FNBU 3221 Chapter 3: Chapter 3

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carminebear339

5 Feb 2017

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Cash flow and financial statements: a closer look. Sources of cash: firm"s activities that generate cash: decrease in left-side/increase in right-side accounts. Uses of cash (applications of cash): firm"s activities in which cash is spent: increase in left-side/decrease in right-side accounts. Statement of cash flows: firm"s financial statement that summarizes its sources & uses of cash over specified period. Common-size statement: standardized financial statement presenting all items in percentage terms. Balance sheet items shown as percentage of assets & income statement items as percentage of sales. Common-base year statement: standardized financial statement presenting all items relative to certain base year amount. Financial ratios: relationships determined form firm"s financial information & used for comparison purposes. Ratio analysis another way of avoiding problems involved in comparing companies of different sizes. Ratio analysis problem large number of possible ratios. (cid:1866)(cid:1857)(cid:1872) (cid:1875)(cid:1867)(cid:1870)(cid:1863)(cid:1866)(cid:1859) (cid:1855)(cid:1853)(cid:1868)(cid:1872)(cid:1853)(cid:1864) (cid:1872)(cid:1867) (cid:1872)(cid:1867)(cid:1872)(cid:1853)(cid:1864) (cid:1853)(cid:1871)(cid:1871)(cid:1857)(cid:1872)(cid:1871)=(cid:3041)(cid:3032)(cid:3047) (cid:3050)(cid:3042)(cid:3045)(cid:3038)(cid:3041)(cid:3034) (cid:3030)(cid:3028)(cid:3043)(cid:3047)(cid:3028)(cid:3039) (cid:3047)(cid:3042)(cid:3047)(cid:3028)(cid:3039) (cid:3028)(cid:3046)(cid:3046)(cid:3032)(cid:3047)(cid:3046) (cid:1866)(cid:1872)(cid:1857)(cid:1870)(cid:1874)(cid:1853)(cid:1864) (cid:1865)(cid:1857)(cid:1853)(cid:1871)(cid:1873)(cid:1870)(cid:1857)= (cid:3030)(cid:3048)(cid:3045)(cid:3045)(cid:3032)(cid:3041)(cid:3047) (cid:3028)(cid:3046)(cid:3046)(cid:3032)(cid:3047)(cid:3046) (cid:3028)(cid:3049)(cid:3032)(cid:3045)(cid:3028)(cid:3034)(cid:3032) (cid:3031)(cid:3028)(cid:3039)(cid:3052) (cid:3042)(cid:3043)(cid:3032)(cid:3045)(cid:3028)(cid:3047)(cid:3041)(cid:3034) (cid:3030)(cid:3042)(cid:3046)(cid:3047)(cid:3046)

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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?

Book: Financial management

1. Review the requirements of the Chapter 3 Mini-Case, parts b through j. Then apply those requirements to do an analysis of Brinker International, which is a real company. Don't complete the minicase itself, just Brinker. Do the analysis on the basis of the figures for the most recent year. For part g, use the 2 most recent years. Download 10K financial statements for the most recent year for Brinker. A good source is the company's home page. Also compare the Brinker ratios to the industry averages and commend on significant differences. You'll note that some of the company's ratios you calculate won't agree with those found on the web page. Ratios are calculated in different ways, however, you should use the formulas in the text. Also, you won't find all of the industry averages, but you will find most of them. You'll need the company's stock price for several of the ratios; use the fiscal year end price. The company's stock symbol is EAT.

(Visit Brinker web site) (Links to an external site.)

(Access industry averages) (Links to an external site.)

Note:

All quantitative work must be done in Excel; Word is not acceptable. You can download Brinker's 10K (annual financial statements they send the Securities and Exchange Commission each year) at the following site:

http://phx.corporate-ir.net/phoenix.zhtml?c=119205&p=irol-sec

You then need to take the various items off the financial statements such as Revenues, Inventory, etc. and calculate the ratios to answer the case questions.

b. calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the companyâs liquidity position in 2012, 2013, and as projected for 2014? We often think of rations as being useful 1. To managers to help run the business, 2. To bankers for credit analysis, and 3. To stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

c. Calculate the 2014 inventory turnover, days sales outstanding, fixed assets turnover, and total assets turnover. How does Brinker utilization of assets stack up against that of other firms in its industry?

d. calculate the 2014 debt ratio, liabilities to assets ratio, times-interest-earned, and EBITDA coverage ratios. How does Brinker compare with the industry with respect to financial leverage: what can you conclude from these ratios:

e. Calculate the 2014 profit margin, basic earning power, return on assets, and return on equity. What can you say about these ratios?

f. Calculate the 2014 price/earnings ratio, price/cash flow ratio, and market/book ratio. Do these ratios indicate the investors are expected to have a high or low opinion of the company?

g. Perform a common size analysis and percentage change analysis. What do these analyses tell you about Brinker?

h. use the extended DuPont equation to provide a summary and overview of Brinkerâs financial condition as projected for 2014. What are the firmâs major strengths and weaknesses?

i. What are some potential problems and limitations of financial ratio analysis?

j. What are some qualitative factors that analysts should consider when evaluating a companyâs likely future financial performance.

