Group Problem Set 1: This problem Set is based on materials covered in modules 1 and 2. It is designed for you to demonstrate your understanding of basic financial statements, financial statement analysis, break-even concepts, financial and operating leverages. Before you start this assignment, please review Modules 1 and 2 materials thoroughly.
Finance date of Adams Stores, Inc. for the year ending 2016 and 2017.
Items 2016 2017
Sales $3,432,000 $5,834,400
Cash 9,000 7,282
Other Expenses 340,000 720,000
Retained Earnings 203,768 97,632
Long-term debt 323,432 1,000,000
Cost of goods sold 2,864,000 4,980,000
Depreciation 18,900 116,960
Short-term investments 48,600 20,000
Fixed Assets 491,000 1,202,950
Interest Expenses 62,500 176,000
Shares outstanding (par value = $46.00) 100,000 100,000
Market Price of stock 8.50 6
Accounts Receivable 351,200 632,160
Accounts payable 145,600 324,000
Inventory 715,200 1,287,360
Notes Payable 200,000 720,000
Accumulated Depreciation 146,200 263,160
Accruals 136,000 284,960
Tax Rate 40% 40%
Instructions:
Complete the following activities using the financial information above:
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.
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 need 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?
Part 3: Break-even, Financial and Operating Leverages
Johnson Products, Inc.
Income Statement
For the Year Ended December 31, 2018
Sales (40,000 bags at $50 each) $2,000,000
Less: Variable costs (40,000 bags at $25) 1,000,000
Fixed costs 600,000
Earnings before interest and taxes 400,000
Interest expense 120,000
Earnings before taxes 280,000
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. What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?
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