BA 620-GroupProject- PART 3 Only

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Part1Ans-AdamsStoresInc1.docx

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Running Head: BA620 PROBLEM 2

BA620 PROBLEM 2

BA620-Problem: Adams Stores Inc

Name

Institution

Date

Part 1: Financial Statements

A. Income Statement for 2016 and 2017

Particulars	2016	Common size	2017	Common size
Revenue
Sales	3432000	100.00%	5834400	100.00%
Total Revenues	3432000	100.00%	5834400	100.00%

Expenses
Cost of goods sold	2864000	83.45%	4980000	85.36%
Depreciation	18900	0.55%	116960	2.00%
Interest Expenses	62500	1.82%	176000	3.02%
Other Expenses	340000	9.91%	720000	12.34%
Total Expenses	3285400	95.73%	5992960	102.72%

Net Income Before Taxes	146600	4.27%	-158560	-2.72%
Less taxes @40%	58640	1.71%	63424	1.09%

Net Income	87960	2.56%	-95136	-1.63%

Statement of Retained Earnings

Particulars	2016	2017
Beginning	115808	203768
Add: Net Income	87960	-95136
Less: Dividends	0	-11000
At the end	203768	97632

B. Balance Sheet for 2016 and 2017

Particulars	2016	Common Size	2017	Common Size
Assets
Current Assets
Cash	9000	0.61%	7282	0.25%
Short term Investments	48600	3.31%	20000	0.69%
Accounts Receivable	351200	23.91%	632160	21.90%
Inventory	715200	48.69%	1287360	44.60%
Total Current Assets	1124000	76.53%	1946802	67.44%

Fixed Assets	491000	33.43%	1202950	41.67%
Less: Accumulated Depreciation	146200	9.95%	263160	9.12%
Total Fixed Assets	344800	23.47%	939790	32.56%

Total Assets	1468800	100.00%	2886592	100.00%

Liabilities and owners Equity
Current liabilities
Accounts Payable	145600	9.91%	324000	11.22%
Accruals	136000	9.26%	284960	9.87%
Total Current liabilities	281600	19.17%	608960	21.10%

Long Term liabilities
Long term debt	323432	22.02%	1000000	34.64%
Notes Payable	200000	13.62%	720000	24.94%
Total long-term liabilities	523432	35.64%	1720000	59.59%

Owner’s Equity
Share Capital	460000	31.32%	460000	15.94%
Retained Earnings	203768	13.87%	97632	3.38%
Total Owners Equity	663768	45.19%	557632	19.32%

Total Liabilities	1468800	100.00%	2886592	100.00%

C. Common-Size financial statements of income statement and Balance sheet.

D. Statement of Cash Flows

Cash Flow Statement	2017
Particulars	Amount

Net Profit After Taxes	-95136
Add: Non Cash Expenditure
Depreciation	116960
Add: Non-Operating Expenditure
Interest	176600
Change in Working Capital
Increase in Accounts Receivable	-280960
Increase in Accounts Payable	178400
Increase in Inventory	-572160
Increase in Accruals	148960
Cash from Operating Activities	-327336


Cash Flow from Investing Activities
Sale of Short Term Investments	28600
Purchase of Fixed Assets	-711950
Total Cash From Investing Activities	-683350

Cash Flow from Financing Activities
Increase in LT Debt	676568
Interest Paid	-17660
Dividends Paid	-11000
Notes Issued	520000
Cash flow from financing activities	1008968
Net Cash flow from all activities	-1718
Add: Opening Cash	9000
Closing Cash	7282

