FINANCIAL MANAGEMENT

ASSIGNMENT-1

2) The comparative statements of Simpson Company are shown below.

SIMPSON COMPANY

Income Statements

For the Years Ended December 31

2014 2013

Net sales $780,000 $624,000

Cost of goods sold 440,000 405,600

Gross profit 340,000 218,400

Selling and administrative expenses 176,880 149,760

Income from operations 163,120 68,640

Other expenses and losses Interest expense 9,920 7,200

Income before income taxes 153,200 61,440

Income tax expense 34,000 14,000

Net income $119,200 $ 47,440

SIMPSON COMPANY Balance Sheets December 31

Assets 2014 2013

Current assets

Cash $ 23,100 $ 21,600

Debt investments (short-term) 44,800 33,000

Accounts receivable 106,200 83,800

Inventory 116,400 74,000

 Total current assets 290,500 212,400

Plant assets (net) 485,300 439,600

Total assets $775,800 $652,000

Liabilities and Stockholders’ Equity

Current liabilities

Accounts payable $138,200 $132,000

Income taxes payable 25,300 24,000

Total current liabilities 163,500 156,000

Bonds payable 132,000 120,000

Total liabilities 295,500 276,000

Stockholders’ equity

Common stock ($10 par) 150,000 130,000

Retained earnings 330,300 246,000

Total stockholders’ equity 480,300 376,000

Total liabilities and stockholders’ equity $775,800 $652,000

All sales were on account. Net cash provided by operating activities was $108,000. Capital expenditures
were $47,000, and cash dividends were $30,900.

Instructions

Compute the following ratios for 2014: (a) Earnings per share. (h) Days in inventory. (b) Return on
common stockholders’ equity. (i) Times interest earned. (c) Return on assets. (j) Asset turnover. (d)
Current ratio. (k) Debt to assets ratio. (e) Accounts receivable turnover. (l) Current cash debt coverage.
(f) Average collection period. (m) Cash debt coverage. (g) Inventory turnover. (n) Free cash flow

Answer:

a) Earning per share = Net income/Common stock

 = $119,200/(($13,000 + $15,000)/2)

= $119,200/$14,000

= $8.51

b) Return on common stockholder`s equity= Net income/Average common stockholders equity

= $119,200/(($376,000 + $480,300)/2)

= $119,200/$428,150

= 27.8%

c) Return on assets = Net income/Average total Assets

= $119,200/(($625,000 + $775,800)/2)

= $119,200/$713,900

= 16.7%

d) Current ratio = Current assets/Current liabilities

= $290,500/$163,500

= 1.78:1

e) Accounts receivable turnover= Net credit sales/Average accounts receivable

= $780,000/(($83,800+$106,200)/2)

= $780,000/$95,000

= 8.2 times

f) Average collection period = 365/Accounts receivable turnover ratio

= 365/8.2 times

= 44.5 days

g) Inventory turnover = Cost of goods sold/Average inventory

= $440,000/(($740,000 + $116,400)/2)
 = $440,000/$95,200

= 4.6 times

h) Days in inventory

Number of days sales in inventory = 365 days/inventory turnover

= 365 days/4.6

= 79.3 days

i) Time interest earned= Income before interest and taxes/Interest Expenses

= ($119,200 + $9,920 + $34,000)/($9,920)

= 16.4 times

j) Asset turnover = Net sales/Average total assets

= ($780,000)/($775,800 + $652,000)/2)

= 1.09 times

k) Debt to asset ratio: Debt to assets = Total Liabilities/Total Assets

= $295,500/$775,800

= 38%

L) Current cash debt coverage = Net cash provided by operating activities/Average of current liabilities

= $108,000/($156,000 + $163,500)/2

= 0.68 times

m) Cash debt coverage = Net cash provided by operating activities/Average of total liabilities

= $108,000/($295,500 + $276,000)/2

= 0.38 times

n) Free cash flow = Operating cash flow – capital expenditure – Dividends

= $108,000 - $47,000 - $30,900

 = $30,100

3) The condensed balance sheet and income statement data for Symbiosis Corporation are presented
below

SYMBIOSIS CORPORATION Balance Sheets December 31

2014 2013 2012

Cash $ 30,000 $ 24,000 $ 20,000

Accounts receivable (net) 110,000 48,000 48,000

Other current assets 80,000 78,000 62,000

Investments 90,000 70,000 50,000

Plant and equipment (net) 503,000 400,000 360,000

$813,000 $620,000 $540,000

Current liabilities $ 98,000 $ 75,000 $ 70,000

Long-term debt 130,000 75,000 65,000

Common stock, $10 par 400,000 340,000 300,000

Retained earnings 185,000 130,000 105,000

$813,000 $620,000 $540,000

SYMBIOSIS CORPORATION Income Statements For the Years Ended December 31

2014 2013

Sales revenue $800,000 $750,000

Less: Sales returns and allowances 40,000 50,000

Net sales 760,000 700,000

Cost of goods sold 420,000 406,000

Gross profit 340,000 294,000

Operating expenses (including income taxes) 230,000 209,000

Net income $110,000 $ 85,000

Additional information:

1. The market price of Symbiosis common stock was $5.00, $3.50, and $2.80 for 2012, 2013, and 2014,
respectively.

2. You must compute dividends paid. All dividends were paid in cash.

Instructions

(a) Compute the following ratios for 2013 and 2014.

(1) Profit margin. (2) Gross profit rate. (3) Asset turnover. (4) Earnings per share. (5) Price-earnings
ratio. (6) Payout ratio. (7) Debt to assets ratio.

