Income Statements» What Do I See?» Exercises www.navigatingaccounting.com SOLUTIONS is.wis.is.040 Applying hierarchical approach to analyzing income These questions pertain to s statements and a related footnote disclosure at the end of this exercise. Here you will search for data to compute ratios that progressively drill deeper into s financial performance. In the How Do I Use the Numbers? section, we will expand on the interpretation of the ratios you compute in this exercise. Part I: Comprehensive income ROE-CI Comprehensive income is the broadest performance measure reported by for-profit companies. The Return-on-Equity Comprehensive Income (ROE-CI) ratio can help you assess companies performance at this broad level. ROE-CI = comprehensive income / average owners equity (a) Calculate s ROE-CI for their most recent year. Level 1: Comprehensive Income ROE-CI 25.03% 12.69% 11.21% Part II: Major categories ROE and ROE-OCI Level 2 analysis entails examining two major categories of comprehensive income: Net income and other comprehensive income (OCI). Here are the related ratios: ROE = net income / average owners equity ROE-OCI = other comprehensive income / average owners equity (b) Calculate s ROE and ROE-OCI for their most recent year. Carry forward your calculation of ROE-CI from above to complete this table. Level 2: Major Categories ROE 25.16% 10.75% 12.79% ROE-OCI -0.13% 1.93% -1.58% ROE-CI 25.03% 12.69% 11.21% You may customize this work, as long as you credit G. Peter & Carolyn R. Wilson and respect the Creative Commons Attribution-Noncommercial-Share Alike United States license. 1991 2011 NavAcc LLC. www.navigatingaccounting.com
2 NAVIGATING ACCOUNTING (c) Compare and contrast the trends in each of the three ratios in (b) above. What is the relationship among the ratios in this table? Both ROE and ROE-CI increased over the past three years; most significantly in fiscal 2010. In contrast, ROE-OCI was inconsistent; increasing and decreasing over this period with both positive and negative performance. Mathematically, the relationship of the ratios is ROE-CI = ROE + ROE-OCI. This reinforces the definition of comprehensive income = net income + other comprehensive income. Consequentially, the relationship of the trends for ROE and ROE-CI are similar. Part III: Significant subcategories Margins and DuPont Model Companies typically combine income-statement line items into subcategories and provide subtotals for each. Here, the focus will be on the significant subcategories of net profit (loss) and the related margin ratios: Operating margin = operating profit / revenue Non-operating profit margin = non-operating income(loss) / revenue Profit margin = profit before taxes / revenue (d) Calculate s margins for their most recent year. Level 3: Significant Subcategories: Margins Operating margin 35.73% 16.26% 23.82% Non-operating margin 1.05% -0.02% -3.37% Profit margin 36.78% 16.24% 20.45% Level 3 analysis can be expanded using the DuPont Model. Here are the related ratios: Profit margin = profit before taxes / revenue Asset turnover = revenue / average total assets Financial leverage = average total assets / average owners equity Tax factor = 1- (tax expense / pretax income) ROE = net income / average owners equity (e) Calculate s DuPont Model ratios for their most recent year. Carry forward your calculations of ROE and profit margin from (b) and (d) to complete this table. Level 3: Dupont Model Profit margin 36.78% 16.24% 20.45% Asset turnover 0.75 0.68 0.71 Financial leverage 1.28 1.27 1.28 Tax factor 71.45% 76.60% 68.85% ROE 25.16% 10.75% 12.79% 1991-2011 NavAcc LLC, G. Peter & Carolyn R. Wilson
EXERCISES 3 (f) Compare and contrast the trends in ratios you computed in (e). What is the relationship among the ratios in this table? Each of the factors were positive over the three year period and all but the tax factor increased in fiscal 2010. We will return to these ratios, and all the other ratios in this exercise in the How Do I Use the Numbers? section. There we will expand on the interpretation of the ratios you computed in this exercise. Mathematically, the DuPont Model provides components of ROE. ROE = profit margin x asset turnover x financial leverage x tax factor. Analyzing the components provides insights into the underlying financial performance that s driving the ROE results.
