Question
Please see attached spreadsheet 1 attached The cash flow statement indicates that the company has repaid long-term debt of about $8.6 million, $5.6 million, and
Please see attached spreadsheet 1 attached
The cash flow statement indicates that the company has repaid long-term debt of about $8.6 million, $5.6 million, and $8.3 million during Year 1, Year 2, and Year 3, respectively. The balance sheet indicates that the book value of the company's finished goods inventory decreased by about 8% from Year 2 to Year 3. In March Year 3, the contents of one of the company's finished goods warehouses were damaged by exposure to smoke from a fire adjacent to the warehouse. The company has received insurance proceeds equal to the wholesale value of the destroyed inventory. Accordingly, a gain of approximately $1,412,000 on the insurance settlement is included in the Year 3 consolidated statements of earnings in the component labeled Other operating income, net. On January 27, Year 3, the company entered into an agreement in principle whereby Peridot Associates Inc. (Peridot), would acquire all outstanding shares of the company's common stock at a per share price of $18.25, subject to certain contingencies. The agreement expired on May 16, Year 3. Under the agreement, the company was obligated to reimburse Peridot $800,000 for certain expenses incurred by Peridot. Additionally, the company incurred other expenses of approximately $305,000 related to the proposed acquisition. These combined expenses are included in the Year 3 consolidated statements of earnings as the component labeled Other operating income, net.
Question: Identify and explain the sources of the change in Baldwin's profitability from Year 2 to Year 3 with a view to evaluating its current earnings quality and future prospects. To what extent can this change be attributed to changes in the management's estimates? (Hint: Preparing a common-size income statement and/or year-to-year percentage change analysis of income statement items will help you formulate your response.)
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