Question

Balance Sheet

2015

2016

2017

Assets

Cash

807,000

628,000

612,000

Accounts Receivables

2,582,000

2,896,000

4,605,000

Inventories

2,870,000

5,181,000

7,319,000

Total Current Assets

6,259,000

8,705,000

12,536,000

Net Fixed Assets

2,216,000

2,423,000

5,538,000

Total Assets

8,475,000

11,128,000

15,074,000

Liabilities and Equity

Accounts Payable

961,000

1,648,000

3,137,000

Notes Payable

400,000

800,000

2,860,000

Accruals

440,000

800,000

1,150,000

Total Current Liabilities

1,801,000

3,248,000

7,147,000

Long Term Debt

1,350,000

1,908,000

1,867,000

Common Stock

3,650,000

3,650,000

3,650,000

Retained Earnings

1,674,000

2,322,000

2,410,000

Total Equity

5,324,000

5,972,000

6,060,000

Total Liabilities and Equity

8,475,000

11,128,000

15,074,000

Income Statement

2015

2016

2017

Sales

26,820,000

28,966,000

30,703,000

Cost of Sales

21,216,000

23,550,000

26,140,000

Gross Profit

5,604,000

5,416,000

4,563,000

Operating Expenses

2,574,000

3,225,000

3,866,000

Operating Profit

3,030,000

2,191,000

697,000

Interest

91,000

275,000

469,000

Earnings Before Taxes

2,939,000

1,916,000

228,000

Taxes (48%)

1,411,000

919,000

110,000

Net Income

1,528,000

997,000

118,000

Liquidity	2015	2016	2017	Average
Current Ratio	3.475	2.68	1.754	2.5x
Quick Ratio	1.882	1.085	0.73	1.0x
Asset Management
Average Collection Period	35.139	36.492	54.745	32.0 (days)
Inventory Turnover	7.392	4.545	3.572	7.0x Fixed
Asset Turnover	3.165	2.603	2.037	12
Debt Management
Total Debt to Total Assets	0.372	0.463	0.598	50.00%
Times Interest Earned	33.297	7.967	1.486	7.7x
Profitability
Profit Margin	0.057	0.034	0.004	2.90%
Return on Equity (ROE)	0.287	0.167	0.019	17.50%

ABC Company, a toy manufacturer, believes the coming holiday season (between Thanksgiving in late November and Christmas on the 25^thof December) will be a very good one, expecting an increase of 20% in its sales. Outside economic analysts believe the effects of the recent recession are over. Consumer confidence is high. To meet that 20% increase, however, inventories must be built up so, to finance that expansion, ABC wants to borrow $1,000,000 from its bank.

You are the loan officer who must make the decision as to whether or not to give ABC the money. You are going to prepare ratios for 3 years, the Cash Conversion Cycle for the same period and operating cash flow for the years for which you have figures.

Review the Balance Sheets and Income Statements for ABC over the 3 years and answer the following questions (20 points each).

3) Operating Cash Flow is the first of the 3 parts to the Statement of Cash Flows.

a) Define operating cash flow. What does it tell us?
b) Calculate ABC’s operating cash flows for those years for which figures are available.
c) Does your analysis of ABC’s operating cash flows change your conclusions listed in 1) and 2) above?

4) Do you believe ABC’s cash position and its management of cash needs improvement? If so, how would you recommend they do it?

Answer Questions in Bold!

Answer 1

A) ‘Operating Cash Flows’ is the cash inlow and the cash outflow that is incurred by day to day activities of a business i.e. core business operations. The main factors involved in calculating operating cash flows are account receivables, depreciation, inventory as well as accounts payable. For a company to remain solvent, it is necessary to keep its operating cash flows positive as if it goes negative then their higher cost results in lesser revenue as a result of a loss.

Operating cash flows converts items mentioned in the income statement from accrual basis to cash basis as and when calculated at that point.