You have been hired by ABC Co. to assess their current financial situation and offer suggestions for potential expansion. ABC has been in business for 6 years and has grown from a sole proprietor to its current status. The business is in a growing industry and sells accessories for technology items. Sales have been steadily growing and this is something that Jane, the owner, is very happy about.

Jane’s area of expertise is marketing and operations and she hired you to get an outsiders perspective on the current position of her business and to see if her young employees have been keeping the books accurately, as well as guiding her appropriately from a financial perspective. She does have long range plans for the business and part of her plan requires external financing. As part of her plan, she is thinking about expansion.

In your meeting with her, she starts throwing out names and numbers of accounts and hands you several documents. You collect the notes and jot down all the information she is verbally telling you, so as not to miss any important facts. You know the first step you will take is to prepare financial statements in order to establish her current situation. But to give her advice for the future of her business, you know an analysis of the statements will also be required.

Janes emphasizes that all the information you are about to receive is for the most recent fiscal year which ended on December 31^st. She tells you taxes were 27% of pre-tax profit of which $9,000 is still owed. She explains there is $102,000 in common stock and she recently paid a dividend of $8,350. She tells you she has a mortgage loan with the long term portion outstanding of $142,800. The current portion for this period was $14,600.

She provides you with a document that lists beginning of the year inventory at $66,780. The document also details several expenses that were incurred throughout the year including utilities at $5,440, depreciation on building and equipment of $18,600, advertising of $14,200, and interest expense of $3,100. The business currently holds $49,000 in other investments that may be sold or turned into depreciable assets in the future.

Jane has a smile when she informs you that sales have grown over 12% from the previous year and she expects similar growth for the following year. Her current year sales are $958,337. Of course her purchases are a major expense for her business and she spent $833,900 to support her encouraging sales figures and $146,300 of this amount is still owed to her suppliers. The owner lets you know that she also has a notes payable of $48,000.

Jane provides you will copies of documents showing that she paid $369,400 for her property. You see that the land was listed at $109,300, and the building and equipment was listed at $232,600 on the document.

The owner states that she does allow some of her business customers to get items on credit, causing current, end of year accounts receivables of $64,200.

She lets you know during the course of your meeting that her business had a gross profit of $256,660, salary expense of $125,970 and other operating expenses of $5,550. At the beginning of the current year, accumulated depreciation on the building and equipment was $104,100.

Lastly, she shows you the previous retained earnings statement and you see her business has previously retained $61,000 of past earnings to help fund the business.

With all the information presented, she requests you create independent financial statements so she can compare them to the information her current employees have provided. Below are the details she is requesting.

CASE ANALYSIS

1. In an Excel spreadsheet, prepare the financial statements. Create an income statement, statement of retained earnings and balance sheet. Be sure to use your own formulas whenever there is a calculation. Do your own work. Show each financial statement in a separate sheet within your Excel spreadsheet. Be sure to clearly identify (rename) each sheet so the sheet corresponds to the statements.

2. Determine how much cash the company has on hand.

3. Perform ratio analysis on ABC Company. Calculate current ratio, quick ratio, debt ratio, debt to net worth ratio, times interest earned, average inventory turnover ratio, average age of inventory, receivables turnover ratio, average collection period ratio, payables turnover ratio, average payable period ratio, total asset turnover ratio, gross profit on sales ratio, operating profit on sales ratio, net profit on sales ratio, net profit to assets ratio and net profit to equity ratio.

Be sure to review previous lesson (lesson 4) for content on how to calculate ratios.

4. ABC is considering building another storeroom and needs $1 million in external financing. List in detail 3 likely sources of debt and 3 likely sources of equity (justify why these would be likely for Jane's particular situation).

5. After considering these sources, what would be your recommendation in terms of how the business should fund the new storeroom? You must justify your answers and be as quantitative as possible.