Two New Pharmacy Owners Learn Valuable Lessons About Financial Statements and Analysis It has been a little more than two years since Angela Crawford and Martin Rodriguez purchased the Bluffton Pharmacy from Frank White, the previous owner and founder, who had started the pharmacy in 1969. The two have spent many long hours in the store and have 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. Crawford and Rodriguez just received an e-mail from their accountant that contained the balance sheet and the income statement for Bluffton Pharmacy for the fiscal year that has just ended. The two financial statements appear below: Bluffton Pharmacy Balance Sheet, December 31, 20XX Assets Current Assets Cash $ 74,473 Accounts Receivable $112,730 Inventory $224,870 $ 21,577 $ 10,202 Supplies Other Assets Total Current Assets $443,851 Fixed Assets $ 33,156 $ 35,706 $ 16,323 $ 85,185 Autos, net Equipment, net Furniture and Fixtures, net Total Fixed Assets Total Assets $529,036 Liabilities Current Liabilities $ 29,585 $ 70,902 $ 32,136 Accounts Payable Notes Payable Line of Credit Payable Total Current Liabilities $132,623 Long-term Liabilities Note Payable $170,880 $ 93,346 Loan Total Long-term Liabilities $264,226 Owner's Equity Crawford and Rodriguez, Capital $132,187 Total Liabilities and Owner's Equity $529,036 Bluffton Pharmacy Income Statement December 31, 20XX Prescription Sales Revenue $2,228,767 All Other Sales Revenue $ 167,757 Total Sales $2,396,524 Cost of Goods Sold Beginning Inventory, 1/1/xx $ 169,578 + Purchases $1,938,097 Goods Available for Sale $2,107,675 - Ending Inventory, 12/31/xx $ 224,870 Cost of Goods Sold $1,882,805 Gross Profit $ 513,719 Operating Expenses Utilities 2$ 10,305 Rent $ 35,948 Advertising 9,586 Insurance 2$ 9,586 Depreciation %24 5,033 Salaries and Benefits $ 321,134 Computer and E-commerce 2$ 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 Miscellaneous Expense 374 Total Other Expenses $25,253 Total Expenses $ 471,965 Net Income $ 41,754 To see how their pharmacy's financial position has changed since their first full year of operation, Crawford and Rodriguez want to calculate 12 financial ratios. They also want to compare Bluffton| Pharmacy's ratios to those of the typical small pharmacy in the industry. The table below shows the value of each of the twelve ratios from last year and the industry median for small pharmacies. Ratio Comparison Bluffton Pharmacy Pharmacy Industry Median* Ratio Current Year Last Year 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 2.1 Times Interest earned ratio 3.04 3.9 Operating Ratios 11.7 times/year Average Inventory Turnover ratio Average Collection Period ratio 10.90 14.0 15.0 days Average Payable Period ratio 5.0 14.0 days Net Sales to Total Assets ratio 4.75 4.68 Profitability Ratios Net Profit on Sales ratio 1.94% 2.9% Net Profit to Assets ratio 9.20% 8.2% Net Profit to Equity ratio *from Risk Management Association Annual Statement Studies and National Community Pharmacists Association 29.21% 48.0% Creating a Successful Financial Plan 1. Calculate the 12 ratios for Bluffton Pharmacy for this year. Liquidity Ratios Current Ratio: Quick Ratio: Leverage Ratios Debt Ratio: Debt-to-Net Worth Ratio: Times Interest Earmed Ratio: Operating Ratios Average Inventory Turnover Ratio: Average Collection Period Ratio: Average Payable Period Ratio: Net Sales to Total Assets Ratio: Profitability Ratios Net Profit on Sales Ratio: Net Profit to Assets Ratio: Net Profit to Equity Ratio: 2. How do the ratios you calculated for this year compare to those for the pharmacy last year? What factors are most likely to account for these changes? Do you spot any areas that could cause the company problems in the future? Explain. 3. Develop a set of specific recommendations for improving the financial performance of Bluffton Pharmacy, using the ratio analysis you conducted.