Question

Refer to the following financial statements of Bongo Comics Group.

Bongo Comic Group Income Statements (In 000’s, except EPS)

	2016	2017	2018
Net Sales	$2,100	$3,051	$3,814
Cost of Goods Sold	681	995	1,040
Gross Profit	1,419	2,056	2,774
Selling and Admin. Expenses	610	705	964
Operating Profit	809	1,351	1,810
Interest Expense	11	75	94
Income before tax	798	1,276	1,716
Income Tax (T=35%)	279	447	601
Net Income	519	829	1,115
Dividends Paid	0	0	0
Increase in Retained Earnings	519	829	1,115
Common shares Outstanding	2,500	2,5000	2,500
EPS	0.21	0.33	0.45

Bongo Comics Group Balance Sheets (In 000’s) as of Dec. 31, Years Ended

	2016	2017	2018
ASSETS:
Cash and Equivalents	$ 224	$ 103	$ 167
Accounts Receivable	381	409	564
Inventories	307	302	960
Other Current Assets	69	59	29
Total Current Assets	981	873	1,720
Prop. Plant, and Equip., Gross	1,901	3,023	3,742
Less: Accum. Depr.	(81)	(82)	(346)
Prop. Plant, and Equip., Net	1,820	2,941	3,396
Other Assets	58	101	200
Total Assets	2,859	3,915	5,316
LIABILITIES AND EQUITY:
Accounts payable	$ 210	$ 405	$ 551
Short-term Debt	35	39	72
Total current Liabilities	245	444	623
Long-term Debt	17	45	152
Total Liabilities	262	489	775
Common Stock	2,062	2,062	2,062
Retained Earnings	535	1,364	2,479
Total equity	2,597	3,426	4,541
Total Liabilities and Equity	2,859	3,915	5,316

a. How long, on average, was Bongo Comics Group taking to collect on its receivable accounts in 2018? (Assume all of the company’s sales were on credit.)

b. Was Bongo Comics Group more or less profitable in 2018 than in 2016? Justify your answer by examining the net profit margin and return on assets ratios.

c. Was Bongo Comics Group more or less liquid at the end of 2018 than it was at the end of 2016? Justify your answer using the curre

Answer 1

a. Days' sales in inventory 2018 = 365 days/(sales/accounts receivable)

in the above formula. sales is credit sales.

Days' sales in inventory 2018 = 365/($3,814/$564) = 365/6.76 = 53.99 days

b. net profit margin = net income/sales

net profit margin 2016 = $519/$2,100 = 24.71%

net profit margin 2018 = $1,115/$3.814 = 29.23%

Return on assets = net income/total assets

Return on assets 2016 = $519/$2,859 = 18.15%

Return on assets 2018 = $1,115/$5,316 = 20.97%

Bongo Comics Group was more profitable in 2018 than in 2016 because both net profit margin return on assets ratio in 2018 have increased compared to 2016 net profit margin return on assets ratio.

c. current ratio = current assets/current liabilities

current ratio 2016 = $981/$245 = 4.00

current ratio 2018 = $1,720/$623 =  2.76

Bongo Comics Group was less liquid at the end of 2018 than it was at the end of 2016 because current ratio in 2018 has gone down compared to 2016 current ratio.