1. Which of the following would result in a decrease in cash flow and a use of cash? A. A decrease in notes payable B. An increase in long-term debt C. A decrease in inventory D. A decrease in common stock

2. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded an average rate of A. 15%. C. 39%. B. 35%. D. 34%.

3. A firm has assets of $60,000 and ownersâ equity of $33,000. Which of the following is the correct balance of the firmâs liabilities? A. $33,000 C. $93,000 B. $27,000 D. $60,000

4. Which of the following would result in an increase in cash flow and a source of cash? A. A decrease in notes payable B. A decrease in long-term debt C. An increase in inventory D. An increase in common stock

5. A firm has current assets of $10,000 and current liabilities of $7,000. Which of the following is the correct net working capital for the firm? A. $10,000 C. $3,000 B. $7,000 D. $13,000

6. If a firm has an accounts receivable balance of $18,800 at the end of 2007 and $16,500 at the end of 2008, which of the following statements about accounts receivable is correct? A. Accounts receivable decreased by $2,300 and represented a use of cash. B. Accounts receivable increased by $2,300 and represented a source of cash. C. Accounts receivable decreased by $2,300 and represented a source of cash. D. Accounts receivable increased by $2,300 and represented a use of cash.

7. If a firm has revenues of $15,090 and expenses of $8,850, what is the firmâs taxable income? A. $15,090 C. $6,240 B. $8,850 D. $23,940

8. Which of the following statements about the issuance of an initial public offering (IPO) is correct? A. IPOs may be either underpriced or overpriced. B. IPOs are never overpriced. C. IPOs are never underpriced. D. IPOs are always correctly priced.

9. If a firm has revenues of $15,090, operating expenses of $8,850, and a tax expense of $2,120, what is the firmâs net income? A. $8,850 C. $6,240 B. $4,120 D. $8,360

10. When youâre preparing a common-sized balance sheet, which of the following measures is set to equal 100 percent? A. Total liabilities C. Total ownersâ equity B. Total assets D. Cash Examination, Lesson 1 35

11. Suppose that a corporation has a taxable income of $200,000. What is the firmâs corporate income tax for the current tax year? (You can use the following table to calculate the firmâs U.S. federal corporate tax.) Taxable Income More Than Taxable Income Less Than Tax Rate $0 $50,000 15% $50,001 $75,000 25% $75,001 $100,000 34% $100,001 $335,000 39% $335,001 $10,000,000 34% $10,000,001 $15,000,000 35% $15,000,001 $183,333,334 38% $18,333,334 35% A. $78,000 C. $39,000 B. $6,250 D. $61,250

12. Using the same table and information provided in Question 11, what is the firmâs average tax rate? A. 39% C. 34% B. 30.625% D. 31.625%

13. Using the same table and information provided in Question 11, what is the firmâs marginal tax rate? A. 39% C. 34% B. 30.625% D. 31.625%

14. Dilution refers to the loss of shareholder value, and may be represented by all of the following except dilution of A. ownership percentage. B. market value. C. the firmâs current ratio. D. book value per share.

15. If a firm has $6,940 in earnings before interest and taxes, $650 in depreciation expense, and $2,120 in taxes, what is the firmâs operating cash flow? A. $4,120 C. $6,240 B. $5,470 D. $9,710

16. The type of financial statement that summarizes the sources and uses of cash over a specified period of time is called the A. statement of cash flows. B. income statement. C. balance sheet. D. inventory ratio statement.

17. The current ratio falls within which of the following classifications of financial ratios? A. Long-term solvency measures B. Asset management or turnover measures C. Short-term solvency or liquidity measures D. Profitability measures

18. If a firm has an accounts payable balance of $34,400 at the end of 2007 and $31,200 at the end of 2008, which of the following statements about accounts payable is correct? A. Accounts payable decreased by $3,200 and represented a use of cash B. Accounts payable increased by $3,200 and represented a source of cash C. Accounts payable decreased by $3,200 and represented a source of cash D. Accounts payable increased by $3,200 and represented a use of cash

19. Which of the following is not one of the six costs of issuing securities? A. Rights offering C. Green Shoe option B. Abnormal returns D. Gross spread 20. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded a marginal rate of A. 15%. C. 39%. B. 35%. D. 34%.

20. In the United States, for the 2007 tax year, federal corporate income tax rates never exceeded a marginal rate of A. 15%. C. 39%. B. 35%. D. 34%.

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FNBU 3221 Chapter 3: Chapter 3

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