Question

Complete the following steps after reading the ABC Co. Case Study (Version 2)

ABC Company Case Analysis: The case study is in bold! The questions are underneath this study.

You have been hired by ABC Co. to assess their current financial situation and offer suggestions for potential expansion. ABC has been in business for 6 years and has grown from a sole proprietor to its current status. The business is in a growing industry and sells accessories for technology items. Sales have been steadily growing and this is something that Jane, the owner, is very happy about.

Jane’s area of expertise is marketing and operations and she hired you to get an outsiders perspective on the current position of her business and to see if her young employees have been keeping the books accurately, as well as guiding her appropriately from a financial perspective. She does have long range plans for the business and part of her plan requires external financing. As part of her plan, she is thinking about expansion.

In your meeting with her, she starts throwing out names and numbers of accounts and hands you several documents. You collect the notes and jot down all the information she is verbally telling you, so as not to miss any important facts. You know the first step you will take is to prepare financial statements in order to establish her current situation. But to give her future oriented advice, you know an analysis of the statements will also be required.

Janes emphasizes that all the information you are about to receive is for the most recent fiscal year which ended on December 31^st. She tells you taxes were 27% of pre-tax profit of which $9,000 is still owed. She explains there is $142,000 of common stock and she recently paid a dividend of $8,350. She tells you she has a mortgage loan with the long term portion outstanding of $142,800. The current portion for this period was $14,600.

She provides you with a document that lists beginning of the year inventory at $99,780. The document also details several expenses that were incurred throughout the year including utilities at $5,440, depreciation on building and equipment of $18,600, advertising of $14,200, and interest expense of $3,100. The business currently holds $49,000 in other investments that may be sold or turned into depreciable assets in the future.

Jane has a smile when she informs you that sales have grown over 12% from the previous year and she expects similar growth for the following year. Her current year sales are $958,337. Of course her purchases are a major expense for her business and she spent $833,900 to support her encouraging sales figures. $136,300 is still owed to her suppliers. The owner lets you know that she also has a notes payable of $48,000.

Jane provides you will copies of documents showing that she paid $369,400 for her property which you see that the land was listed at $109,300, the building and equipment was listed at $232,600 on the document.

The owner states that she does allow some of her business customers to get items on credit, causing current, end of year accounts receivables of $54,200.

She lets you know during the course of your meeting that her business had a gross profit of $286,660, salary expense of $125,970 and other operating expenses of $5,550. At the beginning of the current year, accumulated depreciation on the building and equipment was $104,100.

Lastly, she shows you the previous retained earnings statement and you see her business has previously retained $61,000 of past earnings to help fund the business.

With all the information presented, she requests you create independent financial statements so she can compare them to the information her current employees have provided. Complete the analysis instructions in the assignment.

HINTS PROVIDED ARE: The value for Cash that goes in cell B10 of the Balance Sheet is $16,521. Also, Goodwill is not easy to value. Assets equal liabilities is your starting point. Assets are the sum of current assets plus fixed assets plus other investments which is 332,724 + 49,000 + 219,200 = 600,924 Since liabilities equal 628,424 we can then say liabilities equals assets if 628,424 = 600,924 + 27,500. The 27,500 is the Goodwill that goes in B25.

1. In an Excel spreadsheet, prepare the financial statements. Create an income statement, statement of retained earnings, and balance sheet. Be sure to use your own formulas whenever there is a calculation. Show each financial statement in a separate sheet within your excel spreadsheet. Be sure to clearly identify (rename) each sheet so the sheet corresponds to the statements.
2. Determine how much cash the company has on hand.
3. Perform ratio analysis on ABC Company. Calculate:
   1. current ratio,
   2. quick ratio,
   3. debt ratio,
   4. debt to net worth ratio,
   5. times interest earned,
   6. average inventory turnover ratio,
   7. average age of inventory,
   8. receivables turnover ratio,
   9. average collection period ratio,
   10. payables turnover ratio,
   11. average payable period ratio,
   12. total asset turnover ratio (total asset turnover ratio),
   13. gross profit on sales ratio (gross profit margin or GPM),
   14. operating profit on sales ratio (operating profit margin or OPM),
   15. net profit on sales ratio (net profit margin or NPM),
   16. net profit to assets ratio (return on assets or ROA),
   17. net profit to equity ratio (return on equity or ROE).

The two essay prompts are below:

1. ABC is considering building another storeroom and needs $1 million in external financing, list in detail 3 likely sources of debt and 3 likely sources of equity (justify why these would be likely for Jane's particular situation).
2. After considering these sources, what would be your recommendation in terms of how the business should fund the new storeroom? You must justify your answers and be as quantitative as possible.

Answer 1

Particulars	Amt in $	Source	Particulars	Amt in $	Source
Opening Stock	99,780	Given	Sales	9,58,337	Given
Purchases	8,33,900	Given	Closing Stock	2,62,003	Balancing Figure
Gross Profit	2,86,660	Given
Total	12,20,340		Total	12,20,340
Utilities	5,440	Given	Gross Profit	2,86,660	Brought Down
Depreciation	18,600	Given
Advertising	14,200	Given
Interest Expense	3,100	Given
Salary Expense	1,25,970	Given
Operating Expense	5,550	Given
Tax Expense	32,980	Given
Net Profit	80,820	Balancing Figure
Total	2,86,660		Total	2,86,660
Liabilities	Amt in $	Remarks	Assets	Amt in $	Amt in $	Remarks
Equity	1,42,000.00	Given	Fixed Assets	341900
Retained Earnings	1,33,470.00	Given	Accumulated Depreciation	122700	2,19,200.00	Given
Debt	1,31,300.00	Note 1	Goodwill		27,500.00	Given
Notes Payable	48,000.00	Given	Current Investments		49,000.00	Given
Accounts Payable	1,36,300.00	Given	Inventory		2,62,003.00	As per Statement of Income
Tax Payable	9,000.00		Accounts Receivable		54,200.00	Given
Other Current Liabilities	28,354.00		Cash		16,521.00	Given
Total	6,28,424.00		Total		6,28,424.00
Note 1
Debt	=142800-14600+3100
Opening Balance-Repayment net off interest
Statement of Retained Earnings	Amt in $
Opening Balance	61,000
Add : Current Year	80,820
Less : Dividend	8,350
Closing Balance	1,33,470
Current Ratio	1.72
Quick Ratio	0.54
Debt Ratio	0.56
Times Interest Earned	37.71
Average Inventory	6.37
Asset Turnover Ratio	1.52
GP Ratio	29.91%
NP Ratio	8.43%
ROA Ratio	0.13
ROE Ratio	0.29

ABC is currently financially sound.

The company can look at financing the project by a correct mixture of debt and equity. The ideal debt equity ratio is 2:1

Keeping this as the rule of thumb, the company can look to borrow debt funds by a way of bank borrowings, bonds, or debentures.

As regards funding from equity, the company can look up to issue preferential shares, retained earnings, fresh issue of shares.