Question

P1-7. Reading an Income Statement Mattel, Inc. is a U.S.-based toy company with about half of Mattel, Inc its revenues from sales outside North America. Its globally-recognized names include Barbie Fisher-Price, Hot Wheels, and American Girl, and because of its licensing arrangements with Disney, Viacom, and Warner Brothers, many of its products are based on well-known charac ters, such as Winnie the Pooh, SpongeBob SquarePants, and Batman. Its income statements for the years ended 2014, 2013, and 2012 appear in the exhibit below as the basis for the fol- lowing questions. (Note that the company reports in thousands of U.S. dollars.) Required: a. What is Mattel's largest expense? b. Calculate the gross margin percentaefor each of the three ye might this ratio be useful? What is Mattel's second largest expense? What kinds of specific costs might be included in that line of the income statement?

Answer 1

Answer

• Requirement ‘a’

Mattel’s largest expense = Cost of Sales
It is also proper, since Mattel being engaged in trading, the largest expense would be Cost of Sales (also referred as Cost of Goods Sold).
In all of the three years, Cost of Sales are approximately 50% of the Net Sales.

• Requirement ‘b’

Working		2014	2013	2012
A	Gross Profits	$3,001,022	$3,478,883	$3,409,197
B	Net Sales	$6,023,819	$6,484,892	$6,420,881
C = (A/B) x 100	Gross Margin percentage	49.82%	53.65%	53.10%

This ratio is useful as:
--it tells how much the company is earning as Gross Profit on every $100 of Net Sales.
--it shows earning before other operating expenses are considered.

• Requirement ‘c’

--The second largest expense is “Other selling and administrative expenses”

These expenses might have included:
--Depreciation expenses
--Salaries expense
--Selling expenses
--Rent Expenses, etc

• Requirement ‘d’

We can say that Mattel has borrowed from banks and other lenders because of the presence of “Interest Expense” in the Income Statement.

Interest is paid on borrowed funds, and Mattel has considerable amount of Interest Expense, which means that it had borrowed from banks and other lenders.

• Requirement ‘e’

--If seen at a glance, Net Income shows weird trend.
--It has increased considerably in 2013 when compared with 2012’s.
--However, it again went down below than it was in 2012.
--Profit Margin %

Working		2014	2013	2012
A	Net Income	$498,784	$903,944	$776,464
B	Net Sales	$6,023,819	$6,484,892	$6,420,881
C = (A/B) x 100	Profit Margin %	8.28%	13.94%	12.09%

--It shows that although Net Income seems to have increased a lot in 2013, it has only increased around 2% (approx.) of sales when compared with 2012’s.
--After that it had decreased to 8.28%