The Mathematics of Money

508 Chapter 12 Financial Statements

In the examples of this section, we will refer to the financial statements given below.

Thomas Hydrometer Sales Corp.

2007 Full Year Income Statement

I. Revenues

Gross sales $75,938,275

Less returns $1,500,000

Net sales $74,438,275

II. Cost of goods sold

Inventory as of December 31, 2006 $32,535,000

Net purchases $38,300,000

Less inventory as of December 31, 2007 $22,982,651

Cost of goods sold $47,852,349

III. Gross profi t $26,585,926

IV. Operating expenses

To tal operating expenses $20,752,149

V. Net income before insurance and taxes $5,833,777

VI. Other expenses

Provision for taxes $735,926

Interest $317,000

To tal interest and taxes $1,052,926

VII. Net income $4,780,851

Thomas Hydrometer Sales Corp.

Balance Sheet as of December 31, 2007

Assets Liabilities

Current assets: Current liabilities:
Cash $1,082,925 Accounts payable $2,175,923
Accounts receivable $1,242,075 Other $143,997
Inventory $22,982,651
To tal current assets $25,307,651 Total current liabilities $2,391,920

Property, plant, and
equipment:

Long-term
liabilities:
Buildings $2,167,349 Mortgage notes: $1,250,000
Land $100,000 Other Long-term debt $9,073,055
Other plant and
equipment

$5,675,000

To tal long-term liabilities $10,323,055
To tal P, P, and E $17,925,000 Total liabilities $12,714,975

Equity

Contributed capital $800,000
Retained earnings $19,735,025
To tal equity $20,535,025
Total assets $33,250,000 Total liabilities and equity $33,250,000

Income Ratios

Income ratios are, generally speaking, measurements of the financial results from a

business’s ongoing activities. They are primarily based on the items listed on a business’s

income statement. We can further categorize income ratios into several subcategories.

Profitability ratios are, as their name suggests, measurements of the how well the

business’s sales translate into profits. The two most commonly used profitability ratios

are the gross profit margin and the net profit margin. Both of these ratios are discussed

in Chapter 8 in terms of their use in setting prices. To calculate these ratios from the

balance sheet: