Questions, Exercises, Problems, and Cases 223

Exhibit 4 .2 8
Selected Data for The Hershey Company
(amounts in millions except per-share data)
(Problem 4.23)
Year 3 Year 2 Year 1

Sales $6,644,252 $6,080,788 $5,671,009

Interest expense 95,569 92,183 96,434
Net income 628,962 509,799 435,994
Diluted EPS 2.89 2.74 2.21
Minority interest in net income 12,950 5,817 8,183
Total assets 4,754,839 4,407,094 4,272,732
Total shareholders’ equity 1,048,373 880,943 937,601
Noncontrolling interests in subsidiaries 11,624 23,626 35,285

4.24 Calculating and Interpreting Profitability Ratios. Hasbro is a leading LO 4-1, LO 4-2
firm in the toy, game, and amusement industry. Its promoted brands group includes products from LO 4-3, LO 4-4
Playskool, Tonka, Milton Bradley, Parker Brothers, Tiger, and Wizards of the Coast. Sales of toys and
games are highly variable from year to year depending on whether the latest products meet consumer
interests. Hasbro also faces increasing competition from electronic and online games. Hasbro devel-
ops and promotes its core brands and manufactures and distributes products created by others under
license arrangements. Hasbro pays a royalty to the creator of such products. In recent years, Hasbro
has attempted to reduce its reliance on license arrangements, placing more emphasis on its core
brands. Hasbro also has embarked on a strategy of reducing fixed selling and administrative costs in
an effort to offset the negative effects on earnings of highly variable sales. Exhibit 4.29 presents the
balance sheets for Hasbro for the years ended December 31, Years 1 through 4. Exhibit 4.30 presents
the income statements and Exhibit 4.31 presents the statements of cash flows for Years 2 through 4.

Exhibit 4 .2 9
Hasbro Balance Sheets
(amounts in millions)
(Problem 4.24)
Year 4 Year 3 Year 2 Year 1

ASSETS
Cash $ 725 $ 521 $ 496 $ 233
Accounts receivable 579 607 555 572
Inventories 195 169 190 217
Prepayments 219 212 191 346
Total Current Assets $1,718 $1,509 $1,432 $1,368
Property, plant, and equipment, net 207 200 213 236
Other assets 1,316 1,454 1,498 1,765
Total Assets $3,241 $3,163 $3,143 $3,369

(Continued)

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224 CHAPTER 4 Profitability Analysis

E x h i b i t 4 .2 9 (Continued)
Year 4 Year 3 Year 2 Year 1
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable $ 168 $ 159 $ 166 $ 123
Short-term borrowing 342 24 223 36
Other current liabilities 639 747 578 599
Total Current Liabilities $1,149 $ 930 $ 967 $ 758
Long-term debt 303 687 857 1,166
Other noncurrent liabilities 149 141 128 92
Total Liabilities $1,601 $1,758 $1,952 $2,016
Common stock $ 105 $ 105 $ 105 $ 105
Additional paid-in capital 381 398 458 455
Retained earnings 1,721 1,567 1,430 1,622
Accumulated other comprehensive income (loss) 82 30 (47) (68)
Treasury stock (649) (695) (755) (761)
Total Shareholders’ Equity $1,640 $1,405 $1,191 $1,353
Total Liabilities and Shareholders’ Equity $3,241 $3,163 $3,143 $3,369

Exhibit 4 .3 0
Hasbro
Income Statements
(amounts in millions)
(Problem 4.24)
Year 4 Year 3 Year 2

Sales $ 2,998 $ 3,139 $ 2,816

Cost of goods sold (1,252) (1,288) (1,099)
Selling and administrative expenses:
Advertising (387) (364) (297)
Research and development (157) (143) (154)
Royalty expense (223) (248) (296)
Other selling and administrative (687) (799) (788)
Interest expense (32) (53) (78)
Income tax expense (64) (69) (29)
Net Income $ 196 $ 175 $ 75

REQUIRED
a. Exhibit 4.32 presents profitability ratios for Hasbro for Year 2 and Year 3. Calculate each of these
financial ratios for Year 4. The income tax rate is 35%.
b. Analyze the changes in ROA and its components for Hasbro over the three-year period, suggesting
reasons for the changes observed.

