INTEGRATED CASE

D'LEON INC, PART II

$4-26$ FINANCIAL STATEMENTS AND TAXES Part I of this case, presented in Chapter $3,$ discussed the situation of D'Leon Inc., a regional snack foods producer, after an expansion program. D'Leon had increased plant capacity and undertaken a major marketing campaign in an attempt to $"$go national." Thus far, sales have not been up to the forecasted level, costs have been higher than were projected, and a large loss occurred in $2018$ rather than the expected profit. As a result, its managers, directors, and investors are concerned about the firm's survival.

Donna Jamison was brought in as assistant to Fred Campo, D'Leon's chairman, who had the task of getting the company back into a sound financial position. D'Leon's $2017$ and $2018$ balance sheets and income statements, together with projections for $2019,$ are given in Tables IC $4\mathrm{.}1$ and IC $4\mathrm{.}2.$ In addition, Table IC $4\mathrm{.}3$ gives the company's $2017$ and $2018$ financial ratios, together with industry average data. The $2019$ projected financial statement data represent Jamison's and Campo's best guess for $2019$ results, assuming that some new financing is arranged to get the company "over the hump."

Jamison examined monthly data for $2018($not given in the case$),$ and she detected an improving pattern during the year. Monthly sales were rising, costs were falling, and large losses in the early months had turned to a small profit by December. Thus, the annual data look somewhat worse than final monthly data. Also, it appears to be taking longer for the advertising program to get the message out, for the new sales offices to generate sales, and for the new manufacturing facilities to operate efficiently. In other words, the lags between spending money and deriving benefits were longer than D'Leon's managers had anticipated. For these reasons, Jamison and Campo see hope for the company$-$provided it can survive in the short run.

Jamison must prepare an analysis of where the company is now, what it must do to regain its financial health, and what actions should be taken. Your assignment is to help her answer the following questions. Provide clear explanations, not yes or no answers.

a$.$ Why are ratios useful? What are the five major categories of ratios?

b$.$ Calculate D'Leon's $2019$ current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company's liquidity positions in $2017,$ in $2018,$ and as projected for $2019?$ We often think of ratios as being useful $(1)$ to managers to help run the business, $(2)$ to bankers for credit analysis, and $(3)$ to stockholders for stock valuation. Would these different types of analysts have an equal interest in the company's liquidity ratios? Explain your answer.

TABLE IC $4\mathrm{.}2$

Income Statements

Note: $E$ indicates estimated. The $2019$ data are forecasts.

'The firm had sufficient taxable income in $2016$ and $2017$ to obtain its full tax refund in $2018.$

Ratio Analysis

$\backslash$table$[[,2019$E$,2017,$Industry Average$],[$Current$,1\mathrm{.}2,2\mathrm{.}3x,2\mathrm{.}7x$ Do Questions a through h