a. Calculate Cary?s 2013 forecasted ratios, compare them with the industry average data, and comment briefly on Cary?s projected strengths and weaknesses.
Chapter 2 Spreadsheet-Related ProblemFinancial Statement Analysis The problem requires you to use File C02 on the computer problem spreadsheet. Cary Corporation's forecasted 2013 financial statements follow, along with industry average ratios. a. Calculate Cary's 2013 forecasted ratios, compare them with the industry average data, and comment briefly on Cary's projected strengths and weaknesses. b. What do you think would happen to Cary's ratios if the company initiated cost-cutting sh is ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m measures that allowed it to hold lower levels of inventory and substantially decrease the cost of goods sold? To answer this question, suppose inventories drop to $700,000 and the inventory turnover remains the same as when inventories were $894,000. Cary Corporation: Forecasted Balance Sheet as of December 31, 2013 Cash $ 72,000 Accounts and notes payable $ 432,000 Accounts receivable 439,000 Accruals Inventories 894,000 Total current liabilities Total current assets 170,000 $ 602,000 $1,405,000 Long-term debt 404,290 Land and building 238,000 Common stock 575,000 Machinery 132,000 Retained earnings 254,710 Th Other fixed assets Total assets 61,000 $1,836,000 Total liabilities and equity $1,836,000 Cary Corporation: Forecasted Income Statement for 2013 Sales $4,290,000 Cost of goods sold (3,580,000) Gross operating profit $ 710,000 General administrative and selling expenses ( 236,320) https://www.coursehero.com/file/10588151/Chpt02SpreadsheetProblem/ Depreciation ( 159,000) Miscellaneous ( 134,000) Earnings before taxes (EBT) $ 180,680 Taxes (40%) ( Net income $ 108,408 Number of shares outstanding 72,272) 23,000 sh is ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m Per-Share Data EPS $ 4.71 Cash dividends per share $ 0.95 P/E ratio Market price (average) 5.0 $23.57 Industry Financial Ratios (2013)a Quick ratio Current ratio Inventory turnoverb Days sales outstanding 1.0 2.7 5.8 32 days 13.0 Total assets turnoverb 2.6 Return on assets 9.1% Return on equity 18.2% Debt ratio 50.0% Th Fixed assets turnoverb Profit margin on sales 3.5% P/E ratio 6.0 https://www.coursehero.com/file/10588151/Chpt02SpreadsheetProblem/ a Industry average ratios have been constant for the past four years. b Based on year-end balance sheet figures. c. Suppose Cary Corporation is considering installing a new computer system that would provide tighter control of inventories, accounts receivable, and accounts payable. If the new system is installed, the following data are projected (rather than the data given earlier) for the indicated balance sheet and income statement accounts: $ 395,000 sh is ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m Accounts receivable Inventories $ 700,000 Other fixed assets $ 150,000 Accounts and notes payable $ 275,000 Accruals $ 120,000 Cost of goods sold Administrative and selling expenses P/E ratio $3,450,000 $ 248,775 6.0 How do these changes affect the projected ratios and the comparison with the industry averages? (Note that any changes to the income statement will change the amount of retained earnings; therefore, the model is set up to calculate 2013 retained earnings as 2012 retained Th earnings plus net income minus dividends paid. The model also adjusts the cash balance so that the balance sheet balances.) d. If the new computer system were even more efficient than Cary's management had estimated and thus caused the cost of goods sold to decrease by $125,000 from the projections in part (c), what effect would it have on the company's financial position? e. If the new computer system were less efficient than Cary's management had estimated and https://www.coursehero.com/file/10588151/Chpt02SpreadsheetProblem/ caused the cost of goods sold to increase by $125,000 from the projections in part (a), what effect would it have on the company's financial position? f. Change, one by one, the other items in part (c) to see how each change affects the ratio analysis. Then think about and write a paragraph describing how computer models such as this one can be used to help make better decisions about the purchase of such items as a new Th sh is ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m computer system. https://www.coursehero.com/file/10588151/Chpt02SpreadsheetProblem/ Powered by TCPDF (www.tcpdf.org)