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 Questions, Exercises, Problems, and Cases 225

Exhibit 4 .3 1
Hasbro
Statements of Cash Flows
(amounts in millions)
(Problem 4.24)
Year 4 Year 3 Year 2

OPERATIONS
Net income $ 196 $ 175 $ 75
Depreciation and amortization 146 164 184
Addbacks and subtractions, net 17 68 (67)
(Increase) Decrease in accounts receivable 76 (13) 34
(Increase) Decrease in inventories (16) 35 39
(Increase) Decrease in prepayments 29 8 185
Increase (Decrease) in accounts payable and other current liabilities (90) 17 23
Cash Flow from Operations $ 358 $ 454 $ 473
INVESTING
Property, plant, and equipment acquired $ (79) $ (63) $ (59)
Other investing transactions (6) (2) (3)
Cash Flow from Investing $ (85) $ (65) $ (62)
FINANCING
Increase in common stock $ 3 $ 40 $ 3
Decrease in short-term borrowing (7) — (15)
Decrease in long-term borrowing (58) (389) (127)
Acquisition of common stock — (3) —
Dividends (37) (21) (21)
Other financing transactions 7 9 12
Cash Flow from Financing $ (69) $(364) $(148)
Change in Cash $204 $ 25 $ 263
Cash—Beginning of year 521 496 233
Cash—End of Year $725 $ 521 $ 496

c. Analyze the changes in ROCE and its components for Hasbro over the three-year period, suggest-
ing reasons for the changes observed.

4.25 Calculating and Interpreting Profitability Ratios. Abercrombie & Fitch LO 4-1, LO 4-2,
sells casual apparel and personal care products for men, women, and children through retail stores LO 4-3, LO 4-4
located primarily in shopping malls. Its fiscal year ends January 31 of each year. Financial statements
for Abercrombie & Fitch for fiscal years ending January 31, Year 3, Year 4, and Year 5 appear in Exhibit
4.33 (balance sheets), Exhibit 4.34 (income statements), and Exhibit 4.35 (statements of cash flows).
These financial statements reflect the capitalization of operating leases in property, plant, and equip-
ment and long-term debt, a topic discussed in Chapter 6. Exhibit 4.36 (page 228) presents financial
statement ratios for Abercrombie & Fitch for Years 3 and 4. Selected data for Abercrombie & Fitch
appear here.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
226 CHAPTER 4 Profitability Analysis

Exhibit 4 .3 2
Hasbro
Financial Statement Ratio Analysis
(Problem 4.24)
Year 4 Year 3 Year 2

Profit margin for ROA 6.7% 4.5%

Assets turnover 1.0 0.9
ROA 6.6% 3.9%
Profit margin for ROCE 5.6% 2.7%
Capital structure leverage 2.4 2.6
ROCE 13.5% 5.9%
Cost of goods sold/Sales 41.0% 39.0%
Advertising expense/Sales 11.6% 10.5%
Research and development expense/Sales 4.6% 5.5%
Royalty expense/Sales 7.9% 10.5%
Other selling and administrative expense/Sales 25.4% 28.0%
Income tax expense (excluding tax effects of interest
expense)/Sales 2.8% 2.0%
Accounts receivable turnover 5.4 5.0
Inventory turnover 7.2 5.4
Fixed assets turnover 15.2 12.5

E xhibit 4 .3 3
Abercrombie & Fitch
Balance Sheets
(amounts in millions)
(Problem 4.25)
January 31,
Year 5 Year 4 Year 3 Year 2

ASSETS
Cash $ 350 $ 56 $ 43 $ 188
Marketable securities — 465 387 51
Accounts receivable 26 7 10 21
Inventories 248 201 169 130
Prepayments 28 24 20 15
Total Current Assets $ 652 $ 753 $ 629 $ 405
Property, plant, and equipment, net 1,560 1,342 1,172 947
Other assets 8 1 1 —
Total Assets $2,220 $2,096 $1,802 $1,352
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable $ 84 $ 58 $ 79 $ 32
Short-term borrowing 54 33 — —
Other current liabilities 276 220 193 132

(Continued)

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 Questions, Exercises, Problems, and Cases 227

E xhibit 4 .3 3 (Continued)
January 31,
Year 5 Year 4 Year 3 Year 2
Total Current Liabilities $ 414 $ 311 $ 272 $ 164
Long-term debt 872 713 629 581
Other noncurrent liabilities 265 214 165 12
Total Liabilities $1,551 $1,238 $1,066 $ 757
Common stock $ 1 $ 1 $ 1 $ 1
Additional paid-in capital 140 139 143 141
Retained earnings 1,076 906 701 520
Treasury stock (548) (188) (109) (67)
Total Shareholders’ Equity $ 669 $ 858 $ 736 $ 595
Total Liabilities and Shareholders’ Equity $2,220 $2,096 $1,802 $1,352

REQUIRED
a. Calculate the ratios in Exhibit 4.36 for Year 5. The income tax rate is 35%.
b. Analyze the changes in ROA for Abercrombie & Fitch during the three-year period, suggesting
possible reasons for the changes observed.
c. Analyze the changes in ROCE for Abercrombie & Fitch during the three-year period, suggesting
possible reasons for the changes observed.

Exhibit 4 .3 4
Abercrombie & Fitch
Income Statements
(amounts in millions except retail space and employees)
(Problem 4.25)
For the Year Ended January 31,
Year 5 Year 4 Year 3

Sales $ 2,021 $1,708 $1,596

Cost of goods sold (1,048) (936) (893)
Selling and administrative expenses (562) (386) (343)
Interest expense (63) (54) (48)
Interest income 5 4 4
Income tax expense (137) (131) (121)
Net Income $ 216 $ 205 $ 195

Year 5 Year 4 Year 3

Square feet of retail space (in thousands) 5,590 5,016 4,358
Number of employees 48,500 30,200 22,000
Growth rate in sales 18.3% 7.0% 16.9%
Comparable store sales increase 2.0% (9.0%) 5.0%

Source: Abercrombie & Fitch Co., Form 10-K.

