Balance Sheets TABLE IC 4.1 2019E 2018 2017 Assets Cash $ 85,632 7,282 $ 57,600 Accounts receivable 878,000 632,160 351,200 1,287,360 $1,926,802 Inventories 1,716,480 $2,680,112 715,200 $1,124,000 Total current assets Gross fixed assets 1,197,160 1,202,950 491,000 Less accumulated depreciation 380,120 $ 817,040 $3,497,152 263,160 146,200 $ 344,800 $ 1,468,800 Net fixed assets $ 939,790 $2,866,592 Total assets Liabilities and Equity Accounts payable $ 436,800 $ 145,600 $ 524,160 489,600 636,808 Accruals 408,000 136,000 Notes payable 200,000 $ 481,600 300,000 Total current liabilities $1,144,800 $1,650,568 Long-term debt Common stock 400,000 723,432 323,432 1,721,176 460,000 460,000 Retained earnings 231,176 Total equity Total liabilities and equity 32,592 $ 492,592 $2,866,592 203,768 $ 663,768 $ 1,468,800 $1,952,352 $3,497,152 Note: E indicates estimated. The 2019 data are forecasts. TABLE IC 4.2 Income Statements 2019E 2018 2017 Sales $7,035,600 $ 6,034,000 $3,432,000 Cost of goods sold 5,875,992 5,528,000 2,864,000 Other expenses 550,000 519,968 358,672 Total operating costs excluding depreciation and $ 6,047,968 $3,222,672 amortization $6,425,992 EBITDA $ 609,608 ($ 13,988) $ 209,328 Depreciation and amortization 116,960 116,960 18,900 $ 492,648 (S 130,948) $ 190,428 43,828 $ 146,600 EBIT Interest expense 70,008 136,012 $ 422,640 (S 266,960) EBT Taxes (40%) 169,056 $ 253,584 (106,784) 58,640 Net income (5 160,176) 87,960 $ 1.014 ($ 1.602) $ 0.880 $ 0.220 $ 6.638 EPS $ 0.10 $ 4.926 DPS $ 0.220 Book value per share $ 7.809 Stock price $ 12.17 $ 225 $ 8.50 Shares outstanding 250,000 100,000 100,000 Tax rate 40.00% 40.00% 40.00% Lease payments $40,000 $ 40,000 $ 40,000 Sinking fund payments Nate: E indicates estimated. The 2019 data are forecasts. "The firm had sufficient taxable income in 2016 and 2017 to obtain its full tax refund in 2018. TABLE IC 4.3 Ratio Analysis 2019E 2018 2017 Industry Average Current 1.2x 23x 27x Quick 0.4x 0.8x 1.0x Inventory turnover Days sales outstanding (DSOP 4.7x 4.8x 6.1x 38.2 37.4 320 Fxed assets turnover 6.4x 10.0x 7.0x Total assets turnover 2.1x 23x 26x Debt-to-capital ratio 73.4% 44.19% 40.0% TIE -1.0x 43x 62x Operating margin Profit margin -2.2% 5.5% 73% -2.7% 2.6% 3.5% Basic earning power -4.6% 13.0% 19.19% ROA -5.6% 6.0% 9.1% ROE -32.5% 13.3% 18.2% ROKC -4.2% 9.6% 14.5% Pricelearnings -1.4x 9.7x 14.2x Market/book 0.5x 1.3x 24x Book value per share $4.93 $6.64 na. Note. E indicates estimated. The 2019 data are forecasts. Calculation is based on a 365-day year.

