Chapter 13 Financtal Statement Analysis 393 Case 13-3 Identify the Industries Common-sized balance sheets of 12 firms are presented in the following pages, along with some useful ratios (see Exhibit 1, page 394). These companies were cho- sen because they consist of primarily one major busi- ress segment and the relationships between balance sheet items, profit, and operations are fairly typical of these industries. The companies involved are + Regional bank + Temporary office petsonnel agency + For-profit hospital chain + Warehouse club * Copyright © by the President and Fellows of Harvard Busi- ness College. Harvard Business School case 198-017, + Major passenger airline + Major regional utility company * Manufacturer of oral, personal, and household care products + Hotel chain * Upscale department store chain + Discount department store chain + International oil company + Defense contractor ‘The financial statement dates are noted at the top of each column, Use the ratios, common-sized state- ments, and your knowledge of business operations and conditions at the time these data were generated to identify the companies. Case 13-4 Supplement to Identify the Industries Presented in Exhibit 1 (see page 395) are balance sheets, in percentage form, and selected ratios drawn from the balance sheets and operating statements of Seven different firms in seven different industries. Recognizing the fact of certain differences between firms in the same industry, each firm whose figures are summarized is broadly typical of those in its in- dustry, * Copyright © by the President and Fellows of Harvard College. Harvard Business School case 196-106, See if you can identify the industry represented. ‘Then, be prepated as best you can to explain the dis- tinctive asset structures and ratios of each industry. + Basie chemical company ‘+ Maker of name-brand, quality men’s apparel + Meat packer + Retail jewelry chain (which leased its store properties) + Coal-cartying railroad + Automobile manufacturer + Advertising ageney Case 13-5, Springfield National Bank” John Dawson Jn, president of Dawson Stores, Inc, had §lstussion with Stefanie Anderson, a loan officer at ‘ingfield National Bank. Both Mr. Dawson and “epyright © by Ray G. Stephens Dawson Stores, Ine., were deposit customers of the bank and had been for several years. Dawson's com- ments were direetly to the point: It appears that we are going to have some working capital needs during the next year at Dawson396 Part Financial Accounting Stores, Inc, | would like to obtain a $1,000,000 line of credit, on an unsecured basis, to cover these short-term needs. Could you set up the line of credit for a year to be reviewed when next year’s statements are available? T know from my friends that you need informa- tion about the company in order to grant this re- quest, so I have brought a copy of the company’s statements for the last four years for you, Could you let me know about the line of credit in a few days? We are having a board meeting in two weeks, and I would like to get the appropriate paperwork for you at that time, In reviewing the reports of previous contacts by bank personnel with Dawson Stores, Ine., Ms, Ander- son found the information summarized below: Dawson Stores, Inc., had been incorporated in 1881 ‘The stock had been widely dispersed upon the death of John Dawson St, who had divided his share among his 5 children and 14 grandchildren Dawson Stores, Inc., had maintained its deposit accounts with Springfield for many years, even during the years John Dawson Sr, had managed the ‘company. The accounts had varied over the past few years. Average balances of the accounts were $350,000 for the past year. The company had occa- sionally purchased certificates of deposits for short periods. Dawson Stores, Inc., had not used bank credit in the last 10 years, A recent Dun & Bradstreet report requested by a business development officer re- ported all trade accounts satisfactory and con- tained only satisfactory information. The D&B report showed the officers were John as president and his brother Bill as vice president and treasurer, The directors were the officers, their two sisters, and two cousins, the latter four residing in other states. Credit terms included both revolving (30- day) accounts and installment sales. Dawson Stores, Inc., has operated seven stores for the past six years. All store locations have been modernized frequently, One store location was moved during the past year to a new location two blocks from the previous location. The call report from the business development officer reported the premises orderly and well lo- cated for this chain of small retail soft-goods and hard-goods stores (based upon visits to three of seven locations), all located in the Springfield trade area, The president was happy with his present bank services, but in the opinion of the business development officer there was little possibility for further business. The audited financial statements left with Ms. Anderson by John Dawson are summarized in B hibits 1, 2, and 3. Notes accompanying these financial statements gave the following additional information, ACCOUNTS RECEIVABLE Retail customer accounts receivable are written off in full when any portion of the unpaid balance is past due 12 months. The allowance for losses arising from un- collectible customer accounts receivable is based on, historical bad debt experience and current aging of the accounts. 2000 2001 2002 2003 “Accounts receivable (in thousands): Thisty-day accounts $68 Sit $40 s 2 Deferred payment accounts 2,606 2,709 3,102 3,595 Other accounts 245 310 348 251 Less Allowance for losses a) 67) a2) ay $2862 $3,007 33,378 $3,767 Thirty-day accounts are revolving charge accounts that are billed every 30 days. Deferred payment accounts at 15 percent, Other accounts are for sales contracts from three to five years from the sales of office properties. The are accounts requiring monthly principal payments of at least 10 pervent of the outstanding balance plus interest following is an aging schedule of accounts receivable as of January 31, 2003: pS ODEXHIBIT 1 Chapter 13 s 397 Bcd Comparative Balance Sheets Ces (amounts in thousands) 2000 2001 2002 2003 Assets Current assets: Cash $107 Accounts receivable (net) 2,862 Inventories 2,600 Supplies and prepaid expenses 70 Total current assets 5,639 Investments and other assets 287 Property, plant, and equipment (net) 4,917 Total assets $10,843 Liabilities and Shareholders’ Equity Current liabitties: ‘Accounts payable Taxes other than income taxes ‘Accrued liabilities Income taxes, currently payable Deferred income taxes, installment sales Current portion of long-term debt Total current liabilities Long-term debt Deferred credits Shareholders’ equity Capital stock Retained earnings ‘otal liabilities and shareholders’ equity $1,153 51,166 $1,767 $ 2,272 389 414 418 454 676 792 229 491 480 401 484 589 143 181 141 2,782 4,013, 4,692 3,430 3,136 2,942 292 244 302 130 130 130 1 5,023 690 sm1135 30 Days 30to60 Over 60 r thousands): rd to last-in, first-out principles (amounts in (inthousands) __orLess___Days Days _ i sy $28 $3 si 2000 2001 2002 2003 ferred payment 3,201 288 10 RT Other 308 23 oo $283 $519 $560 $660 INVENTORIES PLANT Substantially all inventories are recorded at cost on the last-in, first-out (LIFO) method. Inventories on Janu- ary 3] are stated less the following amounts that would have been determined under the retail method without Property, plant, and equipment is carried at cost less ac~ cumulated depreciation. Depreciation is computed Using the straight-line method for financial reportin, purposes and accelerated methods for tax purposes.