4 NAVIGATING ACCOUNTING Figure 1 s Balance Sheet This figure is an excerpt from s 2010 annual Form10-K report. INTEL CORPORATION CONSOLIDATED BALANCE SHEETS December 25, 2010 and December 26, 2009 (In Millions--Except Par Value) 2010 2009 Assets Current assets: Cash and cash equivalents $ 5,498 $ 3,987 Short-term investments 11,294 5,285 Trading assets 5,093 4,648 Accounts receivable, net of allowance for doubtful accounts of $28 ($19 in 2009) 2,867 2,273 Inventories 3,757 2,935 Deferred tax assets 1,488 1,216 Other current assets 1,614 813 Total current assets 31,611 21,157 Property, plant and equipment, net 17,899 17,225 Marketable equity securities 1,008 773 Other long-term investments 3,026 4,179 Goodwill 4,531 4,421 Other long-term assets 5,111 5,340 Total assets $ 63,186 $ 53,095 Liabilities and stockholders' equity Current liabilities: Short-term debt $ 38 $ 172 Accounts payable 2,290 1,883 Accrued compensation and benefits 2,888 2,448 Accrued advertising 1,007 773 Deferred income on shipments to distributors 622 593 Other accrued liabilities 2,482 1,722 Total current liabilities 9,327 7,591 Long-term income taxes payable 190 193 Long-term debt 2,077 2,049 Long-term deferred tax liabilities 926 555 Other long-term liabilities 1,236 1,003 Commitments and contingencies (Notes 23 and 29) Stockholders' equity: Preferred stock, $0.001 par value, 50 shares authorized; none issued - - Common stock, $0.001 par value, 10,000 shares authorized; 5,581 issued and 5,511 outstanding (5,523 issued and outstanding in 2009) and capital in excess of par value 16,178 14,993 Accumulated other comprehensive income (loss) 333 393 Retained earnings 32,919 26,318 Total stockholders' equity 49,430 41,704 Total liabilities and stockholders' equity $ 63,186 $ 53,095 's 2010 Form 10-K, page 49. www.sec.gov See accompanying notes in the 10-K.
EXERCISES 5 Figure 2 s Income Statement This figure is an excerpt from s 2010 annual Form10-K report. INTEL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS Three Years Ended December 25, 2010 (In Millions--Except Per Share Amounts) Net revenue $ 43,623 $ 35,127 $ 37,586 Cost of sales 15,132 15,566 16,742 Gross margin 28,491 19,561 20,844 Research and development 6,576 5,653 5,722 Marketing, general and administrative 6,309 7,931 5,452 Restructuring and asset impairment charges 0 231 710 Amortization of acquisition-related intangibles 18 35 6 Operating expenses 12,903 13,850 11,890 Operating income 15,588 5,711 8,954 Gains (losses) on equity method investments, net 117 (147) (1,380) Gains (losses) on other equity investments, net 231 (23) (376) Interest and other, net 109 163 488 Income before taxes 16,045 5,704 7,686 Provision for taxes 4,581 1,335 2,394 Net income $ 11,464 $ 4,369 $ 5,292 Basic earnings per common share $2.06 $0.79 $0.93 Diluted earnings per common share $2.01 $0.77 $0.92 Weighted average shares outstanding Basic 5,555 5,557 5,663 Diluted 5,696 5,645 5,748 's 2010 Form 10-K, page 48. www.sec.gov See accompanying notes in the 10-K.
6 NAVIGATING ACCOUNTING Figure 3 s Comprehensive Income Footnote This figure is an excerpt from s 2010 annual Form10-K report, Note 27. 's Comprehensive Income Footnote The components of total comprehenisve income were as follows: (in millions) Net Income 11,464 4,369 5,292 Other comprehensive income (loss) $ (60) $ 786 $ (654) Total comprehensive income $ 11,404 $ 5,155 $ 4,638 's 2010 Form 10-K, page 94. www.sec.gov See accompanying notes in the 10-K.