Acct101

GB518: Financial Accounting Principles and Analysis

(Decision Case 13.5– Acquisition Decision)

Travis Dorso

GB518- Unit 4 Decision Case

Professor Wendy W. Achilles, PhD, CPA

1.

The company seems to be in a state of decent liquidity however each of the measures of liquidity mentioned should be compared with industry averages. One area of concern is the large increase in both receivables and inventories from the prior year. The company could be experiencing collection problems.

Working capital has nearly doubled over the two-year period, from $88,930,000 in 2007 to $161,820,000 in 2008.

Both the current ratio and the quick ratio have also increased:

Current ratio = Current assets/Current liabilities

2008: $324,120/$162,300 = 2.00 to 1

2007: $215,180/$126,250 = 1.70 to 1

The accounts receivable turnover for 2008 = Net credit sales/Average accounts receivable: $875,250/ ($128,420 + $84,120)/2 = 8.24 times, or an average collection period of 360/8.24 = 44 days

The inventory turnover for 2008 = Cost of goods sold/Average inventory: $542,750/ ($135,850 + $96,780)/2 = 4.67 times, or an average number of days sales in inventory of 360/4.67 = 77 days

The cash operating cycle for 2008 is 44 + 77 = 121 days

2.

The company is carrying a heavy debt burden even though the bonds are not due until 2015. It will continue to have large interest payments for the next seven years. Further information on the operating cash flows is necessary to determine whether funds will be available to service the debt currently outstanding.

The debt-to-equity ratio has increased slightly from the prior year: Total liabilities/ Total stockholders’ equity

2008: ($162,300 + $275,000)/$532,710 = 0.82 to 1

2007: ($126,250 + $275,000)/$519,820 = 0.77 to 1

The times interest earned ratio = Operating income/Interest expense: $68,140/$45,000 =1.51 times

3.

Profitability can be assessed by looking at a number of ratios for 2008. The huge jumps in...