(b) Based on the ratios calculated, discuss briefly the improvement or lack thereof in the financial
position and operating results from 2013 to 2014 of Symbiosis Corporation.

a)

1) 2013(Profit margin)

Profit margin = Net income/Net sales x 100

= $85,000/$700,000 x 100

= 12.1 %

2014

Profit margin = Net income/Net sales x 100

= $110,000/$760000 x 100

= 14.4%

2)2013(asset turnover)

Asset turnover = $700000/$620000

= 1.1 times

2014

Asset turnover = $760000/$813000

 = 1 time

3)2013(Earning per share)

Earning per shares =

2014

Earning per share =

4)2013(Price earning ratio)

Price earning ratio =

2014

Price earning ratio =

5)2013(Payout ratio)

Payout ratio =

2014

Payout ratio =

6)2013(Debt to assets ratio)

Debt to assets ratio =

2014

Debt to assets ratio =

(b) Based on the ratios calculated, discuss briefly the improvement or lack thereof in the financial
position and operating results from 2013 to 2014 of Symbiosis Corporation.

Answer: overall, the company has improved when comparing years 2013 and 2014.

This increased the profit margin ratio by 2.3% (12.1 % in 2013 to 14.4% in 2014

Asset turnover changed by .1% . the company has been consistent in its use of assets to
generate sales.
5) Suppose selected financial data of Edgewater Company and The Ritter Company for 2014 are
presented here (in millions).

Edgewater Ritter

Income Statement Data for Year

Net sales $1,356.0 $1,436.5

Cost of goods sold 776.3 771.7

Selling and administrative expenses 380.6 605.5

Interest expense 0.1 0.1

Other income (expense) 9.0 .5

Income tax expense 63.6 19.7

Net income $ 144.4 $ 40.0

Balance Sheet Data (End of Year)

Current assets $ 885.7 $ 617.2

Noncurrent assets 280.8 219.1

Total assets $1,166.5 $ 836.3

Current liabilities $ 166.5 $ 218.0

Long-term debt 29.9 41.1

Total stockholders’ equity 970.1 577.2

Total liabilities and stockholders’ equity $1,166.5 $ 836.3

Beginning-of-Year Balances

Total assets $1,027.3 $860.4

Total stockholders’ equity 830.7 561.7

Current liabilities 187.9 285.6

Total liabilities 196.6 298.7

 Other Data

Average net accounts receivable $293.2 $196.1

Average inventory 239.1 194.3

Net cash provided by operating activities 124.5 38.6

Capital expenditures 34.3 30.5

Dividends 20.9 –0–

Instructions

(a) For each company, compute the following ratios.

(1) Current ratio. (8) Return on assets.

(2) Accounts receivable turnover (9) Return on common stockholders’ equity.

(3) Average collection period. (10) Debt to assets ratio.

(4) Inventory turnover. (11) Times interest earned.

(5) Days in inventory. (12) Current cash debt coverage.

(6) Profit margin. (13) Cash debt coverage.

(7) Asset turnover. (14) Free cash flow.

(b) Compare the liquidity, solvency, and profitability of the two companies.

a)

1) Current ratio =

Edgewater Current assets/Current liabilities

= $885.7/$166.5

= 5.3:1

Ritter = current assets/current liabilities

 = $617.2/$218.0

= 2.8:1

2) Accounts receivable turnover =

Edgewater = Net sales/Average net receivables

= $1356.0/293.2

= 4.6

Ritter = Net sales/Average net receivables

= $1436.5/$196.1

= 7.3

3) Average collection period =

Edgewater = 365/4.6

= 79.3

Ritter = 365/7.3

=50

4) Inventory turnover =

Edgewater = Cost of goods sold/Average inventory

= $776.3/$239.1

= 3.2

Ritter = Cost of goods sold/Average inventory

= $771.7/$194.3

= 3.9

5) Days in inventory =

Edgewater = 365/3.2

= 114.0
 Ritter = 365/3.9

= 93.5

6) Profit margin =

Edgewater = Net income/Net sales

= $144.4/$1356.0

= 0.10%

Ritter = Net income/Net sales

= $40.0/1436.5

= 0.02%

7) Asset turnover =

Edgewater = Net sales/(Total assets + total assets)/2

= $356.0/(1166.5 + 1027.3)/2

=$356.0/1096.9

= 1.2

Ritter = Net sales/(Total assets + Total assets)/2

= $1436.5/(836.3 + 860.4)/2

= $1436.5/848.35

= 1.69

8) Return on assets =

Edgewater = Net income/(Total assets + Total assets)/2

= $144.4/(166.5 + 1027.3)/2

= $144.4/596.9

= 0.24%

Ritter = Net income/(Total assets + Total assets)/2

 = $40.0/(836.3 + 860.4)/2

= $40.0/848.35

= 0.04%

9) Return on common stockholders equity =

Edgewater = Net income/(Total stockholders equity + Total stockholders equity)/2

= $144.4/(970.1 + 830.7)/2

= $144.4/900.4

= 0.16%

Ritter = Net income/(Total stockholder equity + Total stockholder equity)/2

= $40.0/(577.2 + 561.7)/2

= $40.0/569.45

= 0.07%

(b) Compare the liquidity, solvency, and profitability of the two companies.

Liquidity: Edgewater current ratio of 5.3:1 is significantly better than Ritter`s 2.8:1. However, Ritter has a
better inventory turnover ratio that Edgewater and its receivables turnover is substantially better than
Edgewater`s

Solvency: Ritter betters Edgewater in both of the solvency ratios. Thus, it is more solvent than
Edgewater.

Profitability: With the exception of asset turnover, Edgewater better Ritter in all of the profitability
ratios. Thus, it is more profitable than Ritter