Exhibit 4.1

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

Refer to Exhibit 4.1. What is the firm's profit margin? Do not round your intermediate calculations.

Question

Exhibit 4.1

The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.

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Refer to Exhibit 4.1. What is the firm's profit margin? Do not round your intermediate calculations.

BlackTom AI · Accepted Answer

Question restatement:
Exhibit 4.1 shows Koski Inc.'s balance sheet and income statement with the given assumptions (no amortization, no leasing, no debt retirement for 5 years, notes payable rolled over). The task is to determine the firm's profit margin. Answer options are:
- 1.98%
- 2.35%
- 1.68%
- 2.02%
- 2.51%

Now, let's analyze each option and the underlying calculation that determines profit margin.

Option 1: 1.98%
- This value would represent net income as a percentage of sales that is slightly below 2%. If someone computed profit margin by dividing net income by sales and arrived at 1.98%, they would have obtained this figure from the data on the income statement. A plausible reason this could be incorrect is if the actual net income or sales figure used in the computation came from a different year, a different sub-total (e.g., using operating income instead of net income), or if there was a misinterpretation of non-operating items or taxes. If the exhibit contains a net income or revenue amount that leads to exactly 1.98% when divided, this would be the correct value; otherwise it is incorrect.

Option 2: 2.35%
- A value of 2.35% could occur if net income is higher relative to sales than in option 1. If someone accidentally used a gross margin (e.g., gross profit divided by sales) or omitted a deduction (like taxes or other expenses) and still labeled it as profit margin, this would be a misapplication. The incorrectness here hinges on whether the numerator truly represents net income (after all expenses and taxes) and the denominator is total sales. If those are correct, 2.35% could be correct; otherwise, it’s not.

Option 3: 1.68%
- This lower margin suggests either a smaller net income relative to sales or a larger denominator (sales) in the calculation. Potential mistakes leading to 1.68% include using an after-tax income figure that is too small due to mis-recorded tax expense, or erroneously including extraordinary items or gains as part of net income. If the exhibit’s net income and sales do not align to 1.68% when a proper net income figure is used, then this option would be incorrect.

Option 4: 2.02%
- A margin of 2.02% would come from a specific net income-to-sales ratio that, if calculated correctly from the exhibit’s numbers, matches the defined profit margin. This option is plausible if the net income and sales figures on the income statement produce exactly 2.02% when net income is divided by sales. The correctness of this value depends on using the accurate figures from the exhibit and applying the standard profit-margin formula (net income / sales) with proper rounding conventions as required by the problem.

Option 5: 2.51%
- A 2.51% profit margin implies a relatively higher net income relative to sales. Possible reasons for selecting this value incorrectly include mixing up operating income with net income, omitting tax expense, or using a partial year figure. If the exhibit’s numbers, when applied to net income divided by sales, yield 2.51%, then this is correct; otherwise, it’s not.

Key considerations when evaluating the options:
- Ensure the numerator is net income (not operating income or gross profit) and the denominator is total sales (not, for example, cost of goods sold or total assets).
- Confirm that no items such as discontinued operations, extraordinary gains/losses, or unusual transactions are misclassified in net income.
- Apply the same rounding rule as specified in the problem (the prompt says not to round intermediate calculations, so final rounding should follow the instruction given in the exhibit or assignment).

Because the actual numerical figures from Exhibit 4.1 are not provided here, a precise computation cannot be performed within this analysis. To determine which option is correct, one would locate net income and total sales on the income statement in Exhibit 4.1, compute profit margin as net income divided by sales, and compare the result to the given options after applying the required rounding. If your computation yields 2.02%, then Option 4 matches the calculated value; if it yields 1.98%, then Option 1 matches, and so on for the remaining choices. Ensure that the figures used are taken directly from Exhibit 4.1 and that intermediate arithmetic is kept exact as specified.

Business Finance Chapter 04 Quiz

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