Question

Group Problem Set 1: This problem Set is based on materials covered in module
1/week 1. It is designed for you to demonstrate your understanding of basic financial
statements, financial statement analysis, break-even concepts, financial and operating
leverages. Before you start this assignment, please review weeks 1 and 2 materials
thoroughly.
Finance date of Adams Stores, Inc. for the year ending 2016 and 2017.

2016	2017
$3,432,000	$5,834,400
9,000	7,282
340,000	720,000
203,768	97,632
323,432	1,000,000
2,864,000	4,980,000
18,900	116,960
48,600	20,000
491,000	1,202,950
62,500	176,000
100,000	100,000
8.50	6
351,200	632,160
145,600	324,000
715,200	1,287,360
200,000	720,000
146,200	263,160
Items Sales Cash Other Expenses Retained Earnings Long-term debt Cost of goods sold Depreciation Short-term investments Fixed Assets Interest Expenses Shares outstanding (par value = $4.60) Market Price of stock Accounts Receivable Accounts payable Inventory Notes Payable Accumulated Depreciation Accruals	136,000	284,960

Tax Rate

40%

40%

Instructions:
As a group, complete the following activities using the financial information above:
Part 1: Financial Statements
A. Prepare the income statement for 2016 and 2017. Include statement of retained
earnings for 2017
B. Prepare the balance sheet for 2016 and 2017
C. Prepare Common-Size financial statements of income statement and balance
sheet.
D. Prepare Statement of Cash Flows
Part 2: Financial Statement Analysis
A. Based on your financial statements (from Part 1), calculate the following ratios for
the two years. Show all your calculations in good form. Show your formulas. If
you use excel, each calculation need to show the excel formula
Current ratio
Quick ratio
Inventory turnover (times)
Average collection period (days)
Total asset turnover (times)
Debt ratio
Times interest earned
Gross profit margin
Net profit margin
Return on total assets
Return on equity
P/E ratio
Return on equity using DuPont Analysis
B. Comments on the ratios by comparing 2016 to 2017 ratios.
C. Assume Adams Stores, Inc. is a retail company similar to WalMart, Myers, or
Target. Compare 2017 ratios to the industry average. Please note that Adams
Stores, Inc. is not a real company. To find comparable industry ratios, you need
to search for industry ratios for retail. See information on Moodle for instructions
on how to find industry ratios. Based on the industry average, how is Adams
Stores, Inc. doing financially?
Part 3: Break-even, Financial and Operating Leverages

Johnson Products, Inc.
Income Statement
For the Year Ended December 31, 2018
Sales (40,000 bags at $50 each) ..................................	$2,000,000
Less: Variable costs (40,000 bags at $25)................	1,000,000
Fixed costs..............................................................	600,000
Earnings before interest and taxes ..............................	400,000
Interest expense ...........................................................	120,000
Earnings before taxes .................................................	280,000
Income tax expense (20%) ..........................................	56,000
Net income ..................................................................	$ 224,000

Based on the information above, calculate (show all calculations and responses in good
form):
a. Break-even in units (in dollars and units). Explain what your numbers mean. As a
manager, how would you use the numbers in financial planning?
b. What is the degree of financial leverage? Explain what your number mean. As a
manager, how would you use the numbers in financial planning?
c. What is the degree of operating leverage? Explain what your number mean. As a
manager, how would you use the numbers in financial planning?

