Constructing and Assessing Income Statements Using Percentageof Completion
On March 15, 2012, Frankel Construction contracted to build a shopping center at a contract price of $120 million. The schedule of expected (which equals actual) cash collection and contract costs follow ($ millions):
Year  Cash Collections  Cost Incurred 

2012  $ 30  $ 25 
2013  50  20 
2014  40

40

Total  $ 120  $ 85 
(a) Calculate the amount of revenue, expense, and net income for each of the three years 2012 through 2014 using the percentageofcompletion revenue recognition method. Rounding instructions: Round percentages to the nearest whole number. Use rounded percentages for remaining calculations. Round revenue and income to the nearest whole number.
Percentage of Completion Method  

Year  Costs incurred  Percent of total expected costs  Revenue recognized  Income 
2012  $Answer  Answer%  $Answer  $Answer 
2013  Answer  Answer%  Answer  Answer 
2014  Answer

Answer%  Answer

Answer

$85  $120  $35 
(b) Which of the following statements best summarizes our conclusion about the usefulness of the percentageofcompletion method for this company?
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Question 2
Compute NOPAT Using Tax Rates from Tax Footnote
The income statement for The TJX Companies, Inc., follows.
THE TJX COMPANIES, INC. 

Fiscal Year Ended ($ thousands) 
January 27, 2007 
Net sales 
$17,404,637 
Cost of sales, including buying and occupancy costs 
13,213,703 
Selling, general and administrative expenses 
2,923,560 
Provision (credit) for computer intrusion related costs 
4,960 
Interest expense (revenue), net 
15,566 
Income from continuing operations before provision for income taxes 
1,246,848 
Provision for income taxes 
470,092 
Income from continuing operations 
776,756 
Gain/(loss) from discontinued operations, net of income taxes 
(38,717) 
Net income 
$ 738,039 


U.S. federal statutory income tax rate 
35.0% 
Effective state income tax rate 
4.0% 
Impact of foreign operation 
0.4% 
All other 
0.9% 
Worldwide effective income tax rate 
37.7% 
Compute TJX’s NOPAT for 2007 using its income tax footnote disclosure. (The Federal and State tax rate for 2007 as reported by TJX’s tax footnote is: 39.0%). Round to the nearest whole number.
2007 NOPAT = $Answer
Question 3
Analysis and Interpretation of Profitability
Balance sheets and income statements for Nordstrom, Inc. follow. Refer to these financial statements to answer the requirements.
NORDSTROM, INC. 

For Fiscal Years Ended ($ millions) 
2010 
2009 
2008 
Sales 
$ 8,258 
$ 8,272 
$ 8,828 
Credit card revenues 
369 
301 
252 
Total revenues 
8,627 
8,573 
9,080 
Cost of sales and related buying and occupancy costs 
(5,328) 
(5,417) 
(5,526) 
Selling, general and administrative expenses 



Retail 
(2,109) 
(2,103) 
(2,130) 
Credit 
(356) 
(274) 
(177) 
Earnings before interest and income taxes 
834 
779 
1,247 
Net interest expense 
(138) 
(131) 
(74) 
Earnings before income taxes 
696 
648 
1,173 
Income tax expense 
(255) 
(247) 
(458) 
Net earnings 
$ 441 
$ 401 
$ 715 
NORDSTROM, INC. 

($ millions) 
January 30, 2010 
January 31, 2009 
Assets 


Current Assets 


Cash and cash equivalents 
$ 795 
$ 72 
Accounts receivable, net 
2,035 
1,942 
Merchandise inventories 
898 
900 
Current deferred tax assets, net 
238 
210 
Prepaid expenses and other 
88 
93 
Total current assets 
4,054 
3,217 
Land, buildings and equipment, net 
2,242 
2,221 
Goodwill 
53 
53 
Other assets 
230 
170 
Total assets 
$ 6,579 
$ 5,661 
Liabilities and Shareholders’ Equity 


Current liabilities 


Accounts payable 
$ 726 
$ 563 
Accrued salaries, wages and related benefits 
336 
214 
Other current liabilities 
596 
525 
Current portion of longterm debt 
356 
299 
Total current liabilities 
2,014 
1,601 
Longterm debt, net 
2,257 
2,214 
Deferred property incentives, net 
469 
435 
Other liabilities 
267 
201 
Shareholders’ equity 


