The purpose of the third part of the comprehensive project is to use resources available to obtain industry averages for commonly used ratios. Additionally, you will compare company ratio results to i
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Part 1: Financial Statements
A. Prepare the income statement for 2016 and 2017. Include statement of retained earnings for 2017. The company paid $11,000 dividend in 2017.
B. Prepare the balance sheet for 2016 and 2017
C. Prepare Common-Size financial statements of income statement and balance sheet.
D. Prepare Statement of Cash Flows.
| Income statement for the year ended on 31 December 2017 | |||
| Amount in $ | |||
| Particulars | 2017 | 2016 | |
| Sales | 5834400 | 3432000 | |
| Cost of goods sold | -4980000 | -2864000 | |
| Depreciation | -116960 | -18900 | |
| Other expenses | -720000 | -340000 | |
| Total expenses | -5816960 | -3222900 | |
| Profit/loss before tax | 17440 | 209100 | |
| Less Interest expense | 176000 | 62500 | |
| Earnings before taxes | -158560 | 146600 | |
| Current tax @40% | -63424 | 58640 | |
| Net Income / loss | -95136 | 87960 | |
| Dividend | 11000 | 22000 | |
| Balance sheet as on 31 December 2017 | |||
| Amount in $ | |||
| Assets | 2017 | 2016 | |
| Non-current assets | |||
| Fixed assets | 1202950 | 491000 | |
| accumulated depreciation | -263160 | -146200 | |
| 939790 | 344800 | ||
| Current assets | |||
| Cash | 7282 | 9000 | |
| Accounts receivable | 632160 | 351200 | |
| Inventory | 1287360 | 715200 | |
| short term Investments | 20000 | 48600 | |
| 1946802 | 1124000 | ||
| Total assets | 2886592 | 1468800 | |
| Equity & Liabilities | |||
| Equity share | 460000 | 460000 | |
| Retained earnings | 97632 | 203768 | |
| 557632 | 663768 | ||
| Noncurrent Liability | |||
| Long term debt | 1000000 | 323432 | |
| Current liability | |||
| Accounts payable | 324000 | 145600 | |
| Notes payable | 720000 | 200000 | |
| Accruals | 284960 | 136000 | |
| 1328960 | 481600 | ||
| Total Liabilities | 2886592 | 1468800 | |
| Statement of retained earnings | 2017 | ||
| Balance at beginning of year 2016 | 203768 | ||
| Profit / loss for the year | -95136 | ||
| Dividend for the year | -11000 | ||
| Balance at year end | 97632 | ||
| Statement of cash flow | |||
| Amount in $ | |||
| Particulars | 2017 | ||
| Operating activities | |||
| Net income | -95136 | ||
| Noncash adjustment | |||
| Depreciation | 116960 | ||
| Changes in working capital | |||
| Change in AR | -280960 | ||
| Changes in Inventory | -572160 | ||
| change in AP | 178400 | ||
| Change in accounts | 148960 | ||
| Net cash provided by operating activities | -503936 | ||
| Investing activities | |||
| Cash used to buy assets | -711950 | ||
| short term investment | 28600 | ||
| Net cash provided by investing activities | -683350 | ||
| Financing activities | |||
| Changes in notes payable | 520000 | ||
| changes in long term debt | 676568 | ||
| payment of cash dividend | -11000 | ||
| Net cash provided for financing activities | 1185568 | ||
| Net change in cash and cash equivalent | -1718 | ||
| cash at beginning of the year | 9000 | ||
| cash at end of the year | 7282 | ||
Part 2: Financial statement analysis
A. Based on your financial statements (from Part 1), calculate the following ratios for the two years. Show all your calculations in good form. Show your formulas. If you use excel, each calculation needs to show the excel formula
Current ratio
Quick ratio
Inventory turnover (times)
Average collection period (days)
Total asset turnover (times)
Debt ratio
Times interest earned
Gross profit margin
Net profit margin
Return on total assets
Return on equity
P/E ratio
Return on equity using DuPont Analysis
B. Comments on the ratios by comparing 2016 to 2017 ratios.
C. Assume Adams Stores, Inc. is a retail company similar to Walmart, Myers, or Target. Compare 2017 ratios to the industry average. Please note that Adams Stores, Inc. is not a real company. To find comparable industry ratios, you need to search for industry ratios for retail. See information on Moodle for instructions on how to find industry ratios. Based on the industry average, how is Adams Stores, Inc. doing financially?
