Question

Questins!!!!

Risks: Describe the risks that Koala Fun faced as a company.

Management: In what ways was Koala Fun not being managed to obtain optimum performance from its assets?

Explain. Decisions: How does this case demonstrate the importance of analyzing financial data when making financial decisions?

Recommendations: What recommendations regarding risk and profitability would you make to Koala Fun’s owners to improve their company? Briefly describe your recommendations.

Ratio Type	2012	2013
Current (times)	(2,136,800/573,200) = 3.73	(2,619,700/764,100) = 3.43
Quick (times)	[(2,136,800-765,400)/573,200] = 2.39	[(2,619,700-1,222,300)/764,100} = 1.83
Debt (%)	[(316,000+573,200)/2,361,100] = 37.66%	[(764,100+252,800)/2,879,500] = 35.32%
Times interest earned (times)	(322,400/37,900) = 8.51	(367,100/31,600) = 11.62
Inventory turnover (times)	(4,896,700/765,400) = 6.40	(5,866,200/1,222,300) = 4.80
Total asset turnover (times)	(6,572,800/2,361,100) = 2.78	(7,811,500/2,879,500) = 2.71
Average collections period (days)	[365/(6,572,800/1,004,200)] = 55 days	[365/(7,811,500/1,106,600)] = 51 days
Return on equity (%)	[170,700/(948,000+524,000)] = 11.60%	[201,300/(1,137,600+725,000)] = 10.81%

FINANCIAL CONCERNS Owen and Tessa loved their company but were inexperienced in business matters. Owen asked his mother, Amy, an accountant, for assistance. After studying the ledgers and other records, she reported that there was a signifi- cant working capital problem with declining cash, unsold inventory (mostly old Koala Fun games), and vendors who had not been paid. Tessa had been handling this side of the company, but that had mostly involved writing checks to employees and for payables while waiting around airports. Files were misplaced, documents were missing, and some money was unaccounted for. The problems appeared to be more related to failing to priori- tize financial matters rather than any deliberate mistakes. Owen’s first reaction was to consider the sale of his half interest in KF. Though he has enjoyed the creative side of the business, he was upset by his mother’s report and by Tessa’s apparent failure to take care of that responsibil- ity. Periodically, some of the resellers KF deals with have encountered finan- cial problems and have strung out their payments, which often caused a mad scramble for cash at KF. And if Owen decides to sell, he knows that he is likely provide it.” Owen is skeptical of this argument and wonders if there isn’t a more efficient way of providing good service. He also questions Tessa’s credit standards and collection procedures, and believes that Tessa has been quite generous in granting payment extensions to customers. At one point, nearly 45 percent of the company’s receivables were more than 90 days overdue. Furthermore, Tessa would continue to accept and ship orders to these resellers even when it was clear that their ability to pay was marginal. Tessa’s position is that she doesn’t want to lose sales and that the difficult times are only temporary. Owen wonders about the wisdom of passing up trade discounts. Vendors frequently offer KF terms of 11?2/10, net 30. That is, KF receives a 11?2 percent discount if a bill is paid in 10 days and in any event full payment is expected within 30 days. Tessa rarely takes these discounts because she “wants to hold onto our cash as long as possible.” She also notes that “the discount isn’t espe- cially generous and 981?2 percent of the bill must still be paid.” FINAL THOUGHTS Despite all of Owen’s concerns, however, the relationship between the two partners has been relatively smooth over the years. And he admits that he may be unduly critical of Tessa’s management decisions. “After all,” he concedes, “she seems to have reasons for what she does, and we have never lost money since we started, which is an impressive record, really, for a firm in our business.” Owen has discussed with two advisors the possibility of selling his half of the firm. Since KF is not publicly traded, the market value of the company’s stock must be estimated. The consultants believe that KF is worth between $35 and $40 per share, figures that appear reasonable to Owen.

Answer 1

Risk that Koala fun faced as a company
Risk related to long credit period to reduce the credit.rovided to its customer, resulting in higher average collection. 55 days in 2012 and 51 days in 2013. Risk of shortage of working capital due to unsold inventory Koala fun games.

The ways in which Koala fun was not being managed to obtain optimum performance from its assets is reflected from the fact that it was being ignored by the owners for long time and also vendors were not paid.

Importance of analysing the financial statements
Analysing financial statements keeps the owner aware of it inventory, Assets and liabilities. Which in turn will help to make decisions before it's too late and the inventory turns obsolete. Even if the Koala fun games is sold it would give very low Returns as it was not main for long period of time.

Recommendations that I would give is to shorten the credit period provided to its customers. And stay agile by consistently reviewing financial statements and analyse financial statements to make proper decisions related to inventory management and average collection. These decisions will lead to higher profitability.