Finance Resit – Campers, Inc., manufactures camping

Finance Resit

The Course Assessment (100% weight) evaluates your knowledge of Basic Accounting Equation, understanding of Liquidity, Profitability, Solvency and other performance ratios. Working Capital and Cash Flow knowledge will be assessed as well.

I have prepared 3 exercises for you to review, compute, resolve and interpret (with a submission date by September 9th):

Remember the focus will be on the computations and the interpretations made on the outcome. Less important is the solution.

1. Common Size and Trend Analysis:   

Campers, Inc., manufactures camping equipment. Shown below for the current year are the income statement for the company and a common size summary for the industry in which the company operates. (Notice that the percentages in the right-hand column are not for Campers, Inc., but are average percentages for the industry.)

 

Instructions:

a) Prepare a two-column common size income statement. The first column should show for Campers, Inc., all items expressed as a percentage of net sales. The second column should show the equivalent industry average for the data given in the problem. The purpose of this common size statement is to compare the operating results of Campers, Inc., with the average for the industry.

b) Comment specifically on differences between Campers, Inc., and the industry average with respect to gross profit on sales, selling expenses, general and administrative expenses, operating income, net income, and return on assets. Suggest possible reasons for the more important disparities.

Compute trend percentages for the following items taken from the financial statements of Lopez Plumbing over a five-year period. Treat 2007 as the base year. State whether the trends are favorable or unfavorable. (Dollar amounts are stated in thousands.) 

  

 

2. Financial Ratios Analysis 

Shown below is selected information from the financial statements of Drowning, Inc., a retail furniture store.

 

 

Instructions

a) Explain how the interest expense shown in the income statement could be $84,000, when the interest payment appearing in the statement of cash flows is only $79,000.

b) Compute the following (round to one decimal place):

i. Current ratio

ii. Quick ratio

iii. Working capital

iv. Debt ratio

c) Comment on these measurements and evaluate Drowning, Inc.’s short-term debt-paying ability.

d) Compute the following ratios (assume that the year-end amounts of total assets and total stockholders’ equity also represent the average amounts throughout the year):

i. Return on assets

ii. Return on equity

e) Comment on the company’s performance under these measurements. Explain why the return on assets and return on equity are so different.

f) Discuss (1) the apparent safety of long-term creditors’ claims and (2) the prospects for Drowning, Inc. continuing its dividend payments at the present level.

 

3. Cash Flow   An analysis of the income statement and the balance sheet accounts of Tediore, Inc., on December 31, 2011, provides the following information: 

Additional Information

· Except as noted in 4 below, payments and proceeds relating to investing transactions were made in cash.

· Marketable securities are not cash equivalents.

· All notes receivable relate to cash loans made to borrowers, not to receivables from customers.

· Purchases of new equipment during the year ($196,000) were financed by paying $60,000 in cash and issuing a long-term note payable for $136,000.

· Debits to the accumulated depreciation accounts are made whenever depreciable plant assets are retired. Thus, the book value of plant assets retired during the year was $45,000 ($120,000 – $75,000).

 

Instructions

a) Prepare the investing activities section of a statement of cash flows. Show supporting computations for the amounts of (1) proceeds from sales of marketable securities and (2) proceeds from sales of plant assets. Place brackets around numbers representing cash outflows.

b) Prepare the supporting schedule that should accompany the statement of cash flows in order to disclose the noncash aspects of the company’s investing and financing activities.

c) Assume that Tediore’s management expects approximately the same amount of cash to be used for investing activities next year. In general terms, explain how the company might generate cash for this purpose.

Formalities:

· Wordcount: Your answers to the different cases should add up to a total of 1000 words. About less than half for the midterm assignment (Microeconomics) and slightly over half for the final assignment (Macroeconomics).

· Cover, Table of Contents, References and Appendix are excluded from the total wordcount.

· Font: Arial 12,5 pts.

· Text alignment: Justified.

· The in-text References and the Bibliography must be in Harvard’s citation style.

 

It assesses the following learning outcomes: 

· Distinguish and apply concepts like liquidity, profitability, leverage, and solvency. 

· Explain the Cash Flow Structure and compute its 3 sections.

· Analyze and understand valuation of the firm and critically decide the best alternative to fund the corporation. 

Explanation & Answer

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