Question

I know it's a lot but they are all small questions related to the same case so I didn't know how to split it into multiple questions. I would really appreciate the help, as I need a way to compare my answers.

Dallas & Associates Financial Statement Preparation & Analysis

You have been hired as a senior financial analyst for Dallas and Associates and you are in charge of preparing the financial statements and presenting an annual analysis at the board meeting.

Overview of Dallas & Associate’s Balance Sheet

The assets of Dallas & Associates in 2017 have both current assets and net plant and equipment. It has total assets of $ 7.5 million and net plan and equipment equals $5 million. Dallas & Associate’s only finances with $2.5 million long-term debt, $500,000 notes payable and total common equity of $3.5 million. The firm does have $400,000 accounts payable and $600,000 accruals on its balance sheet. Now assume the firm’s current assets consist entirely of cash and cash equivalence, account receivables and inventories. If it has 1.5 million cash and cash equivalents and $400,000 account receivables.

Dallas & Associates Income Statement in 2017 (dollars are in millions)

Sales	15
Operating costs excluding depreciation and amortization	5
EBITDA	10
Depreciation & Amortization	0.6
EBIT	9.4
Interest	0.4
EBT	9
Taxes (40%)	3.6
Net Income Cash Dividends	5.4 2.0

Use the above information to answer the following questions. Make sure to include the calculation steps/ formula.

Questions:

a. Prepare the balance sheet.

Total Assets	Liabilities & Shareholder’s Equity

b. What is the amount of total liabilities and equity that appears on the firm’s balance?

c. What is the amount of current assets?

d. What is the balance of current liabilities?

e. What is the amount of company’s inventory?

f. What is the amount of total liabilities?

g. What is the amount of total debt?

h. What is the amount of total capital?

i. What is the amount of net working capital?

j. What is the amount of net operating working capital?

k. If by the end of 2017, the retained earnings of John and Jon is $2.5 million, what is the amount of paid-in capital?

l. If John & Jon decides to purchase $500,000 market securities by using its cash, how does this action would affect its current asset position?

m. As the Income of Statement shows in 2017 John & Jon actually gave out $2 million cash dividends, what is the amount of retained earnings?

n. What is the amount of operating income?

o. What are the operating margin and the profit margin?

p. What is the average length of time that John & Jon must wait after making a sale before it receives cash?

q. What is the ratio we generally use to estimate a firm’s ability to meet its annual interest payments? And calculate that ratio for John and Jon.

r. What are the fixed assets turnover ratio and the total asset turnover ratio?

s. What is the ratio of total debt to total capital?

t. What is the ratio of return on common equity?

u. Assume between 2016 and 2017, net operating working capital has increased by $500,000, calculate John & Jon’s free cash flow. (Hint: use this formula. FCF = [EBIT (1-T) +Depreciation & Amortization] – [Capital Expenditures + Change on Net Operating Working Capital])

v. Now after you present your analysis on the meeting, the CEO would like to see higher sales and a forecasted net income of $10.8 million. Assume that operating costs (excluding depreciation and amortization) are still one third of sales and that depreciation and amortization and interest expenses will increase by 10%. The tax rate which is 40%, will remain the same. What level of sales would generate $10.8 million in net income?

THANK YOU!

Answer 1

a) Balance Sheet for 2017 (Amounts in $ millions)

Assets		Liabilities and Stockholder's Equity
Current Assets		Current Liabilities
Cash and Cash Equivalents	1.5	Accounts Payable	0.4
Accounts Receivable	0.4	Accruals	0.6
Inventories (Bal fig) (2.5-1.5-0.4)	0.6	Notes Payable	0.5
Total Current Assets (7.5 - 5.0)	2.5	Total Current Liabilities	1.5
Net Property, Plant and Equipment	5.0	Long term debt	2.5
		Total Liabilities	4.0
		Total Common Equity	3.5
Total Assets	7.5	Total Liabilities and Equity	7.5

b) The amount of total liabilities and equity that appears on the firm's balance sheet will be equal to total assets i.e. $7.5 million.

c) Total Current Assets = Total Assets - Net Property, Plant and Equipment

= $7.5 million - $5.0 million = $2.5 million

The amount of current assets is $2.5 million.

d) The amount of current liabilities is $1.5 million

e) The amount of company's inventory is $600,000 as shown in part a calculated as follows:-

Inventories = Total Current Assets - Accounts Receivable - Cash

= $2.5 million - $0.4 million - $1.5 million = $0.6 million or $600,000

f) The amount of total liabilities is $4.0 million which is calculated as follows:-

Total Liabilities = Current Liabilities+Long term debt

= $1.5 million+$2.5 million = $4.0 million