The cash flow statement highlights some important aspects of Computron's financial condition. First, note that the firm's net operating cash flow is -$73,780, so its operations are draining cash despite the positive net income reported on the income statement. Second, because of its negative cash flow from operations, Computron had to borrow a total of $126,180 in long- and sitort-term debt to cover its operating cash outlays, to pay for fixed asset additions, and to pay dividends. Even after all this borrowing, Computron's cash account still fell by $5,600 during 2014. b. Financial ratios are used to get an idea about how well the company is being operated, and where it needs improving. The ratio categories, and their purposes, are as follows: 1. Liquidity: Can the company make required payments in the short run (defined as the next year)? 2. Asset management: Are the investments in assets about right in view of sales levels? 3. Debt management (financing mix): Does the company have about the right amount of debt, or is it over leveraged? 4. Profitability: Are costs under good control as reflected in the profit margin, ROE, and ROE? 5. Market values: Do investors like what they see as reflected in the P/E and M/B ratios? Balance Sheets 2015 2014 Assets Cash Accounts receivable Inventories Total current assets Gross fixed assets Less: Accumulated depreciation Net fixed assets Total assets $ 52,000 402,000 836,000 $1,290,000 527,000 (166,200) $360,800 $1,650,800 $ 57,600 351,200 715,200 $1,124,000 491,000 (146,200) $ 344,800 $1,468,800 Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock (100,000 shares) Retained earnings Total equity Total liabilities and equity $ 175,200 225,000 140,000 $ 540,200 424,612 460,000 225,988 $ 685,988 $1,650.800 $ 145,600 200,000 136,000 $ 481,600 323,432 460,000 203,768 $ 663,768 $1,468.800 2015 2014 Income Statements Sales Cost of goods sold Other expenses Depreciation Total operating costs EBIT Interest expense EBT Taxes (40%) Net income EPS $3,850,000 (3,250,000) (430,300) 20,000) $3,700,300 $ 149,700 76,000) $ 73,700 29,480 5 44,220 S 0.442 $3,432,000 (2,864,000) (340,000) 18,900) $3.222.900 $ 209,100 62.500 $ 146,600 58,640 5 87.960 0.880 Statement of Cash Flows (2015) $ 44,220 Operating Activities Net income Additions (sources of cash) Depreciation Increase in accounts payable Increase in accruals Subtractions (uses of cash) Increases in accounts receivable Increase in inventories Net cash flow from operations 20,000 29,600 4,000 ( 50,800) (120,800) $(73,780) Long-Term Investing and Financing Activities Investment in fixed assets Increase in notes payable Increase in long-term debt Payment of cash dividends Net cash flow from investing and financing Net reduction in cash account Cash at beginning of year Cash at end of year $(36,000) $ 25,000 101,180 (22,000) $ 68,180 $ 5,600) 57,600 $ 52,000 2015 2014 Other Data December 31 stock price Number of shares Dividends per share Lease payments $ 6.00 100,000 s 0.22 $ 40,000 S 8.50 100,000 $ 0.22 $ 40,000 Industry Average Data for 2015 Ratio Industry Average 2.7% Current Quick 1.0x 101,180 22,000) Increase in long-term debt Payment of cash dividends Net cash flow from investing and financing Net reduction in cash account Cash at beginning of year Cash at end of year $ 68,180 $( 5,600) 57,600 $ 52,000 2015 2014 Other Data December 31 stock price Number of shares Dividends per share Lease payments S 6.00 100,000 $ 0.22 $ 40,000 $ 8.50 100,000 $ 0.22 $ 40,000 Industry Average Data for 2015 Ratio Industry Average Current Quick Inventory turnover Days sales outstanding (DSO) Fixed assets turnover Total assets turnover Debt ratio TIE Fixed charge coverage Net profit margin ROA ROE Pricelearnings Market/book 2.7x 1.0x 6.0x 32.0 days 10.7% 2.6 50.0% 2.5 x 2.1 x 3.5% 9.1% 18.2% 14.2x 1.4x