FIN 322 Study Guide - Final Guide: Operating Cash Flow, Macrs, Cash Flow

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5 Aug 2019

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Dupont system of analysis system used to dissect the firm"s financial statements and to assess its financial conditions. Dupont formula multiplies the firm"s net profit margin by its total asset turnover to calculate the firm"s return on total assets. Modified dupont formula relates the firm"s return on total assets to its return on equity using the financial leverage multiplier. Financial leverage multiplier the ratio of the firm"s total assets to its common stock equity. Depreciation portion of the costs of fixed assets charged against annual revenues over time. Modified accelerated cost recovery system system used to determine the depreciation of assets for tax purposes. Recovery period the appropriate depreciable life of a particular asset as determined by macrs. Operating cash flow the cash flow a firm generates from its normal operations calculated as net operating profits after taxes plus depreciation. Net operating profits after taxes a firm"s earnings before interest and after taxes.

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Thank you in advance for your help. If you will, please explain to me how you came up with the answer for "a". I wasn't sure where to look. I can see the differences in balance sheets.

Donna Jamison was recently hired as a financial analyst by Computron Industries, a manufacturer of electronic components. Her first task was to conduct a financial analysis of the firm covering the last two years. To begin, she gathered the following financial statements and other data.

Balance Sheets 2013 2014

Assets

Cash $ 52,000 $ 57,600

Accounts receivable 402,000 351,200

Inventories 836,000 715,200

Total current assets $1,290,000 $1,124,000

Gross fixed assets 527,000 491,000

Less accumulated depreciation 166,200 146,200

Net fixed assets $ 360,800 $ 344,800

Total assets $1,650,800 $1,468,800

Liabilities and Equity

Accounts payable $ 175,200 $ 145,600

Notes payable 225,000 200,000

Accruals 140,000 136,000

Total current liabilities $ 540,200 $ 481,600

Long-term debt 424,612 323,432

Common stock (100,000 shares) 460,000 460,000

Retained earnings 225,988 203,768

Total equity $ 685,988 $ 663,768

Total liabilities and equity $1,650,800 $1,468,800

(continued)
Income Statements 2014 2013

Sales $3,850,000 $3,432,000

Cost of goods sold (3,250,000) (2,864,000)

Other expenses ( 430,300) ( 340,000)

Depreciation ( 20,000) ( 18,900)

Total operating costs $3,700,300 $3,222,900

EBIT $ 149,700 $ 209,100

Interest expense ( 76,000) ( 62,500)

EBT $ 73,700 $ 146,600

Taxes (40%) ( 29,480) ( 58,640)

Net income $ 44,220 $ 87,960

EPS $0.442 $0.880

Statement of Cash Flows (2014)

Operating Activities

Net income $ 44,220

Other additions (sources o f cash)

Depreciation 20,000

Increase in accounts payable 29,600

Increase in accruals 4,000

Subtractions (uses of cash)

Increases in accounts receivable ( 50,800)

Increase in inventories (120,800)

Net cash flow from operations $( 73,780)

Long-Term Investing Activities

Investment in fixed assets $( 36,000)

Financing Activities

Increase in notes payable $ 25,000

Increase in long-term debt 101,180

Payment of cash dividends ( 22,000)

Net cash flow from financing $104,180

Net reduction in cash account $( 5,600)

Cash at beginning of year 57,600

Cash at end of year $ 52,000

(continued)
Other Data 2014 2013

December 31 stock price $6.00 $8.50

Number of shares 100,000 100,000

Dividends per share $ 0.22 $0.22

Lease payments $40,000 $40,000

Industry average data for 2014:

Ratio Industry Average

Current 2.7x

Quick 1.0x

Inventory turnover 6.0x

Days sales outstanding (DSO) 32.0 days

Fixed assets turnover 10.7x

Total assets turnover 2.6x

Debt ratio 50.0%

TIE 2.5x

Fixed charge coverage 2.1x

Net profit margin 3.5%

ROA 9.1 %

ROE 18.2%

Price/earnings 14.2x

Market/book 1.4x

Assume that you are Donna Jamisonâs assistant and that she has asked you to help her prepare a report that evaluates the companyâs financial condition. Answer the following questions:

a. What can you conclude about the companyâs financial condition from its statement of cash flows?

b. What is Computronâs inventory turnover, dayâs sales outstanding, fixed assets turnover and total assets turnover ratios? How does the firmâs utilization of assets stack up against that of the industry?

c. What are the firmâs debt, times-interest-earned, and fixed charge coverage ratios? How does Computron compare to the industry with respect to financial leverage? What conclusions can you draw from these ratios?

d. Calculate and discuss the firmâs profitability ratiosâthat is, its net profit margin, return on assets (ROA), and return on equity (ROE).

e. WHAT ARE COMPUTRONâS INVENTORY TURNOVER, DAYS SALES OUTSTANDING, FIXED ASSETS TURNOVER, AND TOTAL ASSETS TURNOVER RATIOS? HOW DOES THE FIRMâS UTILIZATION OF ASSETS STACK UP AGAINST THAT OF THE INDUSTRY?

