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ABC Pharmacy - What can two new pharmacy owners learn about their business from its financial statements? It has been a little more than two

ABC Pharmacy - What can two new pharmacy owners learn about their business from its financial statements?

It has been a little more than two years since Angela Ramirez and Martin Bull purchased the ABC Pharmacy from Frank Strand, the previous owner and founder, who started the pharmacy in 1963. The two had spent many long hours in the store and had learned many valuable lessons as business owners that they had not had the opportunity to learn as employees of large chain pharmacies where they had previously worked.

Ramirez and Bull just received an e-mail from their accountant that contained the balance sheet and the in the income statement for ABC Pharmacy for the fiscal year that had just ended. The financial statements appear below.

Assets

Current Assets

Cash

$74,473

Accounts receivable

$112,730

Inventory

$224,870

Supplies

$21,577

Other assets

$10,202

Total Current Assets

$443,852

Fixed Assets

Autos, net

$33,156

Equipment, net

$35,706

Furniture and fixtures, net

$16,323

Total Fixed Assets

$85,185

Total Assets

$529,037

Liabilities

Current Liabilities

Accounts payable

$29,585

Notes payable

$70,902

Line of credit payable

$32,136

Total current liabilities

$132,623

Long-Term Liabilities

Note payable

$170,880

Loan

$93,346

Total long-term liabiities

$264,226

Owner's Equity

Ramirez and Bull, capital

$132,187

Total liabilities and owner's equity

$529,036

Income Statement December 31, 2013

Sales Revenue

Prescription sales revenue

$2,228,767

All other sales revenue

$167,757

Total Sales

$2,396,524

Cost of Goods Sold

Beg. Inventory, 1/1/2013

$169,578

Purchases

$1,938,097

Goods available for sale

$2,107,675

Ending Inventory, 12/31/2013

$224,870

Cost of Goods sold

$1,882,805

Gross profit

$513,719

Operating Expenses

Utilites

$10,305

Rent

$35,948

Advertising

$9,586

Insurance

$9,586

Depreciation

$5,033

Salaries and benefits

$321,134

Computer and e-commerce

$11,983

Repairs and maintenance

$28,758

Travel

$4,793

Professional fees

$3,595

Supplies

$5,991

Total operating expenses

$446,712

Other Expenses

Interest Expense

$24,879

Misc. expenses

$374

Total other expenses

$25,253

Total expenses

$471,965

Net Income

$41,754

To see how their pharmacys financial position has changed since their first full year of operation, they want to calculate 12 financial ratios. They also want to compare ABC Pharmacys ratios to those of the typical small pharmacy in the industry. The table below shows the value of each of the 12 ratios from last year and the industry median for small pharmacies.

Ratio Comparison

ABC Pharmacy

Industry Median

2013

2012

Liquidity Ratios

Current Ratio

3.41

4.71

Quick Ratio

1.72

2.42

Leverage Ratios

Debt Ratio

0.70

0.62

Debt to net worth ratio

2.23

2.10

Times interest earned ratio

3.04

3.90

Operting Ratios

Average inventory turnover ratio

10.90

11.70

Average collection period ratio

14.00

15.00

Average payable period ratio

5.00

14.00

Net sales to total assets ratio

4.75

4.68

Profitability Ratios

Net profit to sales ratio

1.94%

2.90%

Net profit to assets ratio

9.20%

8.20%

Net profit to equity ratio

29.21%

48.00%

Questions:

Calculate the 12 ratios for the ABC Pharmacy for 2013.

How do the ratios you calculated for 2013 compare to those for the pharmacy in 2012? What factors are most likely to account for those changes?

How do the ratios you calculated for 2013 compare to those of the typical company in the industry? Do you spot any areas that could cause the company problems in the future? Explain.

Develop a set of specific recommendations for improving the financial performance of ABC Pharmacy using the analysis you conducted in questions 1 3.

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