The purpose of this assignment is to evaluate data from a companys financial statements to make relevant business decisions.

Based on the Study Problem 6.5 in Appendix 5A, Understanding Financial Statements, to write a memo to a manager, the chief operating officer of Luna Lighting. Summarize the information from the 3 years financial statements, the ratio calculations, and industry comparisons provided in the case to present possible solutions to the company's profitability problems. Conclusion must project the future success of the company based on the findings.

Problem 6. Which of the following is not required to be discussed in the Management Discussion and Analysis of the Financial Condition and Results of Operations?

Liquidity.

Capital resources.

Operations.

Earnings projections.

Appendix 5A: The Analysis of Segmental Data

The FASB requires companies to disclose supplementary financial data for each reportable segment including foreign operations, sales to major customers, and information for enterprises that have only one reportable segment. Segmental disclosures are valuable to the financial analyst in identifying areas of strength and weakness within a company, proportionate contribution to revenue and profit by each division, the relationship between capital expenditures and rates of return for operating areas, and segments that should be de-emphasized or eliminated. The information on segments is presented as a supplementary section in the notes to the financial statements, as part of the basic financial statements, or in a separate schedule that is referenced to and incorporated into the financial statements. (Information is provided at the end of this appendix regarding the definition of a segment and the FASBs disclosure requirements.)

Luna Lighting, a retail firm, has experienced modest sales growth over the past three years but has had difficulty translating the expansion of sales into improved profitability. Using three years financial statements, you have developed the following ratio calculations and industry comparisons. Based on this information, suggest possible reasons for Lunas profitability problems.

Industry Averages

2016 2015 2014 2016

Current 2.3X 2.3X 2.2X 2.1X

Average collection period 45 days 46 days 47 days 50 days

Inventory turnover 8.3X 8.2X 8.1X 8.3X

Fixed asset turnover 2.7X 3.0X 3.3X 3.5X

Total asset turnover 1.1X 1.2X 1.3X 1.5X

Debt ratio 50% 50% 50% 54%

Times interest earned 8.1X 8.2X 8.1X 7.2X

Fixed charge coverage 4.0X 4.5X 5.5X 5.1X

Gross profit margin 43% 43% 43% 40%

Operating profit margin 6.3% 7.2% 8.0% 7.5%

Net profit margin 3.5% 4.0% 4.3% 4.2%

Return on assets 3.7% 5.0% 5.7% 6.4%

Return on equity 7.4% 9.9% 11.4% 11.8%