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ADM 1340 Lecture Notes - Lecture 12: Qst, Promissory Note, Accounts Payable

35 views8 pages
18 Mar 2016
School
University of Ottawa
Department
Administration
Course
ADM 1340
Professor
Lamia Chourou

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ADM 1340 Full Course Notes
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ADM 1340 Full Course Notes
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Document Summary

Liabiliies are present obligaions that result from past transacions. Debt that will be paid within one year from: Through the creaion of other current liabiliies (not payable: non-current liabiliies. Debts that do not meet both of the aforemenioned criteria. Ex. installment notes payable and bonds payable. Pre-authorizaion by the bank that allows companies to borrow money up to a pre-set limit, when it is needed. Interest is usually charged at a loaing (variable) interest rate on any amounts used from the line of credit. Security, called collateral, is usually required by the bank as protecion in the even of default on the loan. A bank indebtedness is a negaive or credit bank balance (debit to the bank) which is reported as a current liability on the statement of inancial posiion. No special journal entry is required to record an overdrawn amount. Cash sale of 6,000 with 13% hs: tax =>780.

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Related Questions

Question - What are the key financial indicators that shows that Jackson Automotive will not be able to pay back the loan at the end of the fiscal year?

Background Jackson had requested the renewal of an existing term loan with the bank in the amount of $5 million that was originally scheduled to be repaid at the end of the month. Jackson was also seeking to borrow an additional $2.4 million to fund the acquisition of a long-needed piece of equipment, which it planned to purchase in late July. Both loans, which totaled $7.4 million, would be repayable on September 30, 2013.

Data -

Exhibit 1 - Forecast Balance Sheets, Fiscal Year 2013 (thousands of dollars)
2013 2013 Forecast
May June July August September
Cash 4,994 2,720 10,796 6,532 (1,372)
Accounts receivablea 3,744 10,881 6,474 7,201 7,394
Inventory 12,163 7,482 6,936 6,524 5,963
Current assets 20,901 21,082 24,206 20,257 11,985
Gross PP&E 45,500 45,500 45,500 47,900 47,900
Accumulated depreciationb 31,448 31,568 31,688 31,818 31,948
Net PP&E 14,052 13,932 13,812 16,082 15,952
Prepaid expenses 54 54 54 54 54
Total assets 35,007 35,068 38,072 36,393 27,991
Accounts payablec 5,950 5,950 5,950 5,950 5,950
Notes payable, bank 5,000 5,000 7,400 7,400 -
Accrued taxesd 273 548 799 1,034 906
Other accrued expenses 1,142 1,142 1,142 1,142 1,142
Customer advance payments 2,700 900 - - -
Current liabilities 15,065 13,540 15,291 15,526 7,998
Shareholders equity 19,923 21,186 21,672 22,128 21,408
Total liabilities and equity 34,988 34,726 36,963 37,654 29,405
aSelling term of net 30 days
bDepreciation of $120,000 per month through July 2013, $130,000 per month as of August 2013
cPurchase terms of net 30 days
dTaxes payable for 2013 were assumed to be $1,500,000 and would be paid on December 15, 2012, March 15, 2013, June 15, 2013 and September 15, 2013 in equal increments.
Cash Calculation (342) (1,108) 1,261 1,414
Exhibit 2 - Forecast Income Statements, Fiscal Year 2013 (thousands of dollars)
FY 2013 Eight Months Ended May Forecast 2013 June Forecast 2013 July Forecast 2013 August Forecast 2013 September Forecast FY 2013 Twelve Months Ended June
Net sales 44,014 12,681 7,374 7,201 7,394 78,664
COGS 34,297 9,881 5,746 5,611 5,762 61,297
Gross Profit 9,717 2,800 1,628 1,590 1,632 17,367
Operating expenses 5,608 750 750 750 750 8,608
Depreciation and amortization 960 120 120 130 130 1,460
Interest expensea 200 25 25 37 37 324
Interest incomeb 60 8 5 18 11 102
Profit (loss) before tax 3,009 1,913 737 691 726 7,076
Income taxesc 1,023 650 251 235 247 2,406
Net income (loss) 1,986 1,263 487 456 479 4,671
Dividends 400 1,200
a6% annualized interest rate charged on outstanding bank loans.
b2% annualized rate of return on beginning monthly cash balances.
cThe federal tax rate on all earnings was 34%.
FYI
% COGS to Net sales 77.9% 77.9% 77.9% 77.9% 77.9% 77.9%

Susan Burke, president of Triple A Office Mart, studied her notes for the afternoon meeting with the bank’s commercial loan committee. The profitable company, organized in 1978, sold a complete line of office equipment, furniture, and supplies. Two stores operated in two adjoining states in the southwestern United States. Budgetary control of the two stores was centralized in the store and office complex which operated in the larger of the two cities. In preparation for the meeting, Burke wondered about the type of information the bank might have with which to make a decision on her loan. She was also concerned about how the bank would view a profitable company that needed to borrow funds.

