MBA 708 Essentials of Financial Statement Analysis Week 6 Case Study: Transaction and Financial Analysis Tallulah Company has been in business for several years and is publicly traded on a major U.S. stock exchange. It is a wholesaler of a variety of high-end pet supplies. The balance sheet and income statement for the year ended December 31, Year 3, appeared as follows (all amounts are in thousands of dollars): Tallulah Company Balance Sheet December 31, Year 3 Assets: Cash Liabilities and Stockholders' Equity: $4,240 Wages payable $640 Accounts receivable 6,800 Total Current Liabilities 640 Inventory 15,200 Total Current Assets 26,240 Total Liabilities 640 Land for Plant Expansion 9,000 Stockholders' Equity Buildings & equipment 16,780 Capital stock 33,000 Accumulated Depreciation (4,780) 12,000 Retained earnings 13,600 Total Stockholders' Equity 46,600 Total liabilities and Total assets $47,240 stockholders' equity $47,240 Tallulah Company Income Statement FYE December 31, Year 3 Revenues: Sales $ 180,000 Expenses: Cost of goods sold $ 136,800 Wages and salaries Rent Advertising Depreciation Total expenses Net income 11,000 9,600 3,500 1,500 162,400 17,600 During the first quarter of the Year 4 (January, February, March), the following events occurred: A. $500 cash was paid for a new trademark for the company. It was determined that this amount should be capitalized rather than expensed. Since the trademark has an indefinite useful life, no amortization will be recorded. B. Wages and salaries totaling $3,200 were paid in cash during the first quarter of Year 4. A portion of this amount paid off the wages that were payable at the end of the previous year. The remaining amount was for wages paid in the first quarter of Year 4. C. All accounts receivable outstanding on December 31, Year 3 were collected in the first quarter of year 4. D. Tallulah Company's advertising agency billed the firm $1,000 for a campaign that ran during the first quarter of Year 4. Tallulah Company had not paid the bill as of March 31, Year 4 E. Sales totaling $18,000 were made to customers during the first quarter of Year 4. Of these sales, 60% were collected during the first quarter and the balance is expected to be collected during the next quarter. F. The inventory related to the sales in part E above cost the company $13,000 when they were purchased. G. Dividends were declared and paid to stockholders in the amount of $1,500. H. Inventory costing $10,600 was purchased during the first quarter of Year 4, of which 10% was paid in cash before the end of the first quarter. The remaining 90% was still payable to the vendors at the end of the first quarter. I. A 3-year, $4,000 12% loan was obtained from a local bank on the last day of the quarter. The full amount of interest and principal is due at the end of the 3-year period. J. New shares of stock were issued by Tallulah Company during the first quarter for $2,000 in cash K. A new 3-year lease agreement was signed and executed on January 1, Year 4 for the first 6 months of Year 4. The lease required that a $900 monthly rental be paid in advance for the first 2 quarters of the year (total paid is $5,400 $900 x 6 months) L. The land that had been held for plant expansion was sold for $9,000. There is no need to adjust the books for depreciation or item I above Required: (Use the Excel Worksheet provided for all Calculations on the tab indicated) 1. Complete the transaction analysis template for the first quarter of Year 4. If you need to come up with a new account, do your best to use a reasonable account title. Extra columns have been added to the transaction template for this purpose. Be advised that you might not use all the columns provided. 2. Prepare a balance sheet in good form at March 31, Year 4. 3. Prepare an income statement in good form for the quarter ended March 31, Year 4. 4. Using the template provided, prepare a Statement of Cash Flows quarter ended March 31, Year 4. 5. Evaluate the company's performance for the first quarter of Year 4. Use no more than five trends, ratios, or other measurements you believe are most important in gaining an overall picture. Within the analysis, provide a defense for the five trends, ratios, or other measurements you selected. Use 500 words or less for this write-up. Clarity and conciseness (along with correct spelling and grammar) are valued in business. How to Calculate Return on Assets Calculate ROA by dividing the company's net income by total assets. ROA is often used to analyze asset efficiency for the fiscal year. However, ROA could also be used for analyzing different periods of time. NOTES FOR COMPARING DIFFERENT TIME PERIODS: To calculate the ROA for year, divide the firm's net income by total assets over that same annual or 12-month period. For quarterly data we would determine ROA by dividing NI by total assets for the quarter. Thus, if we want to compare quarterly ROA with annual ROA, we need to multiply our quarterly ROA by 4 (this step assumes NI for the quarter is approximately 4 of our annual income). How to Calculate Return on Equity Calculate ROE by dividing the company's net income by total equity. ROE is often used to analyze equity capital efficiency for the fiscal year. However, ROE could also be used for analyzing different periods of time. NOTES FOR COMPARING DIFFERENT TIME PERIODS: To calculate the ROE for year, divide the firm's net income by total equity over that same annual or 12-month period. For quarterly data we would determine ROE by dividing NI by total equity for the quarter. Thus, if we want to compare quarterly ROE with annual ROE, we need to multiply our quarterly ROE by 4 (this step assumes NI the quarter is approximately 1/4 of our annual income). 1 Year 4 H Assets Liabilities AA AB AC AE AF AG AH AK AM AN AO Stockholders' Equity Cash Flows Operating, + Common Stock + Retained Earnings Rev. Exp. = Net Inc. Investing, Financing (Accumul Events Cash + 2 Accounts Receivable Buildings ated Wages + Inventory + + Land Held + + + + & Equip Depreciati Payable onj 3 January 1, 4,240 + 6,800 + 15,200 9,000 + 16,780 Year 4 (4,780) + 640 + + + 33,000 + 13,600 4 5 A + + + + + + + + + + + + + 6 B + + 7 C + + + + + + + + + + 8 + 9 E + + + + + + + + + + + + + 10 F + + + 11 G + + + + + + + + + + 12 H + 13 I + + + + + + + + + + + + + 14 J + + + + + + + 15 K + + + + + + + + + + + 16 L + + + + + + + + + 17 March 31 + 18 Year 4 19 20 21 = = $$ O/I/F Tallulah Company Balance Sheet March 31, Year 4 Sheet2 1.Transaction Analysis Template 2. Balance Sheet March 31, YR4