Case Study

Comic book sales have hit record highs due to the volume of comic book-based movies achieving great success. With each new movie and character announcement, collectors and investors feed off the speculation. Many collectors send their books for grading, certification, and encapsulation to protect their investments. The Exceptional Service Grading Company provides those services and wants to expand to assessing other publication formats, such as certifying large magazines and movie posters.

What is the companys financial position? Please refer to the income statement and balance sheet for the Exceptional Service Grading Company available here. Using the learning resources provided in the Reading Assignment, perform a financial ratio analysis of the company using the following ratios:

• Gross profit margin
• Current ratio
• Debt ratio

Locate two other ratios to calculate. Define them and explain their purpose and how they add value to your analysis.

Select significant lines from the financial statements and provide an observation of their trends. For example, if the account is increasing or decreasing in value, what would that indicate?

• Draw some conclusions based on your observations. For example:
• Is there any viability for a new project?
• Why do you think the assets of the company went up from 2017 to 2018?
• What implications does this have?
• What follow-up questions do you have to ask the companys management?

Superior papers will:

• Provide correct values for calculations.
• Explain your approach to the problem.
• Support your approach with references, and execute your approach.
• Provide an answer to the case study questions with a recommendation.

Balance Sheet items 2018 2017 3 CURRENT ASSETS 4 Cash 5 Receivables 6 Inventory 7 Other assets 456,500 3,936,400 89,800 1,169,500 222,400 Cash increase - due to no dividends paid in 2018 3.320,000 100,200 934.300 9 Total current assets 5.652,200 4,576,900 Current ratio 2017: Current ratio 2018: 11 LONG TERM ASSETS 12 Note Receivable 13 Equipment (net of depreciation) 380,600 975,000 280,700 Some additional debt acquired in 2018 1,017,800 15 Total long term assets 1,355,600 1,298,500 7,007,800 5,875,400 17 TOTAL ASSETS 18 LLABILITIES AND 19 STOCKHOLDERS' EQUITY Debt ratio 2017: Debt ratio 2018: 21 CURRENT LIABILITIES 22 Accounts payable 23 Note payable (current maturities) 24 Other accrued liabilities 25 26 Total current liabilities 2,783,100 277,550 265,300 2,805,700 272,550 214,600 3,325,950 3.292.850 29 LONG TERM LIABILITIES 30 Notes payable (long term) 31 Long term accrued liabilities 454,800 389,550 454,800 320.250 33 Total long term liabilities 844,350 775,050 4,170,300 4,067,900 35 TOTAL LIABILITIES 36 38 STOCKHOLDERS' EQUITY 39 Common stock 40 Retained Earnings 41 Total stockholders' equity 450,000 2,387,500 2,837,500 450,000 1,357,500 1,807,500 42 TOTAL LIABILITIES AND 43 STOCKHOLDERS EQUITY 7,007,800 5,875,400 C - B 2018 D 2017 Income Statement items Answers/Comments 3 Service Contract Revenues 9,200,000 6,595,400 Increase in contracts 5 Service Contract Costs -6,503,100 -4,957,800 7 Gross Profit 2,696,900 1,637,600 Gross profit margin 2017: Gross profit margin 2018: -756,000 -896,000 9 General and Administrative Expenses 10 11 Operating Income 12 13 Gain on sale of equipment 1,800,900 881,600 Increase in profit - see above comment 59,900 7,700 15 Interest expense -69,500 -70,800 16 -9,600 -63,100 17 Other expense 18 19 Income before taxes 20 21 Taxes 1,781,700 755,400 -451,700 -300,900 22 23 Net Income 1,330,000 454,500 Increase in net income from 2017-2018 26 1,053,000 1,507,500 -150,000 No dividend paid in 2018 25 Retained Earnings, Beginning Balance 1,057,500 2,387,500 27 Less: Dividends paid 28 29 Retained Earnings, Ending Balance 2,387,500 30 Balance Sheet Income Statement 1,357,500