SITUATION
In 2008, Carter Dalton purchased the Baugh Company, Although the firm has consistently earned profits, little cash has been available for other than business needs, Before purchasing Baugh, Dalton thought that cash flows were generally equal to profits plus depreciation, However, this does not seem to be the case, The finan-cial statements (in thousands) for the Baugh Company, 2007-2008, and the Industry norms for the financial ratios follow,
| BALANCE SHEET |
|
|
2007
|
2008
|
| ASSETS |
|
|
| Current assets: |
|
|
|
Cash
|
$ 8,000
|
$ 10,000
|
|
Accounts receivable
|
15,000
|
20,000
|
|
Inventory
|
22,000
|
25,000
|
|
Total current assets
|
$ 45,000
|
$ 55,000
|
|
Fixed assets:
|
|
|
|
Gross plant and equipment
|
$ 50,000
|
$ 55,000
|
|
Accumulated depreciation
|
15,000
|
20,000
|
|
Net fixed assets
|
$ 35,000
|
$ 35,000
|
|
Other assets
|
12,000
|
10,000
|
|
TOTAL ASSETS
|
$ 92,000
|
$100,000
|
|
DEBT (LIABILITIES) AND EQUITY
|
|
|
| Current liabilities: |
|
|
|
Accounts payable
|
$ 10,000
|
$ 12,000
|
|
Accruals
|
7,000
|
8,000
|
|
Short-term notes
|
5,000
|
5,000
|
|
Total current liabilities
|
$ 22,000
|
$ 25,000
|
|
Long-term liabilities
|
15,000
|
15,000
|
|
Total liabilities
|
$ 37,000
|
$ 40,000
|
|
Total ownership equity
|
55,000
|
60,000
|
|
TOTAL DEBT AND EQUITY
|
$ 92,000
|
$100,000
,
|
|
Income Statement,
|
2008
|
|
|
Sales revenue
|
|
$175,000
|
|
Cost of goods sold
|
|
105,000
|
|
Gross profit on sales
|
|
$ 70,000
|
|
Operating expenses:
|
|
|
|
Marketing expenses
|
$ 26,000
|
|
|
General and administrative expenses
|
20,000
|
|
|
Depreciation expense
|
5,000
|
|
|
Total operating expenses
|
|
$ 51,000
|
|
Operating income
|
|
$ 19,000
|
|
Interest expense
|
|
3,000
|
|
Earnings before taxes
|
|
$ 16,000
|
|
Income tax
|
|
8,000
|
|
Net income
|
|
$ 8,000
|
|
Financial Ratios
|
Industry Norms
|
|
Current ratio
|
2.50
|
|
Average collection period
|
30.00
|
|
Inventory turnover
|
6.00
|
|
Debt ratio
|
50.0%
|
|
Return on assets
|
16.0%
|
|
Operating profit margin
|
8.0%
|
|
Total asset turnover
|
2.00
|
|
Fixed asset turnover
|
7.00
|
|
Times interest earned
|
5.00
|
|
Return on equity
|
14.0%
|
Question 1 Why doesn't Dalton have cash for personal needs? (As part of your analysis, measure cash flows, )
Question 2 Evaluate the Baugh Company's financial performance, given the financial ratios for the industry,