Using relevant ratios covered in Lecture 4 to analyze Scandi Home Furnishings operating and financing performance.

QF

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 fell sharply in 2013, causing Kaj to wander what was happening to his price and joy" business venture. After all , Kaj worked as closely as possible to a 24/7 pace, beginning with the startup of Scandi and continuing through the first three full years of operation. Scandi Home Furnishings, located in eastem North Carolina, designs, manufactures, and sels Scandinavian designed furniture and accessories to home furnishings retailers. The modern Scandinavian design has a streamlined and uncut- tered look. While this fumiture style is primarily associated with Denmark, both Norwegian and Swedish designers have contributed to the allure of Scandinavian home furnishings. 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 furnishings and the home furnishings produced by the other Scandinavian countries --Sweden, Norway, and Finlandare made using wood (primarily oak, 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 funishings manufacturer in Copenhagen. After teeming the trade, he quickly moved into a management position in the fim. 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 Key felt the the 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 California, Oregon and Washington. Kaj Rasmussen hopes that you can help him better understand what has been happening to Scand Home Furnishings from both operating and financial standpoints. 2013 $100.000 1290.000 SCANDI HOME FURNISHINGS, INC. INCOME STATEMENTS 2011 2012 Net sols $1.300.000 $1.500.000 Cost of goods sold 780.000 900.000 Gross profit 520.000 500.000 Marketing 130.000 150.000 General and administrative 150.000 150.000 Depreciation 40.000 50.000 200.000 247.300 Interest 5.000 57.000 Eaming before the 155.000 190.000 Income taxes (409 82000 78.000 Net income $ 93.000 $ 114.000 Cash Dividends $ $14.000 200.000 200.000 80.000 80.000 20.000 10.000 Bry $5.000 (continued on next page) Scandi Home Furnishings, Inc. (Continued) SCANDI HOME FURNISHINGS, INC. BALANCE SHEETS 2011 2012 2013 Cash $ 50,000 $ 40,000 $ 10.000 Accounts receivable 200,000 250,000 360,000 Inventories 450,000 500.000 600,000 Total current assets 700,000 800,000 970,000 Fixed assets, net 300,000 400,000 500,000 Total assets $1,000,000 $1.200.000 $1,470,000 Accounts payable $ 130,000 $ 170,000 $ 180,000 Accruals 50,000 70,000 80,000 Bank loan 90,000 90,000 184,000 Total current liabilities 270,000 330,000 444,000 Long-term debt 300,000 400,000 550,000 Common stock 350,000 350,000 350,000 Retained earnings 80,000 120.000 125,000 Total liabilities and equity $1,000,000 $1,200,000 $1,470,000 *350,000 shares of common stock were issued to Kaj Rasmussen and the venture investors when Scandi Home Furnishings was incorporated in mid-2010. 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