Compute and Interpret Ratios Selected balance sheet and income statement information from Illinois Tool Works follows. $ millions 2019 2018 2017 Net operating profit after tax (NOPAT) $2,349 $2,440 Net income 2,269 2,307 Total assets 14,315 14,127 $15,941 Equity 2,875 3,091 3,091 Net operating profit after tax (NOA) 8,426 8,989 9,585 Treasury stock 17,084 15,791 14,006 a. Compute profitability measures: RNOA, ROA and ROE for 2019 and 2018 using the numbers as reported by the company. Note: Round answers to one decimal place (ex: 0.2345 = 23.5%). Metric 2019 2018 RNOA Answer Answer ROA Answer Answer ROE Answer Answer b. Adjust equity and total assets for the amount of treasury stock. $ millions 2019 2018 2017 Assets, restated Answer Answer Answer Equity, restated Answer Answer Answer Using these restated numbers, recompute RNOA, ROA and ROE for both years. Note: Round answers to one decimal place (ex: 0.2345 = 23.5%). Metric 2019 2018 RNOA Answer Answer ROA Answer Answer ROE Answer Answer c. Which profitability measures (from part a or part b) better reflect the company’s profit levels during the two years? Answer Of the three measures, which one is least influenced by the company’s stock repurchase activity? Answer
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Compute and Interpret Ratios
Selected balance sheet and income statement information from Illinois Tool Works follows.
| $ millions | 2019 | 2018 | 2017 |
|---|---|---|---|
| $2,349 | $2,440 | ||
| Net income | 2,269 | 2,307 | |
| Total assets | 14,315 | 14,127 | $15,941 |
| Equity | 2,875 | 3,091 | 3,091 |
| Net operating profit after tax (NOA) | 8,426 | 8,989 | 9,585 |
| 17,084 | 15,791 | 14,006 |
a. Compute profitability measures: RNOA, ROA and ROE for 2019 and 2018 using the numbers as reported by the company.
Note: Round answers to one decimal place (ex: 0.2345 = 23.5%).
| Metric | 2019 | 2018 |
|---|---|---|
| RNOA | Answer
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Answer
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| ROA | Answer
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Answer
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| ROE | Answer
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Answer
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b. Adjust equity and total assets for the amount of treasury stock.
| $ millions | 2019 | 2018 | 2017 |
|---|---|---|---|
| Assets, restated | Answer
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Answer
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Answer
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| Equity, restated | Answer
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Answer
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Answer
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Using these restated numbers, recompute RNOA, ROA and ROE for both years.
Note: Round answers to one decimal place (ex: 0.2345 = 23.5%).
| Metric | 2019 | 2018 |
|---|---|---|
| RNOA | Answer
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Answer
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| ROA | Answer
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Answer
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| ROE | Answer
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Answer
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c. Which profitability measures (from part a or part b) better reflect the company’s profit levels during the two years?
Answer
Of the three measures, which one is least influenced by the company’s stock repurchase activity?
Answer
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