In: Accounting
Income
Statements for Years Ending December 31, 2011-13
2011 |
2012 |
2013 |
|
Net sales |
$1,697 |
$2,013 |
$2,694 |
Cost of goods sold |
|||
Beginning inventory |
183 |
239 |
326 |
Purchases |
1,278 |
1,524 |
2,042 |
|
$1,461 |
$1,763 |
$2,368 |
Ending inventory |
239 |
326 |
418 |
Total cost of goods sold |
$1,222 |
$1,437 |
$1,950 |
Gross profit |
475 |
576 |
744 |
Operating expense |
425 |
515 |
658 |
Interest expense |
13 |
20 |
33 |
Net income before taxes |
$ 37 |
$ 41 |
$ 53 |
Provision for income taxes |
6 |
7 |
9 |
Net income |
$ 31 |
$ 34 |
$ 44 |
Balance Sheets at December 31, 2011-13
2011 |
2012 |
2013 |
|
Cash |
$ 58 |
$ 49 |
$ 41 |
Accounts receivable, net |
171 |
222 |
317 |
Inventory |
239 |
325 |
418 |
Current assets |
$468 |
$596 |
$776 |
Property, net |
126 |
140 |
157 |
Total assets |
$594 |
$736 |
$933 |
Notes payable |
$105 |
$146 |
$233 |
Accounts payable |
124 |
192 |
256 |
Accrued expenses |
24 |
30 |
39 |
Long-term debt, current portion |
7 |
7 |
7 |
Current liabilities |
$260 |
$375 |
$535 |
Long-term debt |
64 |
57 |
50 |
Total liabilities |
$324 |
$432 |
$585 |
Net worth |
270 |
304 |
348 |
Total liabilities and net worth |
$594 |
$736 |
$933 |
(a) What was the above firm's profit margin and return on equity in 2011, 2012 and 2013. Comment on the relationship between profit margin and ROE over these three years.
(b) Compute the liquidity ratios for 2011, 2012 and 2013. What can be concluded? Are liquidity ratios good gauges of credit risk?
(c) What should be the amount of A/P due to suppliers at the end of 2014 assuming the firm chooses to pay on the 10th day and that sales are projected at $ 3,000,000
(d) Find the amount of bank financing necessary for 2014, assuming that
(i) sales are projected to reach $ 3,000,000;
(ii) the cash balance has to be maintained at $ 50,000, A/P are 2/10 net 30 and the firm is paying the supplier on 10th $ 15,000 in dividends are distributed to the firm. Interest expenses are assumed to be $ 40,000 for the purpose of setting up the income statement and assuming that corporate income tax is 20%.
The steps for calculations are to be shown and explained.
Thanks
1) Return on Equity is the percentage of net income generated by
the average shareholder equity.
Net profit margin is the percentage of net income received from the company's revenue.
The common thread between ROE and net profit margin is net income, however what is different with ROE is the equity part of the equation. So, while two companies may have similar net profit margins (and perhaps similar revenue), but if the average shareholder equity is different then the ROE between the companies will be different. Also, while the net profit margins may be the same, the amount of revenue and net profit for each company can also be quite different.
In order to sustain a high ROE though, net profit margin only as an indicator of performance trend. If the company's profit margin is dropping may be due to the company is losing its competitive advantage, or perhaps it's costs & expenses are not being constrained.
ROE is a good indicator of a company's quality. And net profit
margin is a good indicator of the company's performance
trend.
2) Liquidity ratios means ability of companies to convert assets
into cash. For credit analysis, the ratios show a borrower’s
ability to pay off current debt. Higher liquidy ratios suggest a
company is more liquid and can, therefore, more easily pay off
outstanding debts.