Cango ratio analysis | Business & Finance homework help

Financial Ratio Analysis Refresher

 

As you complete your studies, the BUSN460 capstone course requires that you pull together all of your learning experiences to complete a business case.  A part of that case requires you to review and analyze financial reports.  The purpose of this refresher is to take you back to the basics and, within one hour, get you on the road to successfully completing the financial part of the case.

Instructions:  In the following narrative we have embedded tutorials and videos for you to view.  You need only read the narrative and click on the hyperlink, and you will be on your way.  Make sure your speakers are on.  If you feel uncomfortable with a given topic, feel free to revisit this refresher and watch the appropriate video.

There are six videos available to help you get up to speed on conducting a financial analysis:
1.) Introduction to Accounting
2.) Interrelationship of Financial Statements
3.) Current Ratio
4.) Inventory Turnover
5.) Debt Ratio
6.) Profitability

To start this activity, please view the Introduction To Accounting tutorial.  It will help to answer the questions what is accounting, who developed it, how does it work, how does it fit into the business model, what are the rules and who generates them.  You will learn about the basic accounting equation and some necessary terms.  The financial reports that you will find in the case are also explained. (Transcript)

Now we move to the Interrelationships of Financial Statements tutorial to explore the Balance Sheet, Income Statement, and Statement of Cash Flows.  These reports provide information about the financial position or health of the business, the success of business operations, and explains where the cash came in and where the cash went.  Though this is a very basic look at the financial reports, it is a good starting place.  To go beyond this tutorial, one could review the Annual Report of a business such as Wal-Mart available at the company’s web site and also download a copy of Wal-Mart’s 10k Report from the Securities & Exchange Commission as an exercise.  The comparison of the two would provide an excellent view of the financial operation of the retail industry giant. (Transcript)

Prior to starting our videos on ratio analysis there are a few terms that one needs to know:  

– Liquidity is the ability of the company to meet its current debt obligations. 
– Solvency is the ability of the business to remain in business over a long period of time in terms of its ability to pay its long-term debts.  
– Profitability is the company’s ability to generate a profit.

The Current Ratio tutorial includes the explanation of three ratios.  The Current Ratio, Working Capital computation and the execution of the Quick Ratio are demonstrated.  These are Liquidity ratios. (Transcript)

Next, we will review the Inventory Turnover In this tutorial, Inventory Turnover Ratio and Accounts Receivable Turnover are demonstrated.  These are Liquidity ratios. (Transcript)

In the Debt Ratio tutorial, this Solvency ratio is demonstrated. (Transcript)

Moving on to the Profitability tutorial, Return on Net Sales and Return on Assets are demonstrated.  These are Profitability ratios. (Transcript)

Hopefully you have found this one hour investment to be profitable!

IMPORTANT:  Some ratios call for averages, (e.g. inventory turnover). Since CanGo has only one balance sheet available, you will not use an average, you will use the appropriate number from the most recent year’s financial statement.  Also assume that there is no interest expense.  Good luck!

 

 

Assumptions:

  1. At the beginning of 2009, CanGo purchased the online gaming company. This purchase was for cash, paid for through the proceeds of the IPO and results in goodwill.
     
  2. 90% of the online book sales comes from JIT, the other 10% through the inventory which CanGo possesses. 100% of the CD/DVD/MP3 come through CanGo inventory. The result is that 80% of ALL sales is JIT and 20% is inventory.
     
  3. There is one warehouse for shipping of books and one plant for manufacturing.
     
  4. There are three divisions: a CD/DVD/MP3 division, an online gaming division and a books division. All manufacturing takes place in the CD/DVD/MP3 division.
     
  5. The IPO took place at the beginning of 2009.
     
  6. The CD/DVDs were customized beginning in 2008. The MP3 players were built beginning in the start of 2009.
     
  7. The online gaming company was purchased for $30,000,000 and both Elizabeth and Andrew initiated the process.
     
  8. The company began in 2006, has a VC infusion in 2007 and 2008. It showed a profit in 2008 and 2009. Its only profitable division is the online book sales division.
     
