FINS1613 Lecture Notes - Lecture 8: Accrual, Accounts Payable, Current Liability
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2. Balance sheet
The balance sheet provides a snapshot of the financial conditionof a company. Investors and analysts use the information given onthe balance sheet and other financial statements to make severalinterpretations regarding the companyâs financial condition andperformance.
Blue Hamster Manufacturing Inc. is a hypothetical company.Suppose it has the following balance sheet items reported at theend of its first year of operation. For the second year, some partsare still incomplete. Use the information given to complete thebalance sheets for Blue Hamster Manufacturing Inc. for the yearsending December 31, Year 2 and 1, respectively.
Blue Hamster Manufacturing Inc. | |||||
|---|---|---|---|---|---|
Balance Sheet | |||||
For the Year ended December 31 | |||||
| Year 2 | Year 1 | Year 2 | Year 1 | ||
| Assets | Liabilities and equity | ||||
| Current assets: | Current liabilities: | ||||
| Cash and equivalents | $55,350 | Accounts payable | $0 | $0 | |
| Accounts receivable | $25,312 | $20,250 | Accruals | $3,516 | $0 |
| Inventories | $74,250 | $59,400 | Notes payable | $19,921 | $18,750 |
| Total current assets | $168,750 | $135,000 | Total current liabilities | $18,750 | |
| Net fixed assets: | Long-term debt | $70,312 | $56,250 | ||
| Net plant and equipment | $165,000 | Total debt | $93,750 | $75,000 | |
| Common equity: | |||||
| Common stock | $182,812 | $146,250 | |||
| Retained earnings | $78,750 | ||||
| Total common equity | $281,250 | $225,000 | |||
| Total assets | $375,000 | $300,000 | Total liabilities and equity | $375,000 | $300,000 |
Given the information in the preceding balance sheetâandassuming that Blue Hamster Manufacturing Inc. has 50 million sharesof common stock outstandingâread each of the following statements,then identify the selection that best interprets the informationconveyed by the balance sheet.
Statement #1: Blue Hamsterâs pool of relatively liquid assets,which are available to support the companyâs current and futuresales, decreased from Year 1 to Year 2.
This statement is , because:
Blue Hamsterâs total current liabilities balance decreased by$33,750 between Year 1 and Year 2.
Blue Hamsterâs total current liabilities balance increased from$20,250 to $25,312 between Year 1 and Year 2.
Blue Hamsterâs total current asset balance actually increasedfrom $135,000 to $168,750 between Year 1 and Year 2.
Blue Hamsterâs total current asset balance decreased from$168,750 to $135,000 between Year 1 and Year 2.
Statement #2: In Year 2, Blue Hamster Manufacturing Inc. wasprofitable.
This statement is , because:
Blue Hamsterâs retained earnings account increased between theend of Years 1 and 2.
The cash and equivalents account increased between Years 1 and2.
Blue Hamsterâs total assets increased between Years 1 and 2.
Statement #3: The book value per share of Blue Hamsterâs stockin Year 2 was $5,625.
This statement is , because:
The per-share book value is calculated by dividing the companyâstotal assets by the number of outstanding shares of commonstock.
The per-share book value is calculated by dividing the companyâstotal debt by the number of outstanding shares of common stock.
The per-share book value is calculated by dividing the companyâstotal common equity by the number of outstanding shares of commonstock.
Based on your understanding of the different items reported onthe balance sheet and the information they provide, if everythingelse remains the same, then the cash and equivalents item on thecurrent balance sheet is likely to if the firm issues$3 million of new common stock.
Based on your understanding of the different items reported inthe balance sheet and the information they provide, which statementregarding Blue Hamster Manufacturing Inc.âs balance sheet isconsistent with U.S. Generally Accepted Accounting Principles(GAAP)?
The companyâs assets should be listed in alphabetical order.
The companyâs assets should be listed in the order in which theyare to be converted into cash.
The companyâs assets should be listed from those carrying thelargest balance to those with the smallest balance.
