# problem set 1 1

BA 620 Managerial Finance

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.

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

• Prepare the income statement for 2016 and 2017. Include statement of retained earnings for 2017
• Prepare the balance sheet for 2016 and 2017
• Prepare Common-Size financial statements of income statement and balance sheet.
• Prepare Statement of Cash Flows

Part 2: Financial Statement Analysis

• 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

• Comments on the ratios by comparing 2016 to 2017 ratios.
• 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):

• 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?
• What is the degree of financial leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?
• What is the degree of operating leverage? Explain what your number mean. As a manager, how would you use the numbers in financial planning?

Specific Instructions:

• You may use Excel or Word. Please DO NOT use any other format such PDF, etc.