FSU Manufacturing, Inc. has the following financial statements data for 2014:

Income Statement		Balance Sheet
Sales	$102,500	Cash	$40,000
Cost of Goods	$50,000	Fixed Assets	$55,000
SG&E Expenses	$35,000	Total Assets	$95,000
EBIT	$17,500	Accounts Payable	$12,000
Interest Expense	$2,500	Long-term Debt	$25,000
Taxes	$6,000	Retained Earnings	$28,000
Net Income	$9,000	Paid-in Common Equity	$30,000

Trait 1		Use of financial statements
1.
	a.		Compute the firmâs debt ratio and current ratio.
	b.		Is the firm profitable? Does the balance sheet balance? Explain.
	c.		If the firm paid $5,000 in dividends in 2014, what was its retained earnings balance at the end of 2013? (20 points)

Trait 2		Student relates financial ratios to improved business decisions
2.
	a.		Compute the firmâs net profit margin, total asset turnover, and financial leverage multiplier (also known as the equity multiplier).
	b.		Explain what each of the three ratios above tells you about the firmâs performance and how they combine to form the firmâs return on equity.
	c.		The financial data for the firmâs major competitors show on average a net profit margin of 16%, total asset turnover of 1.25, but comparable leverage. Identify some possible business decisions that the firm could make so that it would be as attractive an investment as its competitors.

beigespider882

QUESTION 1

Determine the cost of sales for a firm with the following financial ratios and data:

Current ratio = 3.0; Quick ratio = 2.0; Current liabilities $1,000,000; Inventory turnover 6 times

	a.	$6,000,000
	b.	$3,000,000
	c.	$2,000,000
	d.	$1,000,000

8.3 points

QUESTION 2

What would be the times interest earned of a company, if its total interest charges are $20,000, sales are $220,000, and its net profit margin is 6 percent? Assume a tax rate of 40 percent.

	a.	2.65
	b.	2.1
	c.	1.1
	d.	1.2

8.3 points

QUESTION 3

A firm's current ratio is 1.5 and its quick ratio is 1.0. If its current liabilities are $10,000, what are its inventories?

	a.	$20,000
	b.	$ 5,000
	c.	$10,000
	d.	$15,000

8.3 points

QUESTION 4

If a firm wishes to retain the same return on equity when its net profit margin and total asset turnover has declined, it must

	a.	increase its equity multiplier
	b.	increase sales and increase assets
	c.	decrease its equity multiplier
	d.	reduce sales and increase assets

8.3 points

QUESTION 5

The sales-to-inventory ratio:

	a.	is technically inferior to other commonly used ratios.
	b.	is superior to the inventory turnover ratio.
	c.	as a determination of financial performance, is good comparison tool.
	d.	was developed by the Dupont Corporation and is satisfactory when used to make comparisons between the firm and the industry as a whole.

8.5 points

QUESTION 6

Primary sources of comparative financial data include

	a.	Dun and Bradstreet
	b.	Richard Moore, Inc.
	c.	Framingham Financial Library
	d.	New York Times

8.3 points

QUESTION 7

____ indicate the ability of the firm to meet its short-term financial obligations

	a.	Leverage ratios
	b.	Profitability ratios
	c.	Activity ratios
	d.	Liquidity ratios

8.3 points

QUESTION 8

If a firmâs common size income statement shows that the earnings after tax percentage is too low, the firm may have spent too much money:

	a.	on total assets as a percentage of long-term liabilities.
	b.	on cost of goods sold as a percentage of sales.
	c.	on taxes paid as a percentage of stockholdersâ equity.
	d.	on expenses as a percentage of current assets.

8.3 points

QUESTION 9

The ____ ratio indicates the percentage of a firm's earnings that are distributed as dividends.

	a.	payout
	b.	earnings
	c.	return on earnings
	d.	dividend yield

8.3 points

QUESTION 10

The work of the external independent auditor includes a letter that states that the financial information represents fairly the financial position of the company and that these statements were:

	a.	based on the company's accounting information system (AIS)
	b.	constructed in conformity with generally accepted accounting principles
	c.	developed using management's choice of accounting enhancement techniques
	d.	an accurate picture of the company's market position

8.3 points

QUESTION 11

The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.

	a.	liquidity
	b.	profitability
	c.	size
	d.	risk

8.3 points

QUESTION 12

The type of ratio that indicates the firmâs ability to provide adequate returns in the form of dividends and share price appreciation is:

	a.	Profitability ratios
	b.	Asset management ratios
	c.	Financial leverage management ratios
	d.	Liquidity ratios

8.5 points

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FIN 322 Study Guide - Final Guide: Operating Cash Flow, Macrs, Cash Flow

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