Ch14(6th)Post - Analysis of Analysis of Operating Operating...

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Unformatted text preview: Analysis of Analysis of Operating Operating Activities Activities Chapter Chapter F14 F14 14-2 1. Explain the relationship between product pricing and sales volume in creating revenues and profits. 2. Explain how operating strategy affects a companys return on assets. 3. Define cost leadership and product differentiation and explain how companies use their strategies to create profits. Objectives Objectives 14-3 4. Evaluate operating performance by using accrual and cash flow measures. 5. Examine the return on equity and explain how operating, investing, and financing activities are interconnected. 6. Describe the primary components of an accounting system and how they are useful for understanding business activities. Objectives Objectives 14-4 Developing an Developing an Operating Strategy Operating Strategy Profit margin = Net income Sales revenue Profit margin is a measure of a companys ability to create profit from its sales. Obj 1 & 2 14-5 Developing an Developing an Operating Strategy Operating Strategy Asset turnover = Sales revenue Total assets Asset turnover is a measure of of a companys ability to generate sales from its investment in assets. Obj 1 & 2 14-6 Developing an Developing an Operating Strategy Operating Strategy Return on assets = Profit margin x Asset turnover Return on assets net income operating revenues operating revenues total assets = x Obj 1 & 2 14-7 Developing an Developing an Operating Strategy Operating Strategy If profit margin is low, a company must sell a lot of its products to earn a reasonable profit. Obj 1 & 2 14-8 Exhibit 1 Exhibit 1 Summary of Expected Assets and Expected Operating Results for Favorite Cookie Company (in thousands) (in thousands) Assets Initial Investment Operating Results Year 1 Year 2 Assets Initial Investment Operating Results Year 1 Year 2 Current assets $1,000 Sales revenues $3,000 $3,600 Plant assets 4,000 Cost of ingredients (800) (960) Total assets $5,000 Depreciation (300) (300) Wages and benefits (700) (700) Other operating exp. (1,000 ) (1,000 ) Operating income 200 640 Interest expense (20 ) (20 ) Pretax income 180 620 Income taxes (54 ) (186 ) Net income $ 126 $ 434 Obj 1 & 2 14-9...
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Ch14(6th)Post - Analysis of Analysis of Operating Operating...

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