Question:
Albert Owen owns and operates Owen Sales which opened its doors on January 1, 2007. Owen Sales has a line of credit with the bank (Note: the line of credit allows Owen Sales' bank account to go into a negative balance, called an overdraft, during slow business periods; the bank charges interest on any overdraft amounts). In order to maintain the line of credit, the bank requires that Owen Sales has a current ratio of at least 1.1. The owner is really frustrated because although his sales are increasing, he felt that he shouldn't make any withdrawals and hasn't done so since opening the business. Albert Owen has come to you, a recent CGA grad, to help him sort this out. You review the financial statements and find the following:
2011 Industry Average Ratios:
|
Current ratio
|
1.6:1
|
|
Acid-test ratio
|
1.1:1
|
|
Accounts receivable turnover
|
16 times
|
|
Days' sales uncollected
|
21 days
|
|
Merchandise turnover
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5 times
|
|
Days' sales in inventory
|
70 days
|
|
Total asset turnover
|
2.3 times
|
|
Accounts payable turnover
|
4 times
|
|
Debt ratio
|
35%
|
|
Equity ratio
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65%
|
|
Pledged assets to secured liabilities
|
1.4:1
|
|
Times interest earned
|
50 times
|
|
Profit margin
|
14%
|
|
Gross profit ratio
|
18%
|
|
Return on total assets
|
20%
|
|
Return on common shareholders' equity
|
32.7%
|
|
Book value per common share
|
$8.63
|
|
Book value per preferred share
|
$15.00
|
|
Basic earnings per share
|
$1.79
|
|
Price-earnings per share
|
18.2
|
|
Dividend yield
|
$0.35
|
Other information:
- sales occur evenly throughout the year
- accounts payable relate to the purchase of inventory
- the capital assets include a warehouse for inventory that remains consistently half empty throughout the year
- the capital assets are two years old and have an estimated remaining life of 10 years
- the note payable due in 2009 was incurred to acquire the capital assets; the principal paid in 2008 was the principal due in that year
- Owen Sales has used the bank overdraft only once during the past year to pay for an inventory purchase
You advise Albert that it will take the information he has provided and present him with a report within the next two business days.
Required to do:
Review the financial statements and provide the owner with an information email that includes some suggestions that might help him address his business concerns. As part of your email, include all appropriate supporting calculations. Use the industry average ratios on textbook page 1017 to assess the financial condition of the company. The written email should supporting calculations presented in appendices and/or exhibits to the email.