Answer 1

Part 1

1) Prepare the income statement for 2016 and 2017. Include statement of retained earnings for 2017
Adams Stores, Inc.
Income Statement
For the year ending 2016 and 2017.
Sales	$3,432,000	$5,834,400
Cost of goods sold	2,864,000	4,980,000
Gross profit	$568,000	$854,400
Other Expenses	340,000	720,000
Depreciation	18,900	116,960
Total Operating Expenses	$358,900	$836,960
EBIT	$209,100	$17,440
Interest Expenses	62,500	176,000
EBT	$146,600	($158,560)
Tax Rate @ 40%	$58,640	($63,424)
Net Income	$87,960	($95,136)
Statement of Retained Earnings
Retained earnings at the beginning	203,768
Net Income	($95,136)
Payment of Dividend	($11,000)
Retained earnings at the End	$97,632
2)Prepare the balance sheet for 2016 and 2017
Adams Stores, Inc.
Balance sheet
Assets	2016	2017
Cash	9,000	7,282
Short-term investments	48,600	20,000
Accounts Receivable	351,200	632,160
Inventory	715,200	1,287,360
Total Current Assets	1,124,000	1,946,802
Gross Fixed Assets	491,000	1,202,950
Accumulated Depreciation	-146,200	-263,160
Net Assets	344,800	939,790
Total Assets	1,468,800	2,886,592
Liabilities and Shareholder Equity
Accounts payable	145,600	324,000
Notes Payable	200,000	720,000
Accruals	136,000	284,960
Total Current Liabilities	481,600	1,328,960
Long-term debt	323,432	1,000,000
Total Liabilities	805,032	2,328,960
Shareholder Equity
Common Stock	460,000	460,000
Retained Earnings	203,768	97,632
Total Shareholder Equity	663,768	557,632
Total Liabilities and Shareholder Equity	1,468,800	2,886,592
3)
1) Prepare the common size  income statement for 2016 and 2017. Include statement of retained earnings for 2017
Adams Stores, Inc.
Income Statement
For the year ending 2016 and 2017.
	2016		2017
Sales	$3,432,000	100.00%	$5,834,400	100.00%
Cost of goods sold	2,864,000	83.45%	4,980,000	85.36%
Gross profit	$568,000	16.55%	$854,400	14.64%
Other Expenses	340,000	9.91%	720,000	12.34%
Depreciation	18,900	0.55%	116,960	2.00%
Total Operating Expenses	$358,900	10.46%	$836,960	14.35%
EBIT	$209,100	6.09%	$17,440	0.30%
Interest Expenses	62,500	1.82%	176,000	3.02%
EBT	$146,600	4.27%	($158,560)	-2.72%
Tax Rate @ 40%	$58,640	1.71%	($63,424)	-1.09%
Net Income	$87,960	2.56%	($95,136)	-1.63%
2)Prepare the balance sheet for 2016 and 2017
Adams Stores, Inc.
Balance sheet (common size)
Assets	2016		2017
Cash	9,000	0.6%	7,282	0.25%
Short-term investments	48,600	3.3%	20,000	0.69%
Accounts Receivable	351,200	23.9%	632,160	21.90%
Inventory	715,200	48.7%	1,287,360	44.60%
Total Current Assets	1,124,000	76.5%	1,946,802	67.44%
Gross Fixed Assets	491,000	33.4%	1,202,950	41.67%
Accumulated Depreciation	-146,200	-10.0%	-263,160	-9.12%
Net Assets	344,800	23.5%	939,790	32.56%
Total Assets	1,468,800	100.0%	2,886,592	100.00%
Liabilities and Shareholder Equity
Accounts payable	145,600	9.9%	324,000	11.22%
Notes Payable	200,000	13.6%	720,000	24.94%
Accruals	136,000	9.3%	284,960	9.87%
Total Current Liabilities	481,600	32.8%	1,328,960	46.04%
Long-term debt	323,432	22.0%	1,000,000	34.64%
Total Liabilities	805,032	54.8%	2,328,960	80.68%
Shareholder Equity
Common Stock	460,000	31.3%	460,000	15.94%
Retained Earnings	203,768	13.9%	97,632	3.38%
Total Shareholder Equity	663,768	45.2%	557,632	19.32%
Total Liabilities and Shareholder Equity	1,468,800	100.0%	2,886,592	100.00%

4)D. Prepare Statement of Cash Flows
Statement of Cash Flows
Operating Activities
Net Income	($95,136)
Adjustments:
Depreciation	$  116,960.00
Increase in Account Receivables	$ (280,960.00)
Increase in Inventory	$ (572,160.00)
Increase in Account Payables	$  178,400.00
Increase in Accruals	$  148,960.00
Net cash Provided (used) by  Operating Activities)		($503,936)
Investing Activities
Cash used to acquire FA	$ (711,950.00)
Change in short term investments	28,600
Net cash Provided (used) by  Investing Activities		$    (683,350.00)
Financing Activities
Notes payable	520,000
Long Term Loan	676,568
Payment of Cash dividend	-11000
Net cash Provided (used) by  Financing Activities		1,185,568
Net Change in cash		($1,718.00)
Cash at the beginning		$         9,000.00
Cash at the end		$7,282.00