Tootsie Roll Industries, Inc

BYP 13-1FINANCIAL REPORTING PROBLEM (a)TOOTSIE ROLL INDUSTRIES, INC. Trend Analysis of Net Sales and Net Earnings For the Five Years Ended 2001 Base Period 1997—($ in thousands) 20012000199919981997 (1)Net sales Trend$423,496 113%$427,054 114%$396,750 106%$388,659 103%$375,594 100% (2)Net ?? earnings Trend ?? 65,687 108% ?? 75,737 125% ?? 71,310 118% ?? 67,526 111% ?? 60,682 100% This analysis of Tootsie Roll shows a favorable trend in net sales over the past five years. Tootsie Roll showed a steady increase from 1997 through 2000.

Net sales declined slightly from 2000 to 2001. The net earnings trend is also favorable from 1997 to 2000. 2001 shows a significant decline in net earnings. The reasons for such decreases in profitability measures during 2001 would require further investigation. (b)(000’s omitted) (1)Debt to Total Assets 2001:?? ($618,676 – $508,461) ? $618,676 = . 178 2000:?? ($562,442 – $458,696) ? $562,442 = . 184 (2)Times Interest Earned 2001:?? ($100,787 + $356) ? $356 = 284. 1 times 2000:?? ($117,808 + $866) ? $866 = 137. 0 times Tootsie Roll’s long-term solvency is not in jeopardy.

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The debt to total assets ratio indicates that creditors are providing only 18% of Tootsie Roll’s total assets. Also, Tootsie Roll easily has the ability to pay interest payments when they come due as indicated by the times interest earned ratio of over 200 times. BYP 13-1 (Continued) (c)(000’s omitted) (1)Profit Margin 2001:?? $65,687 ? $423,496 = . 16 2000:?? $75,737 ? $427,054 = . 18 (2)Asset Turnover 2001:?? $423,496 ? [($618,676 + $562,442) ? 2] = . 72 times 2000:?? $427,054 ? [($562,442 + $529,416) ? 2] = . 78 times (3)Return on Assets 2001:?? $65,687 ? ($618,676 + $562,442) ? 2] = . 111 2000:?? $75,737 ? [($562,442 + $529,416) ? 2] = . 139 (4)Return on Common Stockholders’ Equity 2001:?? $65,687 ? [($508,461 + $458,696) ? 2] = . 136 2000:?? $75,737 ? [($458,696 + $430,646) ? 2] = . 170 All of the profitability ratios decreased in 2001; yet Tootsie Roll is a profitable corporation. Stockholders are earning a good 13. 6% on their investment. Considering that Tootsie Roll is primarily in a high-volume business where the margin above costs is historically low, the profit margins for both 2001 and 2000 are good. d)Substantial amounts of important information about a company are not in its financial statements. Events involving such things as industry changes, management changes, competitors’ actions, technological developments, governmental actions, and union activities are often crit-ical to the successful operation of a company. Financial reports in the media and publications of financial service firms (Standard & Poors, Dun & Bradstreet) will provide additional relevant information not usu-ally found in the annual report.

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