Interpreting Financial Statements
Microbyte Corporation’s consolidated statement of operations (dollars in thousands) follows. Note that Microbyte is a computer company, specializing in data storage devices.
|
2000 |
1999 |
|
|
Sales |
$184,355 |
$92,642 |
|
Cost of goods sold |
102,453 |
53,344 |
|
Gross profit |
81,902 |
39,298 |
|
Operating expenses: |
||
|
Selling, general, and administrative |
20,188 |
12,272 |
|
Research and development |
15,669 |
6,785 |
|
Total operating expenses |
35,857 |
19,057 |
|
Income from operations |
46,045 |
20,241 |
|
Other income |
1,831 |
1,744 |
|
Income before income taxes and |
||
|
extraordinary item |
47,876 |
21,985 |
|
Income taxes |
(17,040) |
(8,056) |
|
Income before extraordinary item |
30,836 |
13,929 |
|
Extraordinary item |
— |
1,049 |
|
Net income |
$30,836 |
$14,978 |
Required
a. Identify any unusual trends or categories of information. Identify any potential problems or questions based on this analysis. What other information would be helpful? Why?
b. Conduct horizontal and vertical analyses for each year. Identify any potential problems or issues based on this analysis.
c. Would you consider Microbyte as a very profitable company? Why or why not?
d. Assume that Microbyte’s annual report contained the following footnote:
Because research is so important to the future of Microbyte, the corporation has budgeted $23,000,000 for research and development for 2001. These funds are presently committed to a new facility under construction and to 42 engineers and computer analysts who have been hired to begin work January 1, 2001.
On the basis of this footnote, estimate what would have happened to 2000 earnings if these charges had been incurred in 2000. Construct a simple balance sheet equation including these charges, as though they happened in 2000.
e. Assume that the annual report also contained the following footnote:
Because interest rates are expected to be low during 2001, Microbyte Corporation has signed commitments and pledges to effectively refinance all its short term and long term liabilities. Accordingly, Microbyte expects to recognize a $12 million gain (on debt refinancing) in 2001. On the basis of this footnote, estimate what would have happened to 2000 earnings, assuming that this gain had been recognized in 2000. Construct a simple balance sheet equation, as though the gain had been recognized in 2000.