Part 2: Financial Statement Analysis

A. Ratios

Ratio	2016	2017
Current Ratio (Current Assets/Current liabilities)	3.991	3.197
Quick Ratio {(Current assets-stock)/Current liabilities}	1.452	1.083
Inventory turnover (Times) (Cost of Goods Sold/ Average Inventory)	4.004	4.974
Average collection period (days) (365/Debtor’s turnover ratio)	37.351	30.759
Total asset turnover (times) (sales/total assets)	2.337	2.021
Debt Ratio (Debt/(Debt + Equity))	0.441	0.755
Times interest earned (Earnings Before Interests and Taxes(EBIT)/Interest)	3.346	0.099
Gross Profit Margin (Gross Profits/Sales)	0.166	0.146
Net profit margin (Net Profit/Sales)	0.026	-0.016
Return on Assets (EBIT/Total Assets)	0.142	0.006
Return on equity (Net Income/ Owners Equity)	0.133	-0.171
P/E Ratio Return on equity (Market Price/Earnings per Share	9.663	-6.307

EBIT = Sales- Cost of Goods Sold – Depreciation -Other Expenses.

For 2016, EBIT is 209100 while that of 2017 is 17440.

Return on Equity using DU Point Analysis

Particulars	2016	2017
Net Profit Margin (NPM)	0.026	-0.016
Asset turnover (AT)	2.337	2.021
Financial Leverage (FL)	2.213	5.177
*Return on Equity (NPMATFL)*	0.134	-0.167

B. Comment on the ratios

Financial ratios are important in describing the financial health of an organization at any given time. The ratios are therefore important for different organizational stakeholders. For instance, any interested investors and analysts tend to pay much attention to the price to earnings ratio, and net profit margin. The two ratios show the return rate of a company and its profitability. The two ratios were positive in 2016 and were negative in 2017. This shows that the financial health of the company deteriorated in the year 2017.

Current ratio is used to understand the liquidity of a company. The current ratio enables the company to pay the debts at ease, as compared to when there is a low current ratio. The company reduced its current ratio for the year 2017 as compared to 2016. Quick ratio subtracts the inventories from the current assets and divides the difference with liabilities. The quick ratios for the company were high in both years. This implies that the company tend to turn their inventories quite slower, which is a threat to the company.

Return on equity enables the organizational shareholders to understand the profitability of their capital as they invest in the company. A high ROE indicates that the organization is capable of generating high levels of profit. Debt-Equity ratio is another important ratio that shows the prospective investors how much the company is likely to borrow. A high debt-equity ratio reduces the safety margin of the investors and vice versa.

C. Compare 2017 ratios with the industry average.

The ratios in 2017 implies that the financial performance of the company had deteriorated. This implies that the company competitors had a higher competitive advantage, which is a threat to the company. Comparing the ratios with the performance of the industry at that time, we could conclude that the financial performance of the company was low.

Part 3: Break even analysis, Financial and Operating Leverages

a. Break-even in dollars and units

Break-even units = fixed cost / contribution per unit

Contribution per unit = Sales per unit - variable cost per unit = 50 - 25 = 25

Break even units = 600000 / 25 = 24000 units

Break even in dollars = 24000 * 50 = 1200000

These numbers mean that the company needs to sell a minimum of 24000 units so as to earn profits and also prevent losses. As a manager, I would use the numbers in financial planning to help in defining minimum sales target of 1200000 and hence minimize losses.

b. Degree of financial leverage

Degree of financial leverage = EBIT / EBT

EBIT (earnings before interest and tax) = 400000

EBT (earning before tax) = 280000

Degree of financial leverage = 400000/280000 = 1.43

This means that for any 1% variation in EBIT, EBT changes by 1.43%. This is important in financial planning especially for the reason that it aids in establishing the capital structure. For instance, the degree of financial leverage more than 1 is good is the operating profit increases especially for the reason that interests are fixed expenses and a rise in operating profit increases the net income and EPS. Hence, financial leverage can be reduced to 1 through the use of capital investment debt.

c. Degree of operating leverage

Degree of operating leverage = Contribution / EBIT

= (2000000-1000000) / 4000000 = 2.5

This means that for every 1% change in sales, there is a 2.5% change in profit. In financial planning, the number is important in making decisions regarding the minimum sales and the amount of sales that ought to be increased without varying the fixed costs.