Balance Sheets TABLE IC 4.1 2019E 2018 2017 Assets Cash $ 85,632 7,282 $ 57,600 Accounts receivable 878,000 632,160 351,200 1,287,360 $1,926,802 Inventories 1,716,480 $2,680,112 715,200 $1,124,000 Total current assets Gross fixed assets 1,197,160 1,202,950 491,000 Less accumulated depreciation 380,120 $ 817,040 $3,497,152 263,160 146,200 $ 344,800 $ 1,468,800 Net fixed assets $ 939,790 $2,866,592 Total assets Liabilities and Equity Accounts payable $ 436,800 $ 145,600 $ 524,160 489,600 636,808 Accruals 408,000 136,000 Notes payable 200,000 $ 481,600 300,000 Total current liabilities $1,144,800 $1,650,568 Long-term debt Common stock 400,000 723,432 323,432 1,721,176 460,000 460,000 Retained earnings 231,176 Total equity Total liabilities and equity 32,592 $ 492,592 $2,866,592 203,768 $ 663,768 $ 1,468,800 $1,952,352 $3,497,152 Note: E indicates estimated. The 2019 data are forecasts. TABLE IC 4.2 Income Statements 2019E 2018 2017 Sales $7,035,600 $ 6,034,000 $3,432,000 Cost of goods sold 5,875,992 5,528,000 2,864,000 Other expenses 550,000 519,968 358,672 Total operating costs excluding depreciation and $ 6,047,968 $3,222,672 amortization $6,425,992 EBITDA $ 609,608 ($ 13,988) $ 209,328 Depreciation and amortization 116,960 116,960 18,900 $ 492,648 (S 130,948) $ 190,428 43,828 $ 146,600 EBIT Interest expense 70,008 136,012 $ 422,640 (S 266,960) EBT Taxes (40%) 169,056 $ 253,584 (106,784) 58,640 Net income (5 160,176) 87,960 $ 1.014 ($ 1.602) $ 0.880 $ 0.220 $ 6.638 EPS $ 0.10 $ 4.926 DPS $ 0.220 Book value per share $ 7.809 Stock price $ 12.17 $ 225 $ 8.50 Shares outstanding 250,000 100,000 100,000 Tax rate 40.00% 40.00% 40.00% Lease payments $40,000 $ 40,000 $ 40,000 Sinking fund payments Nate: E indicates estimated. The 2019 data are forecasts. "The firm had sufficient taxable income in 2016 and 2017 to obtain its full tax refund in 2018. TABLE IC 4.3 Ratio Analysis 2019E 2018 2017 Industry Average Current 1.2x 23x 27x Quick 0.4x 0.8x 1.0x Inventory turnover Days sales outstanding (DSOP 4.7x 4.8x 6.1x 38.2 37.4 320 Fxed assets turnover 6.4x 10.0x 7.0x Total assets turnover 2.1x 23x 26x Debt-to-capital ratio 73.4% 44.19% 40.0% TIE -1.0x 43x 62x Operating margin Profit margin -2.2% 5.5% 73% -2.7% 2.6% 3.5% Basic earning power -4.6% 13.0% 19.19% ROA -5.6% 6.0% 9.1% ROE -32.5% 13.3% 18.2% ROKC -4.2% 9.6% 14.5% Pricelearnings -1.4x 9.7x 14.2x Market/book 0.5x 1.3x 24x Book value per share $4.93 $6.64 na. Note. E indicates estimated. The 2019 data are forecasts. Calculation is based on a 365-day year.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter 3, discussed the situation of D’Leon Inc., a regional snack foods producer, after an expansion program. D’Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to “go national.” Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in 2018 rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm’s survival.
Donna Jamison was brought in as assistant to Fred Campo, D’Leon’s chairman, who had the task of getting the company back into a sound financial position. D’Leon’s 2017 and 2018 balance sheets and income statements, together with projections for 2019, are given in Tables IC 4.1 and IC 4.2. In addition,Table IC 4.3 gives the company’s 2017 and 2018 financial ratios, together with industry average data.
The 2019 projected financial statement data represent Jamison’s and Campo’s best guess for 2019 results, assuming that some new financing is arranged to get the company “over the hump.” Jamison examined monthly data for 2018 (not given in the case), and she detected an improving patternduring the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between c. Calculate the 2019 inventory turnover, days sales outstanding (DSO), fixed assets turnover, and total
assets turnover. How does D’Leon’s utilization of assets stack up against other firms in the industry?
d. Calculate the 2019 debt-to-capital and times-interest-earned ratios. How does D’Leon compare with
the industry with respect to financial leverage? What can you conclude from these ratios?
e. Calculate the 2019 operating margin, profit margin, basic earning power (BEP), return on assets (ROA),
return on equity (ROE), and return on invested capital (ROIC). What can you say about these ratios?
f. Calculate the 2019 price/earnings ratio and market/book ratio. Do these ratios indicate that investors
are expected to have a high or low opinion of the company?
g. Use the DuPont equation to provide a summary and overview of D’Leon’s financial condition as
projected for 2019. What are the firm’s major strengths and weaknesses?
h. Use the following simplified 2019 balance sheet to show, in general terms, how an improvement in
the DSO would tend to affect the stock price. For example, if the company could improve its collection
procedures and thereby lower its DSO from 45.6 days to the 32-day industry average without
affecting sales, how would that change “ripple through” the financial statements (shown in thousands
below) and influence the stock price?
