 138 0% 54% 25% 34% 0% 55% 25% 33% 5% 55% 25% 34% P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 12:7 Printer: Yet to Come 189 Computational Exercises Impact of Changes in Selected Assumptions on Projected Income Statement Colossal Chemical Corporation Year Ended December 31, 2011 ($000,000 omitted) Sales Cost of goods sold Selling, general, and administrative expense Depreciation Research and development Total costs and expenses Operating Income Interest expense Interest (income) Earnings before Income Taxes Provision for Income Taxes Net Income Base Case 1% Increase in Gross Margin 1% Decline in Tax Rate 5% Decrease in Sales $2,110 1,161 $ 528 121 84 1,893 $ 217 34 (5) $ 188 $ 64 $ 124 $2,110 1,118 $ 528 121 84 1,851 $ 259 34 (5) $ 230 $ 78 $ 152 $2,110 1,161 $ 528 121 84 1,893 $ 217 34 (5) $ 188 $ 62 $ 126 $2,005 1,102 $ 501 121 84 1,809 $ 196 34 (5) $ 167 $ 57 $ 110 P1: TIX/b P2: c/d JWBT510-c06 QC: e/f JWBT510-Fridson T1: g May 21, 2011 190 12:7 Printer: Yet to Come FINANCIAL STATEMENT ANALYSIS WORKBOOK Impact of Changes in Selected Assumptions on Projected Income Statement Colossal Chemical Corporation Year Ended December 31, 2011 ($000,000 omitted) Sales Cost of goods sold Selling, general, and administrative expense Depreciation Research and development Total costs and expenses Operating Income Interest expense Interest (income) Earnings before Income Taxes Provision for Income Taxes Net Income Growth Sales CGS as % of Sales 55% SG&A % of Sales 25% Taxrate 34% Change in Sales Growth 5% Change in Gross Margin (2)% Change in SG&A % Sales 5% Taxrate (2)% Base Case Forecast $2,110 1,161 $2,216 1,174 $ 528 121 $ 665 121 84 84 1,893 $ 217 34 (5) 2,044 $ 172 34 (5) $ 188 $ 143 $ 64 $ 124 $ $ 5% 53% 30% 32% 46 97 P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 12:7 Printer: Yet to Come 191 Computational Exercises Impact of Changes in Selected Assumptions on Projected Income Statement Colossal Chemical Corporation Year Ended December 31, 2011 ($000,000 omitted) Sales Cost of goods sold Selling, general, and administrative expense Depreciation Research and development Total costs and expenses Operating Income Interest expense Interest (income) Earnings before Income Taxes Provision for Income Taxes Net Income Growth Sales 0% CGS as % of Sales 70% SG&A % of Sales 12% Taxrate 34% Base Case 1% Increase in Gross Margin 1% Decline in Tax Rate 5% Increase in Sales $2,110 1,477 $2,110 1,456 $2,110 1,477 $2,216 1,551 $ 253 121 $ 253 121 $ 253 121 $ 266 121 84 84 84 84 1,935 $ 175 34 (5) 1,914 $ 196 34 (5) 1,935 $ 175 34 (5) 2,022 $ 194 34 (5) $ 146 $ 167 $ 146 $ 165 $ $ $ 57 $ 110 $ $ $ 56 $ 109 50 96 0% 69% 12% 34% 0% 70% 12% 33% 48 98 5% 70% 12% 34% P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 192 12:7 Printer: Yet to Come FINANCIAL STATEMENT ANALYSIS WORKBOOK Impact of Changes in Selected Assumptions on Projected Income Statement Colossal Chemical Corporation Year Ended December 31, 2011 ($000,000 omitted) Sales Cost of goods sold Selling, general, and administrative expense Depreciation Research and development Total costs and expenses Operating Income Interest expense Interest (income) Earnings before Income Taxes Provision for Income Taxes Net Income Growth Sales 0% CGS as % of Sales 70% SG&A % of Sales 12% Taxrate 34% Base Case 2% Increase in Gross Margin 2% Decline in Tax Rate 5% Increase in Sales $2,110 1,477 $2,110 1,350 $2,110 1,393 $2,216 1,462 $ 253 121 $ 317 121 $ 317 121 $ 332 121 84 84 84 84 1,935 $ 175 34 (5) 1,872 $ 238 34 (5) 1,914 $ 196 34 (5) 2,000 $ 216 34 (5) $ 146 $ 209 $ 167 $ 187 $ $ $ 71 $ 138 $ 53 $ 113 $ 64 $ 123 50 96 0% 64% 15% 34% 0% 66% 15% 32% 5% 66% 15% 34% P1: TIX/b P2: c/d JWBT510-c06 QC: e/f T1: g JWBT510-Fridson May 21, 2011 12:7 Printer: Yet to Come 193 Computational Exercises Impact of Changes in Selected Assumptions on Projected Income Statement Colossal Chemical Corporation Year Ended December 31, 2011 ($000,000 omitted) Sales Cost of goods sold Selling, general, and administrative expense Depreciation Research and development Total costs and expenses Operating Income Interest expense Interest (income) Earnings before Income Taxes Provision for Income Taxes Net Income Growth Sales CGS as % of Sales SG&A % of Sales taxrate 70% 12% 34% Base Case Forecast $2,110 1,477 $ 253 121 84 1,935 $ 175 34 (5) $ 146 $ 50 $ 96 $2,216 1,507 $ 377 121 84 2,088 $ 127 34 (5) $ 98 $ 31 $ 67 5% 68% 17% 32% ... JWBT510-Fridson May 23, 2011 7:24 Printer: Yet to Come Financial Statement Analysis Workbook Step-by-Step Exercises and Tests to Help You Master Financial Statement Analysis Fourth Edition MARTIN FRIDSON FERNANDO... conduct of financial statement analysis and in auditors’ interpretations of accounting principles The issuers of financial statements also exert a strong influence over the creation of the financial. .. JWBT510-Fridson T1: g May 24, 2011 0:16 Printer: Yet to Come FINANCIAL STATEMENT ANALYSIS WORKBOOK 20 The most dangerous trap that users of financial statements must avoid walking into, however, is inferring