The cash flow statement highlights some important aspects of Computron's financial condition. First, note that the firm's net operating cash flow is -$73,780, so its operations are draining cash despite the positive net income reported on the income statement. Second, because of its negative cash flow from operations, Computron had to borrow a total of $126,180 in long- and sitort-term debt to cover its operating cash outlays, to pay for fixed asset additions, and to pay dividends. Even after all this borrowing, Computron's cash account still fell by $5,600 during 2014. b. Financial ratios are used to get an idea about how well the company is being operated, and where it needs improving. The ratio categories, and their purposes, are as follows: 1. Liquidity: Can the company make required payments in the short run (defined as the next year)? 2. Asset management: Are the investments in assets about right in view of sales levels? 3. Debt management (financing mix): Does the company have about the right amount of debt, or is it over leveraged? 4. Profitability: Are costs under good control as reflected in the profit margin, ROE, and ROE? 5. Market values: Do investors like what they see as reflected in the P/E and M/B ratios? Balance Sheets 2015 2014 Assets Cash Accounts receivable Inventories Total current assets Gross fixed assets Less: Accumulated depreciation Net fixed assets Total assets $ 52,000 402,000 836,000 $1,290,000 527,000 (166,200) $360,800 $1,650,800 $ 57,600 351,200 715,200 $1,124,000 491,000 (146,200) $ 344,800 $1,468,800 Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock (100,000 shares) Retained earnings Total equity Total liabilities and equity $ 175,200 225,000 140,000 $ 540,200 424,612 460,000 225,988 $ 685,988 $1,650.800 $ 145,600 200,000 136,000 $ 481,600 323,432 460,000 203,768 $ 663,768 $1,468.800 2015 2014 Income Statements Sales Cost of goods sold Other expenses Depreciation Total operating costs EBIT Interest expense EBT Taxes (40%) Net income EPS $3,850,000 (3,250,000) (430,300) 20,000) $3,700,300 $ 149,700 76,000) $ 73,700 29,480 5 44,220 S 0.442 $3,432,000 (2,864,000) (340,000) 18,900) $3.222.900 $ 209,100 62.500 $ 146,600 58,640 5 87.960 0.880 Statement of Cash Flows (2015) $ 44,220 Operating Activities Net income Additions (sources of cash) Depreciation Increase in accounts payable Increase in accruals Subtractions (uses of cash) Increases in accounts receivable Increase in inventories Net cash flow from operations 20,000 29,600 4,000 ( 50,800) (120,800) $(73,780) Long-Term Investing and Financing Activities Investment in fixed assets Increase in notes payable Increase in long-term debt Payment of cash dividends Net cash flow from investing and financing Net reduction in cash account Cash at beginning of year Cash at end of year $(36,000) $ 25,000 101,180 (22,000) $ 68,180 $ 5,600) 57,600 $ 52,000 2015 2014 Other Data December 31 stock price Number of shares Dividends per share Lease payments $ 6.00 100,000 s 0.22 $ 40,000 S 8.50 100,000 $ 0.22 $ 40,000 Industry Average Data for 2015 Ratio Industry Average 2.7% Current Quick 1.0x 101,180 22,000) Increase in long-term debt Payment of cash dividends Net cash flow from investing and financing Net reduction in cash account Cash at beginning of year Cash at end of year $ 68,180 $( 5,600) 57,600 $ 52,000 2015 2014 Other Data December 31 stock price Number of shares Dividends per share Lease payments S 6.00 100,000 $ 0.22 $ 40,000 $ 8.50 100,000 $ 0.22 $ 40,000 Industry Average Data for 2015 Ratio Industry Average Current Quick Inventory turnover Days sales outstanding (DSO) Fixed assets turnover Total assets turnover Debt ratio TIE Fixed charge coverage Net profit margin ROA ROE Pricelearnings Market/book 2.7x 1.0x 6.0x 32.0 days 10.7% 2.6 50.0% 2.5 x 2.1 x 3.5% 9.1% 18.2% 14.2x 1.4x
