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Case Study: John & Jon (J&J) Financial Statement Preparation & Analysis

You are recently hired as a senior financial analyst for John & Jon (J&J) and you are in charge of preparing the financial statements and presenting an annual analysis on the board meeting.

Overview of John & Jon’s Balance Sheet

The assets of John & Jon (J&J) in 2017 has both current assets and net plant and equipment. It has total assets of $ 7.5 million and net plan and equipment equals $5 million. J&J only finances with $2.5 million long-term debt, $500,000 notes payable and total common equity of $3.5 million. The firm does have $400,000 accounts payable and $600,000 accruals on its balance sheet. Now assume the firm’s current assets consist entirely of cash and cash equivalence, account receivables and inventories. If it has 1.5 million cash and cash equivalents and $400,000 account receivables.

John & Jon’s Income Statement in 2017 (dollars are in millions)

Sales     $15

Operating costs excluding depreciation and amortization              $5

EBITDA $10

Depreciation & Amortization      $0.6

EBIT      $9.4

Interest $0.4

EBT       $9

Taxes (40%)      $3.6

Net Income $5.4

Cash Dividends $2.0

Use the above information to answer the following questions. When you answer your question, make sure include the calculation steps or formula.

Prepare the balance sheet and present to the board of directors (5%)

Total Assets	Liabilities & Shareholder’s Equity

2. What is the amount of total liabilities and equity that appears on the firm’s balance? (1%)

3. What is the amount of current assets (1%)

4. What is the balance of current liabilities? (1%)

5. What is the amount of company’s inventory? (1%)

6. What is the amount of total liabilities? (1%)

7. What is the amount of total debt? (1%)

8. What is the amount of total capital? (1%)

9. What is the amount of net working capital? (1%)

10. What is the amount of net operating working capital? (1%)

11. If by the end of 2017, the retained earnings of John and Jon is $2.5 million, what is the amount of paid-in capital? (1%)

12. If John & Jon decides to purchase $500,000 market securities by using its cash, how does this action would affect its current asset position? (2%)

13. As the Income of Statement shows in 2017 John & Jon actually gave out $2 million cash dividends, what is the amount of retained earnings? (1%)

14. What is the amount of operating income? (1%)

15. What are the operating margin and the profit margin? (1%)

16. What is the average length of time that John & Jon must wait after making a sale before it receives cash? (1%)

17.What is the ratio we generally use to estimate a firm’s ability to meet its annual interest payments? And calculate that ratio for John and Jon (1%)

18. What are the fixed assets turnover ratio and the total asset turnover ratio? (1%)

19. What is the ratio of total debt to total capital? (1%)

20. What is the ratio of return on common equity? (1%)

21. Assume between 2016 and 2017, net operating working capital has increased by $500,000, calculate John & Jon’s free cash flow. (Hint: use this formula. FCF = [EBIT (1-T) +Depreciation & Amortization] – [Capital Expenditures + Change on Net Operating Working Capital]) (5%)

22. Now after you present your analysis on the meeting, the CEO would like to see higher sales and a forecasted net income of $10.8 million. Assume that operating costs (excluding depreciation and amortization) are still one third of sales and that depreciation and amortization and interest expenses will increase by 10%. The tax rate which is 40%, will remain the same. What level of sales would generate $10.8 million in net income? (5%)

Answer 1

2) Total liabilities is the summation of short term debt as well as long term debt. In this case, total debt is the summation of Long term debts, notes payable and accruals payable which is equal to $3.4 million and total common equity is $3.5 million. Hence total of Total liabilities and Equity is $3.4+$3.5 which is $6.9 million.

3) Current asset is the summation of cash and cash equivalents, inventory and accounts receivable.

In this case, total asset is $7.5 million out of which $5 million is fixed asset hence the remaining that is $2.5 million is the amount of current assets.

4) Current Liabilities is the summation of notes payable as well as accounts payable

=$500,000+$400,000= $900,000 which is $0.9 million.