Abington-Hill Toys, Inc. On December 2, 1991, Vernon Albright assumed the position of president of the Abington-Hill Toy Company (A-H), following the death of Lewis Hill, the last of the original founders of the firm. Neither Abington nor Hill had a son or daughter who was interested in taking over the firm's management. The financial condition of the firm had deteriorated during the final years of Hill's control; however, the firm's owners' felt that the company's prospects were good if a capable manager could be found to take over the leadership A key concern of the owners was the lack of fi- nancial planning and general crisis-to-crisis pattern that had characterized the firm's operation in recent years. It was decided to seek a manager from outside the firm who, in the owners' opinion, could reshape the company into the prosperous concern it once had been Advertisements placed in a number of trade journals provided the owners with a list of six individuals who were willing and apparently capable of rebuilding A-H After extensive correspondence and several personal interviews with each of the applicants, Vernon Albright was chosen to head the firm. One of the first actions of the new president was to hire a company comptroller." David Hartly, an assistant comptroller of a major electric ap- pliance manufacturing firm, was hired and took over his duties on Decem- ber 28, 1991 Hartly had been with the appliance company since receiving his MBA in 1977 and had moved up in the comptroller's office to the po- sition of assistant to the comptroller in charge of general accounts and bud- geting. His experience in budgetary procedures was viewed with particular favor by Albright in light of A-H's recent financial problem Hartly's first task was to undertake a complete analysis of the firm's financial condition Specifically, Albright had requested a statement of the firm's condition, including an enumeration of specific strengths and weak nesses. He also requested a brief statement of a feasible solution to the firm's most pressing problems. David Hartly, comptroller of A-H, completed the financial analysis of the firm and, based upon his findings, suggested the following course of ac- tion: 1 Seek a long-term loan to raise the firm's long-term debt to a level of $386,000 2 Take steps to make the following ratios conform to industry averages: a Average collection period b Inventory turnover 3 Reduce short-term notes payable, 4 Sell plant and equipment with an original cost of $140,000 and accumulated depreciation of $65,000 for its book value of $75,000 In his final report to the president, Hartly wanted to show the effect of the successful implementation of his plan on the financial condition of the firm. "The firm is closely held, with 85 percent of the stock held by the combined Abing- ton and Hill families The remaining minority interest is primarily held by company em- ployees who acquired it through the company stock option plan "In the past, Hill had handled most of the comptroller functions with the assistance of the firm's chief accountant, Jerald Cohen, who had been with the firm for the 28 years of its existence and planned to retire within the year He agreed to remain with the firm, at the request of the owners, until the new president could be selected and the company was on its feet However, Cohen was in poor health and would probably be forced to retire within the yearEXHIBIT 1 Abington-Hill Toys, Inc. Comparative Balance Sheets December 31, 1990-1991 December 31, December 31, 1990 1991 Assets Cash 50,000 $ 10,000 Accounts receivable 100,000 120,000 Inventory 150,000 150,000 Total current assets 300,000 280,000 Plant and equipment 1,200,000 1,480,000 Less: Allowance for depreciation (500,000) (560,000) Total fixed assets 700,000 20,000 Total assets 1,000,000 1,200,000 Liabilities and Net Worth Accounts payable 40,000 $ 42,000 Short-term notes 50,000 224,000 Accrued expenses 20,000 24,000 Total current liabilities 110,000 $ 290,000 Long-term debt 200,000 200,000 Common stock, $10 par 200,000 200,000 Capital surplus 490,000 510,000 Total liabilities and net worth 1,000,000 1,200,000 Income Statement for Year Ended December 31, 1991 Actual 1991 Sales $ 1,200,000* Cost of goods sold 900,000 Gross profit $ 300,000 Operating expenses Variable cash operating expense 84,000 Fixed cash operating expense 30,000 Depreciation 60,000 Total operating expenses 174,000 Net income before interest and taxes 126,000 Interest 39,600 Net income before taxes 86,400 Taxes (@ 30% 25,920 Net income 60,480 *Includes 60 percent credit salesEXHIBIT 2- Abington-Hill Toys, Inc. Standard Industry Ratios Ratio Industry* Current ratio 3.50X Acid-test ratio 1,50X Average collection period 60.0 days Inventory turnover (COGS to ending inventory) 5.00X Fixed asset turnover 1,43X Total asset turnover 1 00X Debt ratio (total debt to total assets) 45 0% Times interest earned (overall interest coverage) 4.10X Gross profit margin 25,0% Net profit margin 8,0% Return on total assets 8,0% Return on net worth 14.55% *All ratios based on year-end (rather than average) figures and on 360 (rather than 365) days in a yearPlease answer all questions. Please read the questions carefully and identify what is required of you. Please show ALL your work. \"Correct\" answers without accompanying calculations will not get any credit. 1. Please calculate, for Abbington-Hill Toys, all the ratios for 1990 and 1991, as shown for the industry in Exhibit 2. Categorize the ratios under Profitability, Activity, Asset Management, Debt Management and Liquidity. 2. Please comment on Abbington-Toys current financial condition on Dec 31, 1991 under each of the four categories in Exhibit 1. 3. Based on your analysis, which areas ofthe firm's operation are in the greatest need of immediate attention. Use the DuPont formulation to amplify your answer. 4. Prepare a proforma income statement and balance sheet on Dec 31, 1992, further assuming (i) Sales increase by 10% in 1992. Proportion of credit sales remain the same as in 1991. (ii) Cost ofGoods are variable expenses varying with sales. (iii) In 1992, there is no change in fixed expenses from that in 1991. (iv) No new xed assets are acquired in 1992. Depreciation for 1992 is $55,000. (v) Plant and equipment with an original cost of $140,000 and accumulated depreciation of 565000 is sold for book value of 575000, as suggested by Hartley. (vi) Interest expense for 1992 is $40,000, on long-term debt of $386,000 as suggested by Hartley. {vii} The Dividend Payout Ration for 1991 is maintained in 1992. If the projected Assets exceed the projected liabilities plus owner's equity, use Notes Payable as the balancing gure. If projected Liabilities plus Owner's equity exceed projected Assets, use Cash as the balancing figure. Please provide explanations for each projected item in 1992, to get credit. 5. Calculate relevant ratios on Dec 31, 1992 and evaluate the financial position of the firm after implementation of Hartley's plan