Finance

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Chapter 2 Spreadsheet Problem

Financial Statement Analysis

The problem requires you to use Case 2 - Excel File.xlsx on the computer problem spreadsheet.

Cary Corporation’s forecasted financial statements for next year follow, along with industry average

ratios.

a. Compare Cary’s forecasted ratios with the industry average data, and comment briefly on Cary’s

projected strengths and weaknesses.

Cary Corporation: Forecasted Balance Sheet as of December 31

Cash $ 72,000 Accounts and notes payable $ 432,000

Accounts receivable 439,000 Accruals 170,000

Inventories 894,000 Total current liabilities $ 602,000

Total current assets $1,405,000 Long-term debt 404,290

Land and building 238,000 Common stock 575,000

Machinery 132,000 Retained earnings 254,710

Other fixed assets 61,000

Total assets $1,836,000 Total liabilities and equity $1,836,000

Cary Corporation: Forecasted Income Statement

Sales $4,290,000

Cost of goods sold (3,580,000)

Gross operating profit $ 710,000

General administrative and selling expenses ( 236,320)

Depreciation ( 159,000)

Miscellaneous ( 134,000)

CFIN5

© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Earnings before taxes (EBT) $ 180,680

Taxes (40%) ( 72,272)

Net income $ 108,408

Number of shares outstanding 23,000

Per-Share Data

EPS $ 4.71

Cash dividends per share $ 0.95

P/E ratio 5.0×

Market price (average) $23.57

Industry Financial Ratiosa

Quick ratio 1.0×

Current ratio 2.7

Inventory turnoverb 5.8×

Days sales outstanding 32 days

Fixed assets turnoverb 13.0×

Total assets turnoverb 2.6×

Return on assets 9.1%

Return on equity 18.2%

Debt ratio 50.0%

Profit margin on sales 3.5%

P/E ratio 6.0×

aIndustry average ratios have been constant for the past four years.

bBased on year-end balance sheet figures.

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© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

b. What do you think would happen to Cary’s ratios if the company initiated cost-cutting measures that

allowed it to hold lower levels of inventory and substantially decrease the cost of goods sold? To

answer this question, suppose inventories drop to $700,000 and the inventory turnover is 5.0 (HINT:

In this case, cost of goods sold will change.).

c. Suppose Cary Corporation is considering installing a new computer system that would provide

tighter control of inventories, accounts receivable, and accounts payable. If the new system is

installed, the following data are projected (rather than the data given earlier) for the indicated

balance sheet and income statement accounts:

Accounts receivable $ 395,000

Inventories $ 700,000

Other fixed assets $ 150,000

Accounts and notes payable $ 275,000

Accruals $ 120,000

Cost of goods sold $3,450,000

Administrative and selling expenses $ 248,775

P/E ratio 6.0×

How do these changes affect the projected ratios and the comparison with the industry averages?

(Note that any changes to the income statement will change the amount of retained earnings;

therefore, the model is set up to calculate next year’s retained earnings as this year’s retained

earnings plus net income minus dividends paid. The model also adjusts the cash balance so that the

balance sheet balances.)

d. If the new computer system were even more efficient than Cary’s management had estimated and

thus caused the cost of goods sold to decrease by $125,000 from the projections in part (c), what

effect would it have on the company’s financial position?

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© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

e. If the new computer system were less efficient than Cary’s management had estimated and caused

the cost of goods sold to increase by $125,000 from the projections in part (a), what effect would it

have on the company’s financial position?

f. Change, one by one, the other items in part (c) to see how each change affects the ratio analysis.

Then think about and write a paragraph describing how computer models such as this one can be

used to help make better decisions about the purchase of such items as a new computer system.