EXERCISE 1: FINANCIAL RATIOS Ian Stoddart was reviewing his company's 2013 year-nd financial estimates, and he was not satisfed with the overall performanca He asked his mmagement tenm to prepare their detailed operational plans for 2014 and provide their operating budgets to the controller so that he could consolidate the budgets and present, in the hatter part of November, the compmy's financial projections for 2014. As he pointed out to his tenm, "The finmcial projections should be better than the year-end 2013 estimates. We have to achieve four basic finmcial objectives related to liquidity, solvency, nd productivity, and our return on revenue (profitability) shoukd be at least 4% and retum on total assets more than 6%. "The specific objectives for 2014 that Ihave in mind are as follows: Regarding liquidity, our currentratio shoukd not be less thm 15 times. For solvency, our debt-to-total-as sets ratio should be maintained at no mone that 50% and times-interest-eamed should be more than 5.0 times. The productivity of our total assets should be 15 times, the average collection period for our tradereceivables should be maintained at less than 45 days, and our inventory turnover should be more tham 4 times; • With respect to profitability, ourreturn on reveme should be at least 4%and retum on total assets over 6%." During the second week of November, the controller pres ented the projectad 2014 fimmcial statements to the mmagement committee. Projected Statement of Financial Position As at December 31, 2014 Ton-current assets Equity $ 800,000 $ 800,000 Non-current liabilities Property, plant, and equipment 300,000 urrent assets Long term borrowings 400,000 Current liabilities Inventories 250,000 300,000 Trade and other payables Trade receivables 170,000 20,000 Short-term borrowing Cash 420,000 Fotal current assets 720,000 Total current liabilities 720,000 Total liabilities $1,520.000 $1,520,000 Total equity and liabilities otal assets
EXERCISE 1: FINANCIAL RATIOS Ian Stoddart was reviewing his company's 2013 year-nd financial estimates, and he was not satisfed with the overall performanca He asked his mmagement tenm to prepare their detailed operational plans for 2014 and provide their operating budgets to the controller so that he could consolidate the budgets and present, in the hatter part of November, the compmy's financial projections for 2014. As he pointed out to his tenm, "The finmcial projections should be better than the year-end 2013 estimates. We have to achieve four basic finmcial objectives related to liquidity, solvency, nd productivity, and our return on revenue (profitability) shoukd be at least 4% and retum on total assets more than 6%. "The specific objectives for 2014 that Ihave in mind are as follows: Regarding liquidity, our currentratio shoukd not be less thm 15 times. For solvency, our debt-to-total-as sets ratio should be maintained at no mone that 50% and times-interest-eamed should be more than 5.0 times. The productivity of our total assets should be 15 times, the average collection period for our tradereceivables should be maintained at less than 45 days, and our inventory turnover should be more tham 4 times; • With respect to profitability, ourreturn on reveme should be at least 4%and retum on total assets over 6%." During the second week of November, the controller pres ented the projectad 2014 fimmcial statements to the mmagement committee. Projected Statement of Financial Position As at December 31, 2014 Ton-current assets Equity $ 800,000 $ 800,000 Non-current liabilities Property, plant, and equipment 300,000 urrent assets Long term borrowings 400,000 Current liabilities Inventories 250,000 300,000 Trade and other payables Trade receivables 170,000 20,000 Short-term borrowing Cash 420,000 Fotal current assets 720,000 Total current liabilities 720,000 Total liabilities $1,520.000 $1,520,000 Total equity and liabilities otal assets
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:EXERCISE 1: FINANCIAL RATIOS
Ian Stoddart was reviewing his company's 2013 year-end financial estimates, and he was not satisfied with the overall performance
He asked his management team to prepare their detailed operational plans for 2014 and provide their operating budgets to the
controller so that he could consolidate the budgets and pres ent, in the latter part of November, the company's financial projections for
2014.
As he pointed out to his team, "The fmancial projections should be better than the year-end 2013 estimates. We have to achieve
four basic financial objectives related to liquidity, solvency, and productivity, and our return on revenue (profitability) should be at
least 4% and retum on total assets more than 6%.
"The specific objectives for2014 that I have in mind are as follows:
Regarding liquidity, our currentratio should not be less than 15 times.
For solvency, our debt-to-total-as sets ratio should be maintained at no more that 50% and times-interest-eamed should be
more than 5.0 times.
• The productivity of our total assets shouldbe 15 times, the average collection period forourtradereceivables should be
maintained at less than 45 days, and our inventory turnovershould be more than 4 times;
• With respect to profitability, ourreturn on reveme should be at least 4%and retum on total assets over 6%."
22
During the second week of November, the controller pres ented the projected 2014 fnancial statements to the management
committee.
Projected Statement of Financial Position As at December 31, 2014
Non-current assets
Equity
$ 800,000
$ 800,000
Non-current liabilities
Property. plant, and equipment
300,000
Current assets
Long-term borrowings
400,000
Current liabilities
Inventories
300,000
250,000
Trade and other payables
Trade receivables
170,000
20,000
Short-term borrowings
Cash
420,000
720,000
Total current liabilities
Total current assets
720,000
Total liabilities
$1,520,000
$1.520,000
Total equity and liabilities
Total assets
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Transcribed Image Text:Projected Statement of Income For the year ended December 31, 2014
Revenue
$2.000,000
Cost of sales
(1200,000)
Gross margin
800,000
Other expenses
(600,000)
Finance costs
(25,000)
(625,000)
Total expenses
175,000
Profit before taxes
(65,000)
Income tax expense
$110,000
Profit for the year
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