Chapter 5: Evaluating Opstad Finch Performance 191 MINICASE Scandi Home Furnishings, Inc. Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2013. Sales during the first full year (2014) of operation reached $1.3 million Sales increased by 15 percent in 2015 and another 20 percent in 2016. However, after increasing in 2015 over 2014, profits fell sharply in 2016, causing Kaj to wonder what was happening to his "pride-and- joy" business venture. After all, kaj worked as closely as possible to a 24/7 pace, beginning with the startup of Scandi and continuing through the first three full years of operation Scandi Home Furnishings, located in eastern North Carolina, designs, manufactures, and sells Scandinavian-designed furniture and accessories to home furnishings retailers. The modern Scandinavian design has a streamlined and unclut- tered look. While this furniture style is primarily associated with Denmark, both Norwegian and Swedish designers have contributed to the allure of Scandinavian home furnishings. Some say that the inspiration for the Scandinavian design can be traced to the elegant curves of art nouveau from which designers were able to produce aesthetically pleasing structurally strong modern furniture. Danish furnishings and the home furnishings produced by other Scandinavian countries-Sweden, Norway, and Finland are made using wood (primarily ook, maple, and ashl, aluminum, steel and high-grade plastics. Kaj grew up in Copenhagen, Denmark, and received an undergraduate degree from a technical university in Sweden As is typical in Europe. Kaj began his business career as an apprentice at a major home furnishings manufacturer in Copenhagen. After learning the trade, he quickly moved into a management position in the firm. However, after a few years, kaj realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business. At the same time, after travelling throughout the world, he was sure that he wanted to be an entrepreneur in the United States. Kaj moved to the United States in early 2013. With $140,000 of his personal assets and $210,000 from venture investors, he began operations in mid-2013. Kaj, with a 40 percent ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Scandi. Four years later, Kaj is sure he did the right thing Following are the three years of income statements and balance sheets for Scandi Home Furnishings. Kaj felt that he would need to continue to expand sales to maintain a competitive advantage. After first concentrating on selling Scandinavian home furnishings in the Northeast in 2014 and 2015, he decided to enter the West Coast market. An in- crease in expenses occurred associated with identifying contacting, and selling to home furnishings retailers in California, Oregon, and Washington. Kaj Rasmussen hopes that you can help him better understand what has been happening to Scandi Home Furnishings from both operating and financial standpoints. 2016 $19000 SCANDI HOME FURNISHINGS, INC. INCOME STATEMENTS 2014 2015 Net sales $13000 $1.500.000 Cost of goods sold 900.000 Gross profit 520.000 800,000 Marketing 130.000 150,000 150 g General and administrative 150.000 Depreciation 40.000 53000 EBIT 200 000 247 000 45.000 57,000 Earnings before tres 190.000 78.00 Income $ 114.000 Net income 74000 Cash Dividends 540 000 200.000 200.000 0000 30 000 20.000 10.000 continued on next page) penting the Venture 2016 000 Scandi Home Furnishings, Inc. (Continued) SCANDI HOME FURNISHINGS, INC. BALANCE SHEETS 2014 2015 $ 500 $ .000 Accounts receivable 200.000 200.000 Inventories 450.000 500.000 Total current assets BACO 300 000 400.000 Total assets $1,000 000 $1.200.000 700.000 360,000 800.000 9700 500.000 $1,470,000 $180.000 30.000 184,000 Accounts payable Acous Bank loan Total current liabilities Long debt Common stock Retained earnings Total ties and equity $ 130.000 50.000 30 000 22000 300 250 000 80,000 $1.000 $120.000 70.000 90.000 300.000 200.000 350.000 120.000 4000 550 000 350.000 128.000 100 000 *350.000 shares of common stock were issued to Kaj Rasmussen and the venture investors when Scand Home Furnishings was incorporated in mid-2013 Part A Your first challenge is to advise kaj on what has been happening with Scandi Home Furnishings from a liquidity perspective A kaj was particularly concerned by the drop in cash from $50,000 in 2014 to $10,000 in 2016. Calculate the average current ratio, the quick ratio, and the NWC-to-total-assets ratio for 2014-2015 and 2015-2016. What has happened to Scandi's liquidity position? B. Kaj should be interested in knowing whether Scandi has been building or burning cash. Compare the cash build cash burn, and the net cash build/burn positions for 2015 and 2016. What, if any, changes have occurred? Part B Your second challenge is to advise kaj on what has been happening to Scandi from a financial leverage profitability, and efficiency perspective c reditors as well as management are also concerned about the ability of the venture to meet is dat obligations as they come due, the proportion of current liabilities to total debt, the availability of assets to meet debt obligations in the event of financial distress, and the relative size of equity investments to debt levels Calculate average ratios in each of these areas for the 2014-2015 and 2015-2016 periods. Interpret your results and explain what has happened to Scandi. D. Of importance to kaj and the venture investors is the efficiency of the operations of the venture. Several profit margin ratios relating to the income statement are available to help analyze Scandi's performance Calculate average profit is for 2014-2015 and 2015-2016 and describe what is hacering to the profitability of Sand Home Furnishings Kai and the venture investors are also interested in how efficiently Scandi is able to comert its pulty investment as the venture's total assets, into sales Calculate several ratios that combine data from the come statements halance sheets and compare what has happened between the 2014-2015 and 2015-2016 pri A model consisting of the product of two fotos provides an overview of a venture's efficiency and liability the same time. An HOE model consists of the product of three ratios and simultaneously shows an overview of a e efficiency, profitability, and leverage performance Calculate HOA and ROE model for the 2014-2015 and 2015-2016 periods Provide an interpretation of your findings