Problem:
John Spencer Corporation
Comparative Income Statement
For the Years Ended December 31
2009 2008
Sales $530,000 $448,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 372,000 338,000
Gross margin on sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158,000 110,000
Operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,000 68,000
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,000 42,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 2,000
Income before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000 40,000
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,000 12,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,000 $28,000
John Spencer Corporation
Comparative Balance Sheet
December 31
2009 2008
Assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000 $ 6,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 14,000
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 20,000
Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 20,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............ $176,000 $160,000
Liabilities and stockholders' equity:
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,000 $ 50,000
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000 10,000
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000 60,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000 40,000
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . $176,000 $160,000
Required:
Question 1: Compute the following ratios for 2008 and 2009:
a. Current ratio
b. Debt ratio
c. Asset turnover
d. Return on sales
e. Return on equity
Question 2: Have the firm's performance and financial position improved from 2008 to 2009? Explain.
Question 3: Inventory Ratios
Captain Geech Boating Company sells fishing boats to fishermen. Its beginning and ending inventories for 2009 are $462 million and $653 million, respectively. It had cost of goods sold of $1,578 million for the year ended December 31, 2009. Merchant Marine Company also sells fishing boats. Its beginning and ending inventories for the year 2009 are $120 million and $90 million, respectively. It had cost of goods sold of $1,100 million for the year ended December 31, 2009.
A) Calculate the inventory turnover and number of days' sales in inventory for the two companies.
B) Are the results of these ratios what you expected? Which company is managing its inventory more efficiently?
Question 4: Analyzing Earnings
Roger Donahoe owns two businesses: a drug store and a retail department store.
(Assume the financial information is for the same time period.)
Drug Store Department Store
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,050,000 $670,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000 600,000
Average total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 200,000
Other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,500 36,500
Question 5: Which business is more profitable? Which business is more efficient? Overall, which business would you consider to be a more attractive investment? Provide ratios and other financial rationale to support your answer.