Question
Analysis of Financial Statements
Balance Sheets
EXHIBITS: INPUT DATA (XYZ)
Table 1 Balance Sheets
| Assets | 2013E | 2012 | 2011 |
| cash | $ 85,632 | $7,282 | $57,600 |
| Acount Receivable | 878,000 | 632,160 | 351,200 |
| Inventories | 1,716,480 | 1,287,360 | 715,200 |
| Total current assets | $2,680,112 | $1,926,802 | $ 1,124,000 |
| Gross fixed assets | 1,197,160 | 1,202,950 | 491,000 |
| Less: accumulated depreciation | 380,120 | 263,160 | 146,200 |
| Net fixed assets | $ 817,040 | $ 939,790 | $ 344,800 |
| Total assets | $3,497,152 | $2,866,592 | $ 1,468,800 |
| Liabilities and equity | |||
| Accounts payable | $ 436,800 | $ 524,160 | $ 145,600 |
| Notes payable | 300,000 | 636,808 | 200,000 |
| Accruals | 408,000 | 489,600 | 136,000 |
| Total current liabilities | $1,144,800 | $1,650,568 | $ 481,600 |
| Long term bonds | 400,000 | 723,432 | 323,432 |
| Total debt | $1,544,800 | $2,374,000 | $ 805,032 |
| Common stock (100,000 shares) | 1,721,176 | 460,000 | 460,000 |
| Retained earnings | 231,176 | 32,592 | 203,768 |
| Total common equity | $1,952,352 | $ 492,592 | $ 663,768 |
| Total liabilities and equity | $3,497,152 | $2,866,592 | $ 1,468,800 |
Analysis of Financial Statements
Income Statements
Table 2
Income Statements
| 2013E | 2012 | 2011 | |
| Sales | $7,035,600 | $6,034,000 | $ 3,432,000 |
| Cost of goods sold | 5,875,992 | 5,528,000 | 2,864,000 |
| Other expenses | 550,000 | 519,988 | 358,672 |
| Total operating exp. excl. depreciation and amortization | $6,425,992 | $6,047,988 | $ 3,222,672 |
| EBITDA | $ 609,608 | $(13,988) | $ 209,328 |
| Depreciation and amortization | 116,960 | 116,960 | 18,900 |
| Earnings before interest and taxes (EBIT) | $492,648 | $(130,948) | $190,428 |
| Interest expense | 70,008 | 136,012 | 43,828 |
| Earnings before taxes (EBT) | $ 422,640 | $ (266,960) | $ 146,600 |
| Taxes (40%) | 169,056 | (106,784) | 58,640 |
| Net Income | $ 253,584 | $ (160,176) | $ 87,960 |
| Earnings per share (EPS) | $ 1.014 | $ (1.602) | $ 0.880 |
| Dividends per share (DPS) | $ 0.220 | $ 0.110 | $ 0.220 |
| Book value per share (BVPS) | $ 7.809 | $ 4.926 | $ 6.638 |
| Stock price | $ 12.17 | $ 2.25 | $ 8.50 |
| Shares outstanding | 250,000 | 100,000 | 100,000 |
| Tax rate | 40.00% | 40.00% | 40.00% |
| Lease payments | $ 40,000 | $ 40,000 | $ 40,000 |
| Sinking fund payments | 0 | 0 | 0 |
Analysis of Financial Statements
Ratio Analysis
| 2013E | 2012 | 2011 | Industry Average | |
| Current ratio | * | 1.2 | 2.3 | 2.7 |
| Quick ratio | * | 0.4 | 0.8 | 1.0 |
| Inventory turnover | * | 4.7 | 4.8 | 6.1 |
| Days sales outstanding (DSO) | * | 38.2 | 37.4 | 32.0 |
| Fixed assets turnover | * | 6.4 | 10.0 | 7.0 |
| Total assets turnover | * | 2.1 | 2.3 | 2.6 |
| Debt-to- assets ratio | * | 82.8% | 54.8% | 50.0% |
| Times interest earned (TIE) | * | -1.0 | 4.3 | 6.2 |
| Operating margin | * | -2.2% | 5.6% | 7.3% |
| Profit margin | * | -2.7% | 2.6% | 3.5% |
| Basic earning power (BEP) | * | -4.6% | 13.0% | 19.1% |
| Return on assets(ROA) | * | -5.6% | 6.0% | 9.1% |
| Return on equity (ROE) | * | -32.5% | 13.3% | 18.2% |
| Price/earnings (P/E) | * | -1.4 | 9.7 | 14.2 |
| Market/book (M/B) | * | 0.5 | 1.3 | 2.4 |
| Book value per share (BVPS) | * | $4.93 | $6.64 | n.a. |
Requiremnts:
Note: Question 1 through 5 has been answered completley, thank you very much. Please I am waiting for the question 6 and 7.
6. Use the extended DuPont equation to provide a summary and overview of XYZâs financial condition as projected for 2013.
7. Use the following simplified 2013 balance sheet to show, in general terms, how an improvement in the DSO would tend to affect the stock price. For example, if the company could improve its collection procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without affecting sales, how would that change âripple throughâ the financial statements (shown in thousands below) and influence the stock price?
Accounts receivable $878 Debt $1,545
Other current assets 1,802
Net fixed assets 817 Equity 1,952
Total assets $3,497 Liabilities plus equity $3,497
First, we need to calculate XYZâs daily sales.
Daily sales = Sales / 365
Daily sales = $7,035,600 / 365
Daily sales = $19,275.62
Target A/R = Daily sales à Target DSO
Target A/R = $19,276 Ã 32
Target A/R = $616,820
Freed-up cash = old A/R â new A/R
Freed-up cash = $878,000 â $616,820
Freed-up cash = $261,180