  9. It has some type of international operations, hence the need for a “translation gain or loss” in owner’s equity.
     
  10. It has an extraordinary loss from fire and a sale of a segment of its business in 2009.

Balance Sheet

ASSETS

December 31, 2009

 

Cash

$20,900,000

 

Marketable Securities

$117,000,000

 

Accounts Receivable

$33,000,000

 

Less: Allowance for Bad Debts

$(880,000)

 

Net Accounts Receivable

$32,120,000

 

 

 

 

Inventory

 

 

Raw Materials

$2,000,000

 

Work-in-process

$1,000,000

 

Finished Goods

$5,000,000

 

Inventory Purchased for Resale

$24,000,000

 

Total Inventory

$32,000,000

 

 

 

 

Plant, Property and Equipment

$6,700,000

 

Less: Accumulated Depreciation

$(320,000)

 

Net Plant, Property and Equipment

$6,380,000

 

 

 

 

Prepaid Expenses

$200,000

 

 

 

 

Goodwill and Other Purchased Intangibles

$28,000,000

 

Less: Amortization

$(700,000)

 

Net Goodwill and Other Purchased Intangibles

$27,300,000

 

 

 

 

Total Assets

$235,900,000

 

 

LIABILITIES AND OWNERS’ EQUITY

Accounts Payable

$22,000,000

 

Accrued Advertising

$11,800,000

 

Other Liabilities and Accrued Expense

$1,400,000

 

Current Portion of Long-Term Debt

$2,300,000

 

 

 

 

Long Term Debt

$57,400,000

 

 

 

 

Preferred Stock, $100 par value per share,

 

 

    100,000 authorized, 0 shares issued and outstanding

$0

 

 

 

 

Common Stock, $1 par value per share,

 

 

    250,000,000 shares authorized, 13,000,000 shares

 

 

    issued, 12,900,000 outstanding

$13,000,000

 

 

 

 

Additional Paid-in-Capital in excess of par value, Common Stock

$117,000,000

 

 

 

 

Treasury Stock

$(1,000,000)

 

 

 

 

Retained Earnings (less Cash Dividends Paid)

$12,000,000

$11,000,000

 

 

 

Total Liabilities and Owner’s Equity

$235,900,000

 

Income Statement

 

December 31, 2009

December 31, 2008

Sales Revenues

$51,000,000

$10,300,000

Less: Sales Returns

$(1,000,000)

$(300,000)

Net Sales Revenues

$50,000,000

$10,000,000

Less: Cost of Goods Sold

$(9,000,000)

$(4,000,000)

Gross Profit

$41,000,000

$6,000,000

 

 

 

Operating Expenses:

 

 

Advertising and Sales

$(26,000,000)

$(3,000,000)

Depreciation

$(160,000)

 

Salaries and Wages

$(1,700,000)

$(1,400,000)

Product Development

$(4,000,000)

$(1,200,000)

Merger and Acquisition Related Costs, including

 

 

    Amortization of Goodwill and Other Intangibles

$(700,000)

$0

Total Operating Expenses

$(32,560,000)

 

 

 

 

Income from Continuing Operations Before Income Taxes

$8,440,000

 

 

 

 

Less: Income Taxes at 35%

$(2,954,000)

 

Income from Continuing Operations

$5,486,000

 

 

 

 

Discontinued Operations:

 

 

Income from Operations of Discontinued Division

 

 

    (less applicable income taxes)

$350,000

 

Loss on Disposal of Discontinued Division

 

 

    (less applicable income taxes)

$(150,000)

 

Total Gain from Discontinued Operations

$200,000

 

 

 

 

Extraordinary Items:

 

 

Loss from fire (less applicable income taxes)

$(200,000)

 

 

 

 

Net Income

$5,486,000

 

 

Divisional Revenues

Books

$15,000,000

$7,000,000

Online gaming

$25,000,000

 

Customized MP3/CD/DVD

$10,000,000

$3,000,000

Customized MP3/CD/DVD Inventory at end of 2009

$8,000,000

 

 

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