Ans:
A:
| S. No | Ratio | 2016 | 2017 |
| Current Ratio | 6.189 | 1.44 | |
| Quick Ratio | 2.25 | 0.47 | |
| Inventory turnover(times) | 4.00 | 3.74 | |
| Average Collection period(days) | 0.000 | 0.000 | |
| Total asset turnover(times) | 2.132 | 2.0212 | |
| Debt ratio | 0.3278 | 0.4603 | |
| Times Interest earned | 3.3456 | 0.099 | |
| Gross profit margin | 1.655 | 0.1464 | |
| Net profit margin | 0.0256 | 0.01636 | |
| 10 | Return on total assets | 0.05988 | 0.0329579 |
| 11 | Return on equity | 0.1912 | 0.2068 |
| 12 | P/E ratio | 2.257 | 4.7115 |
| 13 | Return on equity using DuPont Analysis | 0.012 | 0.00806 |
B. since the company is having the sales of $3432000 in the year 2016 and the sales of $5834400 in the year 2017 that means it is indicating the growth of 70% in the sales on YOY basis. So, it can be assumed from the sales level that the company is increasing exponentially.
C. The normal growth rate in retail industry is around 8% marketwise and the company is execution very well as associate to the organization average that will lead the company to value more than its book value.
Part 3: Break-even, Financial and Operating Leverages
| ITEM | COST |
| Sales (40,000 bags at $50 each) | $2,000,000 |
| Less: Variable costs (40,000 bags at $25) | $1,000,000 |
| Contribution | $1,000,000 |
| Less: Fixed cost | $600,000 |
| Earnings before interest and taxes (EBIT) | $400,000 |
| Less: Interest expense | $120,000 |
| Earnings before taxes (EBT) | $280,000 |
| Less: Income tax expense (20%) | $56,000 |
| Net Income | $224,000 |
Based on the information above, calculate (show all calculations and responses in good form):
A. Break-even in units (in dollars and units). Explain what your numbers mean. As a manager, how would you use the numbers in financial planning?
B. What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning? C
C. What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?
Ans:
Finding the breakeven point:
We can calculate this in terms of units or dollars
In units
= 
=600,000/($50-$25)
= 600000/25
= 24,000 bags
In dollars
= 
But P/V ration = = 
= 
= 0.5
Therefore, becomes
= 
= 1,200,000
At breakeven, the revenue is equal to the expenses, this means that the organization is not making a profit. If I were the manager, I will consider analyzing the whole system and check the cost of producing a bag of maize. If I find that I will be making a profit by production of more bags, then I will go on and produce beyond the breakeven point.
The degree of financial leverage (DFL) is given by
= 1.43
The financial leverage measures the value of equity in a company. It’s the overall debt load a company has compared to the assets the company owns. The higher the degree of financial leverage, the more volatile the earnings will be. Since the above figure passes the o.5 mark, it is considered a high DFL. As a manager, I will use this number to minimize the borrowings and look for other sources of capital so that the revenue can be higher than interests paid to the loans.
Degree of Operating Leverage (DOL)
=2.5
The degree of operating leverage helps the company to understand the effects of operating leverage on the company's probable earnings. A high DOL indicates that the costs cannot be scaled down when the sales are declining. This is a risk because even a small decrease in sells can trigger massive loses and offsets the company from making a profit.
Group K
