Question B, C and E

MINICASE Scandi Home Furnishings, Inc. Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2010. Sales during the first full year (2011) of operation reached $1.3 million Sales increased by 15 percent in 2012 and another 20 percent in 2013. However, after increasing in 2012 over 2011, profits fall sharply in 2013, 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 Scani 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 fumishings retailers. The modern Scandinavian design has a streamiined and uncut- tered look. While this furniture style is primarily associated with Denmark, both Norwegian and Swedish designers have contributed to the allure of Scandinavian home tumishings. 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 fumishings and the home furnishings produced by the other Scandinavian countriesSweden, Norway, and Finland--are made using wood primarily ook maple, and ashl, aluminium, 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 furishings manufacturer in Copenhagen. After leaming 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 fumistings 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 2010. With $140,000 of his personal assets and $210.000 from venture investors, he began operations in mid-2010. 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 that he would need to continue to expand sales to maintain a competitive advantage. After first concentrating on selling Scan dinavian home furnishings in the Northeast in 2011 and 2012, he decided to enter the West Coast market. An increase in expenses occurred associated with identifying, contacting and selling to home furnishings retailers in Califomia, Oregon, and Washington, Kaj Rasmussen hopes that you can help him better understand what has been happening to Scandi Home Fumishings from both operating and financial standpoints. SCANDI HOME FURNISHINGS, INC. INCOME STATEMENTS 2013 Net sales $1,300.000 Cost of goods sold Gross profit 520.000 B00.000 540.000 Marketing General and administrative Depreciation 80,000 70.000 Earnings before 10.000 Income taxes (40% 4000 Net Income som Cash Dividende (continued on next page) 2011 2012 $1.500.000 900.000 $1.300.000 1.250.000 780.000 150.000 150.000 200.000 200.000 EBIT 130.000 150.000 40.000 200.000 5000 155.000 52.000 $93.000 $ 247.000 57000 190.000 78.000 $ 114.000 574.000 2011 2013 150 000 370.000 500.000 90.000 464.000 Scandi Home Furnishings, Inc. (Continued SCANDI HOME FURNISHINGS, INC. BALANCE SHEETS 2012 Cash $ 50.000 $40.000 $10.000 Accounts receivable 200.000 250.000 Inventories 500.000 500.000 Total current assets 700.000 800.000 Feed assets.net 2000 100.000 Total $1.000.000 $1.200.000 $1.470.000 Accounts payable $ 130,000 $ 170.000 $ 180,000 Aconials 50.000 Bank loan 90.00 10000 Total current lobes 270.000 300.000 Long-term dubt 300.000 400.000 550.000 Common stock 350.000 250.000 350.000 Retained Gaming 80.000 120.000 125.000 Total abilities and equity $1.000.000 51.200.000 $1.420.000 *350.000 shares of common stock were issued to Ka Rasmussend the wore investors when Scandi Home Furnishings was incorporated in mid-2010 Part A Your first challenge is to advise Kaj on what has been happening with Scandi Home Fumishings from a liquidity perspective. A Kaj was particularly concerned by the drop in cash from $50,000 in 2011 to $10,000 in 2013. Calculate the average current ratio, the quick ratio, and the NWC-to-total-assets ratio for 2011-2012 and 2012-2013. 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 2012 and 2013. What, if any, changes have occurred? Part B Your second challenge is to advise Kaj on what has been happening to Stand from a financial foverage, profitability, and effi ciency perspective C. Creditors, as well as management, are also concerned about the ability of the venture to meet its debt 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 2011-2012 and 2012-2013 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 margin ratios for 2011-2012 and 2012-2013 and describe what is happening to the profitability of Scandi Home Furnishings. E Kaj and the venture investors are also interested in how efficiently Scandi is able to convert its equity investment, as well as the venture's total assets, into sales. Calculate several ratios that combine data from the income statements and balance sheets and compare what has happened between the 2011-2012 and 2012-2013 periods F. An ROA model consisting of the product of two ratios provides an overview of a venture's efficiency and profitability at the same time. An ROE model consists of the product of three ratios and simultaneously shows an overview of a venture's efficiency, profitability, and leverage performance Calculate ROA and ROE models for the 2011-2012 and 2012-2013 periods. Provide an interpretation of your findings