What can you conclude about the company's financial condition from its statement of cash flows? What are Computron's current and quick ratios? What do they tell you about the company's liquidity position? What are Computron's inventory turnover, day's sales outstanding, fixed assets turnover and total assets turnover ratios? How does the firm's utilization of assets stack up against that of the industry?
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Donna Jamison was recently hired as a financial analyst by Computron Industries, a manufacturer of
electronic components. Her first task was to conduct a financial analysis of the firm covering the last two
years. To begin, she gathered the following financial statements and other data.
Balance Sheets 2015 2016
Assets
Cash $ 52,000 $ 57,600
Inventories 836,000 715,200
Total current assets $1,290,000 $1,124,000
Gross fixed assets 527,000 491,000
Less
Net fixed assets $ 360,800 $ 344,800
Total assets $1,650,800 $1,468,800
Liabilities and Equity
Accounts payable $ 175,200 $ 145,600
Notes payable 225,000 200,000
Accruals 140,000 136,000
Total current liabilities $ 540,200 $ 481,600
Long-term debt 424,612 323,432
Common stock (100,000 shares) 460,000 460,000
Retained earnings 225,988 203,768
Total equity $ 685,988 $ 663,768
Total liabilities and equity $1,650,800 $1,468,800
(continued)
Income Statements 2016 2015
Sales $3,850,000 $3,432,000
Cost of goods sold (3,250,000) (2,864,000)
Other expenses ( 430,300) ( 340,000)
Depreciation ( 20,000) ( 18,900)
Total operating costs $3,700,300 $3,222,900
EBIT $ 149,700 $ 209,100
Interest expense ( 76,000) ( 62,500)
EBT $ 73,700 $ 146,600
Taxes (40%) ( 29,480) ( 58,640)
Net income $ 44,220 $ 87,960
EPS $0.442 $0.880
Statement of
Operating Activities
Net income $ 44,220
Other additions (sources o f cash)
Depreciation 20,000
Increase in accounts payable 29,600
Increase in accruals 4,000
Subtractions (uses of cash)
Increases in accounts receivable ( 50,800)
Increase in inventories (120,800)
Net cash flow from operations $( 73,780)
Long-Term Investing Activities
Investment in fixed assets $( 36,000)
Financing Activities
Increase in notes payable $ 25,000
Increase in long-term debt 101,180
Payment of cash dividends ( 22,000)
Net cash flow from financing $104,180
Net reduction in cash account $( 5,600)
Cash at beginning of year 57,600
Cash at end of year $ 52,000
Other Data 2016 2015
December 31 stock price $6.00 $8.50
Number of shares 100,000 100,000
Dividends per share $ 0.22 $0.22
Lease payments $40,000 $40,000
Industry average data for 2016:
Ratio Industry Average
Current 2.7x
Quick 1.0x
Inventory turnover 6.0x
Days sales outstanding (DSO) 32.0 days
Fixed assets turnover 10.7x
Total assets turnover 2.6x
Debt ratio 50.0%
TIE 2.5x
Fixed charge coverage 2.1x
Net profit margin 3.5%
ROA 9.1 %
ROE 18.2%
Price/earnings 14.2x
Market/book 1.4x
- What can you conclude about the company's financial condition from its statement of cash flows?
- What are Computron's current and quick ratios? What do they tell you about the company's liquidity position?
- What are Computron's inventory turnover, day's sales outstanding, fixed assets turnover and total assets turnover ratios? How does the firm's utilization of assets stack up against that of the industry?
- What are Computron's debt and times-interest-earned ratios? How does Computron compare to the industry with respect to financial leverage? What conclusions can you draw from these ratios? (8 points possible)
- What are Computron's profitability ratios - that is, its net profit margin, return on assets (ROA), and return on equity (ROE)? What conclusions can you draw from these ratios when compared to the industry average?
- What are Computron's market value ratios - that is, its price/earnings ratio and its market/book ratio? What do these ratios tell you about investors' opinions of the company?
- Although financial statement analysis can provide useful information about a company's operations and its financial condition, this type of analysis does have some potential problems and limitations, and it must be used with care and judgment. Describe two or three problems or limitations.
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