A large loss occurred in 2019 at Hororata Inc in Canterbury, rather than the expected profit. As a result, its stakeholders are concerned about the firm’s performance.

You are hired as the new Chief Financial Officer and are given the task of getting the company back into a sound financial position. Hororata’s 2018 and 2019 balance sheets and income statements, together with projections for 2020, are shown in the following tables. The tables also show the 2018 and 2019 financial ratios, along with industry average data. The 2020 projected financial statement data represent the best projection for 2020 results, assuming that some new financing is arranged to get the company “over the hump” and back on track.

You are given the responsibility to prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken.

Table 1 - Hororata Inc. Balance Sheets

Assets—————————————2018 ($’000)———2019 ($’000)—————2020e ($’000)

Cash———————————————7,500——————7,300————————-14,000

Short-Term Investments-——————46,600——————18,500————————-70,000

Accounts Receivable———————3 50,000—————650,000————————-870,000

Inventories———————————-713,000———-—-1,283,860-——-—-———-1,810,080

Total Current Assets———————1,117,100———-—-1,959,660-—-—-————-2,764,080

Gross Fixed Assets————————-490,500—————1,201,350———————1,218,300

Less: Accumulated Depreciation———144,700—————261,860————————381,760

Net Fixed Assets—————————-345,800—-——-——939,490———————-836,540

Total Assets-——————————-1,462,900———-—-2,899,150———————3,600,620

Liabilities And Equity——————2018 ($’000)———-2019 ($’000)—————-2020e ($‘000)

Accounts Payable—————————145,400–—————323,550–———————-358,000

Notes Payable——————————-198,200–—————699,700–———————-296,800

Accruals————————————-132,700–—————-283,510–———————-377,200

Total Current Liabilities——————-476,300–————-1,306,760–———————1,032,000

Long-Term Debt—————————-322,000–—————980,000–————————595,000

Common Stock——————————460,000–—————540,000–———————1,600,000

Retained Earnings—————————204,600–—————-72,390–————————373,620

Total Equity———————————-664,600–—————612,390–———————1,973,620

Total Liabilities And Equity————-1,462,900–————-2,899,150–———————3,600,620

Table 2 - Hororata Inc. Income Statements

______________________________2018 ($’000)_______2019 ($’000)_________2020e ($‘000)

Sales___________________________4,429,200–————5,831,300–——————8,031,400

COGS excluding depreciation_______2,860,500–————4,975,800–——————5,795,000

Depreciation_______________________18,500–—————116,600–——————-115,000

Other Expenses____________________325,000–—————698,000–——————-590,000

Total Operating Costs______________3,204,000–————-5,790,400–—————-6,500,000

EBIT ___________________________1,225,200–—————-40,900–—————-1,531,400

Interest Expense_____________________61,000–—————-173,600————–——-68,000

EBT____________________________1,164,200–—————-132,700–—————1,463,400

Taxes (40%)_______________________465,680——————-( — )———————585,360

Net Income________________________698,520–—————-132,700–——————878,040

Table 3 - Hororata Inc. Ratio Analysis

__________________________________2018_______2019______2020e____Industry Average

Current Ratio (X)______________________2.35–———-1.50–———( )—————2.00

Quick Ratio (X)_______________________0.85–———-0.52–———( )—————1.00

Inventory Turnover (X)_________________4.01–———-3.88–———( )—————5.00

Average Age of Inventory (days)_________90.98–———94.18–———( )————-45.00

Average Collection Period (days)_________28.84–———40.69–———( )————-30.00

Average Payment Period (days)__________18.55–———23.73–———( )————-60.00

Fixed Asset Turnover (X)_______________12.81–———-6.21–———( )—————9.00

Total Asset Turnover (X)________________3.03–———-2.01–———( )—————2.50

Debt Ratio (X)________________________0.55–———-0.79–———( )—————0.40

Debt to Equity Ratio (X)________________1.20–———-3.73–———( )—————0.70

Times Interest Earned (X)______________20.09–———-0.24-–———( )————-25.00

Gross Profit Margin (%)_______________35.42–———14.67–———( )————-27.00

Operating Profit Margin (%)____________27.66–———-0.70-–———( )————-16.00

Net Profit Margin (%)_________________15.77–———-2.28-—–——( )————-12.00

Return on Total Assets (%)_____________47.75-–———-4.58-–———( )————-30.00

Return on Equity (%)________________105.10–———21.67–———( )—————35.00

Price/Earnings (P/E) Ratio (X)__________21.47–———76.87-———( )—————-15.00

Market/Book Value Ratio (X)___________11.63–———-9.62–———( )——————8.00

Table 4 - Hororata Inc. other data

Stock Price ($)_________________75.00–———51.00–—————60.00

Shares (units)________________200,000–——200,000–————300,000

Earnings per Share ($)____________3.49–———-0.66–——————2.93

Dividend per Share ($)____________0.25————( — )——————0.20

Tax Rate (%)___________________40.00–———40.00–—————-40.00

Book Value per Share ($)__________6.450–————-5.300–————-6.200

Lease Payments ($)______________50,000—–———50,000–————50,000

REQUIRED:

Prepare a financial statement analysis of Hororata Inc. Your analysis should cover each of the followings:

1. Calculate the missing financial ratios for projected 2020 as in Table 3 and fill-in the answers.

2. Hororata’s liquidity position (using current and quick ratios) in 2018, 2019, and projected

for 2020. Compare it to the industry averages. What actions should be taken to improve its liquidity position?