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
228 CHAPTER 4 Profitability Analysis

E xhibit 4 .3 5
Abercrombie & Fitch
Statements of Cash Flows
(amounts in millions)
(Problem 4.25)
For the Year Ended January 31,
Year 5 Year 4 Year 3

OPERATIONS
Net income $ 216 $ 205 $ 195
Depreciation and amortization 106 90 76
Addbacks and subtractions, net 13 56 49
(Increase) Decrease in inventories (34) (27) (34)
Increase (Decrease) in current liabilities 125 19 60
Cash Flow from Operations $ 426 $ 343 $ 346
INVESTING
Property, plant, and equipment acquired $ (185) $ (160) $ (146)
Marketable securities sold 4,779 3,771 2,419
Marketable securities purchased (4,314) (3,849) (2,729)
Other investing transactions — — 5
Cash Flow from Investing $ (280) $ (238) $ (451)
FINANCING
Increase in short-term borrowing $ 20 $ 4 $ 4
Increase in common stock 49 20 —
Acquisition of common stock (435) (116) (43)
Dividends (46) — —
Cash Flow from Financing $ (412) $ (92) $ (39)
Change in Cash $ 294 $ 13 $ (144)
Cash—Beginning of year 56 43 188
Cash—End of Year $ 350 $ 56 $ 43

Source: Abercrombie & Fitch Co., Form 10-K.

E xhibit 4 .3 6
Abercrombie & Fitch Financial Statement Ratio Analysis
(Problem 4.25)
Year 5 Year 4 Year 3

Profit margin for ROA 14.1% 14.2%

Assets turnover 0.9 1.0
ROA 12.3% 14.3%
Profit margin for ROCE 12.0% 12.2%
Capital structure leverage 2.4 2.4
ROCE 25.7% 29.3%
Cost of goods sold/Sales 54.8% 56.0%

(Continued)

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.
 Questions, Exercises, Problems, and Cases 229

E xhibit 4 .3 6 (Continued)
Year 5 Year 4 Year 3
Selling and administrative expense/Sales 22.6% 21.5%
Interest revenue/Sales 0.2% 0.3%
Income tax expense (excluding tax effects of interest
expense)/Sales 8.8% 8.6%
Accounts receivable turnover 200.9 103.0
Inventory turnover 5.1 6.0
Fixed assets turnover 1.4 1.5
Sales per store $2,440,000 $2,673,367
Sales per square foot $ 340.51 $ 366.22
Sales per employee $ 56,556 $ 72,545

4.26 Analyzing the Profitability of a Service Firm. Kelly Services (Kelly) places LO 4-1, LO 4-2,
employees at clients’ businesses on a temporary basis. It segments its services into (1) commercial, (2) LO 4-3, LO 4-4
professional and technical, and (3) international. Kelly recognizes revenues for the amount billed to
clients. Kelly includes the amount it pays to temporary employees in cost of services sold. It includes
the compensation paid to permanent employees that administer its offices in selling and administra-
tive expenses. The latter expense also includes data processing costs relating to payroll records for
all employees, rent, taxes, and insurance on office space. Amounts receivable from clients appear in
accounts receivable, and amounts payable to permanent and temporary employees appear in current
liabilities.
The temporary personnel business offers clients flexibility in adjusting the number of workers to
meet changing capacity needs. Temporary employees are typically less costly than permanent workers
because they have fewer fringe benefits. However, temporary workers generally are not as well trained
as permanent workers and have less loyalty to clients.
Barriers to entry in the personnel supply business are low. This business does not require capital for
physical facilities (most space is rented), does not need specialized assets (most temporary employees
do not possess unique skills; needed data processing technology is readily available), and operates with
little government regulation. Thus, competition is intense and margins tend to be thin.
Exhibit 4.37 presents selected profitability ratios and other data for Kelly Services, the largest
temporary personnel supply firm in the United States. Note that the data in Exhibit 4.37 reflect the
capitalization of operating leases in property, plant, and equipment and long-term debt, a topic dis-
cussed in Chapter 6.

Exhibit 4 .3 7
Profitability Ratios and Other Data for Kelly Services
(Problem 4.26)
Year 4 Year 3 Year 2

Profit margin for ROA 0.6% 0.3% 0.6%

Assets turnover 3.8 3.5 3.5
ROA 2.2% 0.9% 2.1%
Profit margin for ROCE 0.4% 0.1% 0.4%
Capital structure leverage 2.1 2.0 1.9
ROCE 3.3% 0.8% 2.9%

(Continued)

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Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.