Financial Accounting: An Integrated Statements Approach, 2nd Edition

206 Chapter 4 Accounting Information Systems

BUSINESS ACTIVITIES AND RESPONSIBILITY ISSUES

Mohawk Industriesis a leading distributor of carpets and rugs in the United States. The com-

pany sells its carpets and rugs to locally owned, independent carpet retailers, home centers such

asHome DepotandLowe’s, and department stores such as Sears. Mohawk’s carpets are mar-

keted under the brand names that include “Aladdin, Mohawk Home, Bigelow, Custom Weave,

Durkan, Karastan, and Townhouse.”

1. List some factors that increase the demand for carpet.


2. Do you think Mohawk should view itself as a carpet or floor-covering manufacturer?
   Discuss the advantages and disadvantages of Mohawk viewing itself as a floor-covering
   manufacturer rather than just a carpet manufacturer.


3. Read Mohawk’s latest 10-K filing with the Securities and Exchange Commission by using
   EdgarScan (http://edgarscan.pwcglobal.com). Does Mohawk view itself as a carpet manu-
   facturer or as a floor-covering manufacturer? Explain.

Activity 4-1

Business emphasis

Case 4-6

Case 4-7

On the Internet, go to the google.com Web site and perform an advanced search for “EBITDA.”

Review the articles for a discussion of the advantages and disadvantages of using EBITDA as a

financial analysis tool. Pick one or more articles, read them, and summarize your findings.

The income statements for Amazon.com,Google, Inc., and Borders, lnc., for a recent year are

provided below.

Amazon.com Google, Inc. Borders, Inc.

Net sales $6,921 $3,189 $3,903

Cost of sales 5,319 1,457 2,804

Gross profit $1,602 $1,732 $1,099

Selling, general, and administrative expenses 1,162 1,092 883

Operating income $ 440 $ 640 $ 216

Interest expense (income) 84 (10) 9

Income before income taxes $ 356 $ 650 $ 207

Income taxes expense (benefit) (232) 251 76

Net income $ 588 $ 399 $ 131

In addition, the statement of cash flows revealed the following line item in the cash flows from

operations section of the statement:

Amazon.com Google, Inc. Borders, Inc.

Depreciation and amortization $76 $148 $113

1. Determine EBITDA (earnings before interest, taxes, depreciation, and amortization) for each
   company.


2. Why is the EBITDA for Amazon.com actually less than the net income?


3. Would you conclude that the EBITDA performance of Amazon.com is more like an Internet
   company such as Google, Inc., or more like a book retailer like Borders, Inc.? Explain.
   Hint:Compute EBITDA as a percent of net sales.


4. How is EBITDA different than cash flows from operations?