3. Hororata’s operating and utilisation of assets projected (using inventory turnover, average age of inventory, average collection period, average payment period, fixed asset turnover, and total asset turnover) in 2018, 2019, and projected for 2020. Compare it to the industry averages. What actions should be taken to improve its operating and utilisation of assets position?

4. Hororata’s financial leverage (using debt ratio, debt to equity ratio, and times-interest-

earned) in 2018, 2019, and projected for 2020. What actions should be taken to improve its financial leverage position?

5. Hororata’s profitability (using gross profit margin, operating profit margin, net profit margin, return on assets (ROA), and return on equity (ROE)) in 2018, 2019, and projected for 2020. Compare it to the industry averages. What actions should be taken to improve its profitability position?

6. Analyse the projected 2020 price/earnings ratio and market/book value ratio. Do these ratios indicate that investors are expected to have a high or low opinion of the company? Explain your answers.

7. Discuss the major strengths and weaknesses of the firm using the results of Du Pont

analysis as projected for 2020.

8. If one uses the industry average P/E ratio to estimate the firm’s share price in 2020, how much should it be? Comment on this method.

9. What are some potential problems and limitations of financial ratio analysis?

10. Perform a common size analysis and percent change analysis. What do these analyses tell you about Hororata? What actions should be taken to improve its overall financial position?

In 2020, Ibran Corp. required additional cash for its business. Management decided to use accounts receivable to raise the additional cash and has asked you to determine the income statement effects of the following transactions:

1. On July 1, 2020, Ibran assigned $600,000 of accounts receivable to Provincial Finance Corporation as security for a loan. Ibran received an advance from Provincial Finance of 90% of the assigned accounts receivable less a commission of 3% on the advance. Before December 31, 2020, Ibran collected $220,000 on the assigned accounts receivable, and remitted $232,720 to Provincial Finance. Of the latter amount, $12,720 was interest on the advance from Provincial Finance.

2. On December 1, 2020, Ibran sold $300,000 of accounts receivable to Wunsch Corp. for $275,000. The receivables were sold outright on a without recourse basis and Ibran has no continuing interest in the receivables.

3. On December 31, 2020, an advance of $120,000 was received from First Bank by pledging $160,000 of Ibran's accounts receivable. Ibran's first payment to First Bank is due on January 30, 2021. Instructions a. Prepare a schedule showing the income statement effects of 1004 these transactions for the year ended December 31, 2020.

Instructions
a. Prepare a schedule showing the income statement effects of
these transactions for the year ended December 31, 2020.

Based on the article, what was driving this flurry of corporate issuance?

Apple on Wednesday joined U.S. companies ranging from Deere & Co. to Walt Disney in a recent sprint to issue new bonds, taking advantage of the steep decline in benchmark interest rates and a surge in investor demand.

Apple launched its first bond deal since 2017 and is looking to raise $4 billion to $5 billion with bonds ranging in maturity from three to 30 years, according to people familiar with the sale.

Twenty-one corporations with investment-grade credit ratings issued bonds totaling about $27 billion on Tuesday, said Andrew Karp, head of investment-grade capital markets at Bank of America. “That’s equivalent to a busy week for us — in one day,” he said.

The bond boom is the corporate version of the refinancing rush that hit the mortgage market last month as homeowners moved to lock in cheaper loans. Sharply declining U.S. government bond yields — the 10-year Treasury yields about 1.5% compared with around 2% in July — have dragged down corporate borrowing costs in lockstep. The yield of Disney’s bond due in 2046 fell to 2.83% from 3.3% since the start of August, according to data from MarketAxess.

Deere and Disney nabbed record-low yields on bonds they issued Tuesday and the surge continued Wednesday with Apple leading the charge. Coca-Cola and health insurer Anthem also announced new bond sales Wednesday, according to S&P Global Market Intelligence.

Companies are also capitalizing on a surge in demand for investment-grade corporate debt in recent months that is helping to drive yields lower, said Gibson Smith, founder of Denver-based Smith Capital Investors.“The flows are presenting issuers with an opportunity to borrow at new lows,” he said.

Mutual funds focusing on corporate investment-grade bonds took in $32 billion over the past three months compared with $77 billion of outflows from all stock funds over the same period, according to data from Thomson Reuters Lipper.

The asset class is still attracting inflows because it occupies a sweet spot in the fixed-income landscape. Bonds issued by name-brand corporations give investors a relatively safe alternative that still pays more than government bonds when they switch out of stocks and high-yield debt because of global uncertainty. Conversely, government-bond investors fleeing the negative yields spreading through Asia and Europe can buy corporate bonds without taking on too much more risk.U.S. government bond yields were virtually unchanged Wednesday after initially rising on optimism about easing tensions in Hong Kong.