The stores had operated profitably since their inception. Triple A was organized by Burke and a college roommate, Virginia Best, one year after their graduation. Best left the company after only three years to participate in an overseas venture. Her interest was sold to Burke at that time.

With the advent of the personal computer, a major component of company sales, and a general trend in the economy toward specialty stores, Triple A had experienced excellent growth in revenue and earnings. Table 1 illustrates a portion of the firm’s sales and earnings history. Table 2 provides balance sheets for selected years.

The firm had issued no common stock or long-term debt in the recent past. In fact, the second store was opened in 1990 without any additional long-term financing. In the case of the new store, however, there was an increase in inventory and bank borrowing. The company’s financial staff wondered if this were a normal state of affairs for an expansion situation. Triple A had traditionally handled its credits well, and the stockholders were generally satisfied with the firm’s return on equity. (Stock was offered to the public for the first time in 1980).

The primary benefit to the company was the strong local economy. Although it was primarily a service economy, it supported Triple A almost perfectly. A nearby college of business administration, which published an economic report and forecast concerning the local economy, stated that since 1987 the growth of the local GNP had been in the range of 8-10 percent. Susan Burke had, as a long-range plan, every intention of participating in the region’s growth and of contributing to it through the efficient operation of her firm.

In recent months during early 1992, there had been cause for concern on the part of company management. Prices from suppliers had risen and the firm’s financial managers wondered about the effect of this upon profitability and the general operation of the business. The suppliers to the firm were varied, since the firm carried a wide range of office equipment and supplies. As a result, it was not possible to develop a strong and mutually supportive relationship with any one supplier. In general, the company had to deal with the vagaries of the economy.

Foremost in Burke’s thinking was to maintain a sensible payout ratio for the equity investors, one which reflected the operational reality of the company. Firms that were similar in product line and sales pattern to Triple A paid a dividend which amounted to 30-60 percent of earnings. Growth in sales volume beyond the nominal growth in the economy usually came about as a result of market share being taken away from competitors. Triple A’s management intended to survive in the region in which they operated. The relatively stable payout ratio which the company had maintained for several years seemed appropriate given revenue growth.

In preparation for her meeting with the bank, Susan Burke had concerns about the financial condition of her firm and whether there was a trend in the financial statements that might cause the bank to become wary of Triple A as a continuing customer.

TABLE 1

Triple A Office Mart

Income Statement (selected years)

1990

1989 1990 1991 1992

Sales $3,800,000 $4,180,000 $4,850,000 $6,000,000

Cost of goods sold (2,460,000) (2,975,000) (3,200,000) (4,180,000)

Gross profit $1,340,000 $1,205,000 $1,650,000 $1,820,000

Selling, admin, and

Depreciation expenses ($684,000) ($820,000) ($898,408) ($1,015,467)

Interest (30,780) (30,780) (42,372) (35,313)

Profit before tax $625,220 $354,220 $709,220 $769,220

Taxes (187,566) (106,266) (212,766) (230,766)

Net income $437,654 $247,954 $496,454 $538,454

TABLE 2

Triple A Office Mart

Balance Sheet

1989 1990 1991 1992

Cash $295,000 $326,040 $378,300 $468,000

Accounts receivable 11,400 12,540 20,700 18,000

Inventory 950,000 1,028,595 1,559,407 1,735,207

Total current assets $1,256,400 $1,367,175 $1,958,407 $2,221,207

Property, plant, equip… 450,000 501,600 501,600 503,000

Total assets $1,706,400 $1,868,775 $2,460,007 $2,724,207

Accounts payable $152,000 $167,200 $190,000 $300,000

Notes payable-bank ……… …… 289,776 113,326

Accrued wages & taxes 114,000 125,000 145,500 180,000

Total current liabilities 266,000 292,200 625,276 593,326

Long term debt 342,200 342,000 342,200 342,200

Common stock 600,000 600,000 600,000 600,000

(120,000 shares)

Retained earnings 498,200 634,575 892,731 1,188,881

Total liabilities and equity $1,706,400 $1,868,775 $2,460,007 $2,724,207

QUESTIONS

1. What are Triple A’s earnings per share for year 1991 and 1992, respectively?

2.Calculate some financial ratios for the company for 1990, 1991 and 1992 (including ROE, net profit margin, total asset turnover, financial leverage, current ratio, and number of days of receivables)

1990 1991 1992

ROE

Net profit margin

Total asset turnover

Financial leverage

Current ratio

Number of days of receivables

3. Comment on the trend of ROE you got in part 2, what are the reasons for the trend of Roe based on the Dupont Analysis?

4. If the typical firm in the industry in which Triple A operates has a debt to equity ratio of 42 percent, what advice would you give Triple A concerning its debt ratio? Show the work.