Question

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

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%)

Answer 1

(13) Net Income = $ 4 million and Cash Dividends = $ 2 million

Retained Earnings = Net Income - Cash Dividends = 4 - 2 = $ 2 million

(14) Operating Income = EBIT = $ 9.4 million

(15) Operating Margin = EBIT/ Sales = 9.4 / 15 = 0.6267 or 62.67 %

Profit Margin = Net Income / Sales = 5.4 / 15 = 0.36 or 36 %

(16) The average length of time required after sales to receive cash in lieu of those sales is known as the days sales outstanding (DSO). DSO is calculated as shown below:

Account Receivables Turnover Ratio (ARTR) = Sales / Accounts Receivable = 15000000 / 400000 = 37,5

DSO = 365 / ARTR = 365 / 37.5 = 9.733 days