The yield on the benchmark 10-year Treasury note recently traded at 1.466%, compared with around 1.469% Tuesday, according to data from Tradeweb. Yields fall as bond prices rise.

The Age Discrimination in Employment Act mandates that 40 years of age or older be treated without regard to age in all phases of employment (hiring, promotions, firings, etc.) Age discrimination cases are of two types: disparate treatment and disparate impact. In the former, the issue is whether workers have been intentionally discriminated against. In the latter, the issue is whether employment practices adversely affect the protected class (i.e., Zabell, 1989). During the recession of the early 1990s, a small computer manufacturer laid off 10 of its 20 software engineers. The ages of all the engineer at the time of the lay-off are shown in the table below.

Not Laid off: 34,55,42,38,42,32,40,40,46,29

Laid off:         52,35,40,41,40,39,40,64,47,44

1. If a software engineer were selected at random from these 20 to be laid off, what is the probability that the engineer would be 40 or older?
2. Find the median age of all 20 engineers, the median age of the 10 who were laid off, and the median age of the 10 who were not laid off.
3. Given your answer to part a. and b. (and any other information that you care to use) does it appear that the company may be vulnerable to disparate impact claim? Explain.

On November 12, Drowner filed for relief under the provisions of Chapter 7 of the Bankruptcy Code. Prior to filing, Drowner advised his attorney that he had engaged in the following activities and transactions. On June 1, he paid the equivalent of three mortgage payments on his home to Fidelity Funding. On August 15, his prior landlord seized $4,100 from his bank account to satisfy a three year old judgment for rent. On November 1, he (Drowner) paid off his car note with a check for $4,500. Sun Finance held the note and the car title, with its lien noted thereon. The mortgage debt of approximately $220,000 was properly recorded and the house had a fair market value of $245,000. Drowner’s car is worth $11,000. Drowner’s attorney should advise Drowner that:

A) The money seized by his former landlord constitutes a preferential transfer.

B) The money paid on his car note constitutes a preferential transfer.

C) The money paid to his mortgage company constitutes a preferential transfer.

D) All of the above payments and seizures were preferential transfers.

On November 12, Drowner filed for relief under the provisions of Chapter 7 of the Bankruptcy Code. Prior to filing, Drowner advised his attorney that he had engaged in the following activities and transactions. On June 1, he paid the equivalent of three mortgage payments on his home to Fidelity Funding. On August 15, his prior landlord seized $4,100 from his bank account to satisfy a three year old judgment for rent. On November 1, he (Drowner) paid off his car note with a check for $4,500. Sun Finance held the note and the car title, with its lien noted thereon. The mortgage debt of approximately $220,000 was properly recorded and the house had a fair market value of $245,000. Drowner’s car is worth $11,000. Drowner’s attorney should advise Drowner that:

A) The money seized by his former landlord constitutes a preferential transfer.

B) The money paid on his car note constitutes a preferential transfer.

C) The money paid to his mortgage company constitutes a preferential transfer.

D) All of the above payments and seizures were preferential transfers.

The firm of Sun & Brinkley, CPAs, has been asked to perform attest services for Star Corporation (a nonpublic company) for the year ended December 31, 20X9. Sun & Brinkley has two offices: one in Wilmington and the other in Charlotte. Star Corporation would be audited by the Wilmington office. For each of the following cases, indicate whether or not Sun & Brinkley’s (the firm’s) independence is definitely impaired. If it is not definitely impaired, but might be under some circumstances, discuss those circumstances.

Establish an excel worksheet for the financial statement analysis framework. Refer to the following financial information;

1. On January 1, 2019, Frances Corp. started doing business and the owners contributed $200,000 capital in cash.
2. The company paid $24,000 to cover the rent for the office space for the 24-month period from January 1, 2019 to December 31, 2020.
3. On March 1, 2019, MSK Inc. entered into a consulting contract under which Frances Corporation Contract under which Frances Corporation promised to provide consulting to MSK Inc. for the 10-month period from March 1, 2019 to December 31, 2019. In return, MSK promised to pay a monthly consulting fee of $15,000 which was to be paid in January, 2020. Frances fulfilled its contractual obligations during 2019.
4. On July 1, 2019, Frances purchased office equipment for $100,000 cash. The equipment has an estimated useful life of five years and no salvage value. The equipment was immediately placed into use. Frances uses the straight-line method proportion to the number of month’s usage.
5. Through November 30, 2019, the company had paid $66,000 to its employees for 11 months of salaries. Accrued salaries on December 31, 2019 were $6,000.
6. On December 31, 2019, Norbert Corporation advanced $20,000 to Frances Corporation for consulting services to be provided during 2020.

Questions:

1. For each transaction, using the financial statement effect template, analyze the effects of the above transactions of financial statement.
2. At the end of the year, analyze how the adjustment for accrual basis accounting affects the financial statement.
3. Prepare financial statements for the year ended December 31, 2019.
4. If Frances recognized ‘rent expense’ instead of ‘prepaid rent’ on January 1, discuss the effect of this error on the financial statement.