Common stock, no par value 
1,066 
997 
Retained earnings 
525 
223 
Accumulated other comprehensive income (loss) 
(19) 
(10) 
Total shareholders’ equity 
1,572 
1,210 
Total liabilities and shareholders’ equity 
$ 6,579 
$ 5,661 
(a) Compute net operating profit after tax (NOPAT) for 2010. Assume that the combined federal and statutory rate is: 37.0%. (Round your answer to the nearest whole number.)
2010 NOPAT = $Answer
(b) Compute net operating assets (NOA) for 2010 and 2009.
2010 NOA = $Answer
2009 NOA = $Answer
(c) Compute RNOA, net operating profit margin (NOPM), and net operating asset turnover (NOAT) for 2010. Do not use NOPM x NOAT to calculate RNOA. (Do not round until final answers. Round to two decimal places.)
2010 RNOA = Answer
%
2010 NOPM = Answer
%
2010 NOAT = Answer
(d) Compute net operating obligations (NNO) for 2010 and 2009.
2010 NNO = $Answer
2009 NNO = $Answer
(e) Compute return on equity (ROE) for 2010. (Round your answers to two decimal places. Do not round until your final answer.)
2010 ROE = Answer
%
(f) Infer the nonoperating return component of ROE for 2010. (Use answers from above to calculate. Round your answer to two decimal places.)
2010 nonoperating return = Answer
%
(g) Comment on the difference between ROE and RNOA. Which of the following statements best describes the inference from the difference between Nordstrom’s ROE and RNOA?
ROE>RNOA implies that Nordstrom’s equity has grown faster than its NOA. The faster increase of equity compared to NOA allows higher dividends to be paid to Nordstrom’s stockholders.
ROE>RNOA implies that Nordstrom is able to borrow money to fund operating assets that yield a return greater than its cost of debt. The excess accrues to the benefit of Nordstrom’s stockholders.
ROE>RNOA implies that Nordstrom has taken on too much financial leverage. The high financial leverage results in a higher interest rate on Nordstrom’s debt, therefore the cost of debt is greater.
ROE>RNOA implies that Nordstrom has increased its financial leverage during the period. The increase in financial leverage also increases Nordstrom’s risk, therefore increasing the expected ROE by Nordstrom’s stockholders.
Question 4
Interpreting Foreign Currency Translation Disclosure
BristolMyers Squibb (BMY) reports the following table in its 10K report relating to the change in sales from 2007 to 2008.

Analysis of % Change 


Total Change 
Volume 
Price 
Foreign Exchange 
U.S. net sales 
16% 
9% 
7% 
– 
Foreign net sales 
10% 
4% 
1% 
5% 
Total net sales 
13% 
7% 
4% 
2% 
(a) Includes Puerto Rico.
(b) Includes Russia and Turkey.
(c) Includes Japan, China, Canada, Australia and Brazil, among other countries.
Hint: Do not enter any negative signs with your answers.
(a) By what percentage did U.S. net sales change during the year? How much of this change is attributable to volume versus price change?
2008 change in U.S. net sales: Answer
by Answer
%
Volume change: Answer
by Answer
%
Price change: Answer
by Answer
%
Exchange rate: Answer
by Answer
%
(b) By what percentage did foreign net sales change during the year? How much of this change is attributable to volume versus price change?
2008 change in foreign net sales: Answer
by Answer
%
Volume change: Answer
by Answer
%
Price change: Answer
by Answer
%
Exchange rate: Answer
by Answer
%
(c) Is the change in total net sales equal to the average of the changes in U.S. and foreign net sales? What does this imply?
Yes, U.S. sales increase by 16 percent, and foreign sales increase by 10 percent, for an average increase of 13%. This implies that U.S. sales are much larger than foreign sales.
Yes, U.S. sales increase by 16 percent, and foreign sales increase by 10 percent, for an average increase of 13%. This implies that U.S. sales are much smaller than foreign sales.
Yes, U.S. sales increase by 16 percent, and foreign sales increase by 10 percent, for an average increase of 13%. This implies that U.S. sales and foreign sales are fairly close in dollar terms.
No, the change in net sales is not equal to the average of the changes in U.S. and foreign net sales because foreign sales are much larger than U.S. sales.
Question 5
Constructing and Assessing Income Statements Using Percentageof Completion
On March 15, 2012, Frankel Construction contracted to build a shopping center at a contract price of $120 million. The schedule of expected (which equals actual) cash collection and contract costs follow ($ millions):
Year 
Cash Collections 
Cost Incurred 
2012 
$ 30 
$ 25 
2013 
50 
20 
2014 
40 
40 
Total 
$ 120 
$ 85 
(a) Calculate the amount of revenue, expense, and net income for each of the three years 2012 through 2014 using the percentageofcompletion revenue recognition method. Rounding instructions: Round percentages to the nearest whole number. Use rounded percentages for remaining calculations. Round revenue and income to the nearest whole number.
Percentage of Completion Method 

Year 
Costs incurred 
Percent of total expected costs 
Revenue recognized 
Income 
2012 
$Answer 
Answer % 
$Answer 
$Answer 
2013 
Answer 
Answer % 
Answer 
Answer 
2014 
Answer 
Answer % 
Answer 
Answer 
$85 

$120 
$35 
(b) Which of the following statements best summarizes our conclusion about the usefulness of the percentageofcompletion method for this company?
The percentage ofcompletion method is not useful because it does not provide information about the total revenues over the life of the project.
The percentageofcompletion method is an acceptable method under GAAP.
The percentageofcompletion method does not provide a good estimate of the revenue and income earned in each period.
The percentage ofcompletion method is not useful because it is so dependent upon the completion estimate used by the company and can be easily manipulated.
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