Accounts receivable $ 878 Current liabilities $ 845
Other current assets 1,802 Debt 700
Net fixed assets 817 Equity 1,952
Total assets $3,497 Liabilities plus equity $3,497
i. Does it appear that inventories could be adjusted? If so, how should that adjustment affect D’Leon’s
profitability and stock price?
j. In 2018, the company paid its suppliers much later than the due dates; also, it was not maintaining
financial ratios at levels called for in its bank loan agreements. Therefore, suppliers could cut the company
off, and its bank could refuse to renew the loan when it comes due in 90 days. On the basis of data
provided, would you, as a credit manager, continue to sell to D’Leon on credit? (You could demand
cash on delivery—that is, sell on terms of COD—but that might cause D’Leon to stop buying from
your company.) Similarly, if you were the bank loan officer, would you recommend renewing the loan or demanding its repayment? Would your actions be influenced if, in early 2019, D’Leon showed you its 2019 projections along with proof that it was going to raise more than $1.2 million of new equity?
m. What are some qualitative factors that analysts should consider when evaluating a company’s likely
future financial performance? spending money and deriving benefits were longer than D’Leon’s managers had anticipated.For these reasons, Jamison and Campo see hope for the company—provided it can survive in the short run.
a. Why are ratios useful? What are the five major categories of ratios?
b. Calculate D’Leon’s 2019 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity positions in 2017, in 2018, and as projected for 2019? We often think of ratios as being useful
(1) to bankers for credit analysis, and (3) to stockholders for stock valuation. Would these different types of analysts have an equal interest in the company’s liquidity ratios? Explain your answer.

Balance Sheets
TABLE IC 4.1
2019E
2018
2017
Assets
Cash
$ 85,632
7,282
$ 57,600
Accounts receivable
878,000
632,160
351,200
1,287,360
$1,926,802
Inventories
1,716,480
$2,680,112
715,200
$1,124,000
Total current assets
Gross fixed assets
1,197,160
1,202,950
491,000
Less accumulated depreciation
380,120
$ 817,040
$3,497,152
263,160
146,200
$ 344,800
$ 1,468,800
Net fixed assets
$ 939,790
$2,866,592
Total assets
Liabilities and Equity
Accounts payable
$ 436,800
$ 145,600
$ 524,160
489,600
636,808
Accruals
408,000
136,000
Notes payable
200,000
$ 481,600
300,000
Total current liabilities
$1,144,800
$1,650,568
Long-term debt
Common stock
400,000
723,432
323,432
1,721,176
460,000
460,000
Retained earnings
231,176
Total equity
Total liabilities and equity
32,592
$ 492,592
$2,866,592
203,768
$ 663,768
$ 1,468,800
$1,952,352
$3,497,152
Note: E indicates estimated. The 2019 data are forecasts.

TABLE IC 4.2
Income Statements
2019E
2018
2017
Sales
$7,035,600
$ 6,034,000
$3,432,000
Cost of goods sold
5,875,992
5,528,000
2,864,000
Other expenses
550,000
519,968
358,672
Total operating costs excluding depreciation and
$ 6,047,968
$3,222,672
amortization
$6,425,992
EBITDA
$ 609,608
($
13,988)
$ 209,328
Depreciation and amortization
116,960
116,960
18,900
$ 492,648
(S 130,948)
$ 190,428
43,828
$ 146,600
EBIT
Interest expense
70,008
136,012
$ 422,640
(S 266,960)
EBT
Taxes (40%)
169,056
$ 253,584
(106,784)
58,640
Net income
(5 160,176)
87,960
$ 1.014
($ 1.602)
$ 0.880
$ 0.220
$ 6.638
EPS
$ 0.10
$ 4.926
DPS
$ 0.220
Book value per share
$ 7.809
Stock price
$ 12.17
$ 225
$ 8.50
Shares outstanding
250,000
100,000
100,000
Tax rate
40.00%
40.00%
40.00%
Lease payments
$40,000
$ 40,000
$ 40,000
Sinking fund payments
Nate: E indicates estimated. The 2019 data are forecasts.
"The firm had sufficient taxable income in 2016 and 2017 to obtain its full tax refund in 2018.
TABLE IC 4.3
Ratio Analysis
2019E
2018
2017
Industry Average
Current
1.2x
23x
27x
Quick
0.4x
0.8x
1.0x
Inventory turnover
Days sales outstanding (DSOP
4.7x
4.8x
6.1x
38.2
37.4
320
Fxed assets turnover
6.4x
10.0x
7.0x
Total assets turnover
2.1x
23x
26x
Debt-to-capital ratio
73.4%
44.19%
40.0%
TIE
-1.0x
43x
62x
Operating margin
Profit margin
-2.2%
5.5%
73%
-2.7%
2.6%
3.5%
Basic earning power
-4.6%
13.0%
19.19%
ROA
-5.6%
6.0%
9.1%
ROE
-32.5%
13.3%
18.2%
ROKC
-4.2%
9.6%
14.5%
Pricelearnings
-1.4x
9.7x
14.2x
Market/book
0.5x
1.3x
24x
Book value per share
$4.93
$6.64
na.
Note. E indicates estimated. The 2019 data are forecasts.
Calculation is based on a 365-day year.

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