1. Assume that you the CEO of a company that is publicly traded. In FOUR SENTENCES OR LESS - explain to me in general terms what you as the CEO would hope to learn by reviewing the financial statements of your company.
2. Big Bad Company (BBC) owns 40% of Tiny Company. Due to anti-trust issues, BBC is restricted from having any sort of say regarding the operation of Tiny Company. As such, BBC has elected to account for its investment in Tiny Company by applying the Mark-to-Market Method on the financial statements it sends to the SEC. At the beginning of 20X4, BBC's investment in Tiny Company was reflected on the balance sheet as $100,000. In 20X4, Tiny Company earned $40,000 in total Net Income and declared and paid dividends totaling $20,000. At the end of 20X4, the fair market value of BBC's investment in Tiny Company was $130,000.
- From this information, what would BBC show ($ figure and line item title) on its income statement for 20X4, if anything, to account for its investment in Tiny Company assuming that BBC holds its investment in Tiny as a security available for sale and not a trading security?
- What will BBC show on its year-end 20X4 Balance Sheet to reflect its investment in Tiny Company?
- What would your answers to Parts 1) and 2) above be if BBC applied the Equity Method instead of the Mark-to-Market method in accounting for its investment in Tiny Company
3. A manufacturing company's financials reveal the following ratios:
|
Ratio/Calculation
|
20X4
|
20X3
|
20X2
|
20X1
|
20X0
|
Industry Ave.
|
|
Day's Sales In Receivables (days)
|
46
|
38
|
31
|
30
|
30
|
29
|
|
Day's Sales In Inventory (days)
|
65
|
72
|
78
|
77
|
78
|
60
|
|
Current Ratio
|
2.9
|
2.9
|
2.6
|
2.5
|
2.5
|
2.2
|
|
Acid Test (Quick) Ratio
|
2.2
|
2.1
|
1.9
|
1.9
|
2
|
1.9
|
|
Debt Ratio
|
40%
|
42%
|
46%
|
45%
|
45%
|
52%
|
|
Times Interest Earned (x's per year)
|
7.1
|
7.1
|
7.1
|
6.9
|
6.9
|
7.1
|
|
Fixed Charge Coverage (x's per year)
|
5.4
|
5.8
|
5.9
|
6.9
|
6.9
|
6.5
|
|
Gross Profit Margin
|
42%
|
41%
|
42%
|
43%
|
42%
|
40%
|
|
Operating Profit Margin
|
17%
|
18%
|
18%
|
21%
|
21%
|
20%
|
|
Net Profit Margin
|
5%
|
5%
|
6%
|
8%
|
8%
|
8%
|
|
Total Asset Turnover (x's per year)
|
3.4
|
3.5
|
3.4
|
3.4
|
3.3
|
3.5
|
|
Financial Leverage Ratio
|
????
|
1.7
|
1.9
|
1.8
|
1.8
|
2.1
|
Based on the financial information presented in the table above, address the following questions/inquiries. KEEP YOUR ANSWERS
SHORT AND SWEET - there is not reason to write a novelette for your answers.
1) Calculate the ROA and ROE for this company for 20X3.
2) Calculate the FLR for this company in 20X4.
3) Comment on the overall liquidity of this company and also address how the movement of the DSR and DSI in 20X2 through 20X4 might be related.
4) Focusing on the profit margins presented above, where would you look to improve this company's operations from an expense standpoint if you were senior management of this company?
When it comes to restatements, why is it important for us as analysts to restate the income statement into the multi-step format.