Question

Grdueook RrON Downloadable eTextbook nt CALCULATOR | FULLSCREEN : PRİNTER VERSION | | BACK Cookie Creations 2 (Essay) After investigating the different forms of business organization, Natalie Koebel decides to operate her business as a corporation, Cookie Creations Inc., and she then begins the process of getting her business running. While at a trade show, Natalie is introduced to Gerry Richards, operations manager of "Biscuits," a national food retailer. After much discussion, Gerry asks Natalie to consider being Biscuits major supplier of oatmeal chocolate chip cookies. He provides Natalie with the most recent copy of the finandial statements of Biscuits. He expects that Natalie will need to supply Biscuits Watertown warehouse with approximately 1,500 dozen cookies a week. Natalie is to send Biscuits a monthly invcice, and she will be paid approximately 30 days from the date the invoice is received in Biscuits' Chicago office. Natalie is thrilled with the offer. However, she has recently read in the newspaper that Biscuits has a reputation for selling cookies and donuts with high amounts of sugar and fat, and as a result, consumer demand for the company's products has decreased Natalie has several questions. Answer the following questions for Natalie. What type of information does each financial statement provide? ch

Answer 1

(1): The income statement will provide information regarding the profitability of the company i.e. whether the business operations of a company is profitable or not, what are the margins generated by the company in terms of EBITDA margin, EBIT margin net margin etc. Balance Sheet provides a snapshot of company’s accounts as on a particular date. The different accounts are assets, liabilities, equity etc. It shows what a company owns, what is owes and what the amount of equity is held by it and its net worth. Cash flow statement helps in determining the amount of change in cash balance that took place in a year due to different activities like operating activities, financing activities and investing activities.

(2): For this purpose Natalie will use the balance sheet. She will use the balance sheet to determine the current ratio of Biscuits. Current ratio = current assets/current liabilities. The higher the current ratio of Biscuits the higher will be its ability to meet its current liabilities.

(3): To determine if Biscuits can survive for a long period of time Natalie will make use of balance sheet. The ratio that will be used here will be the solvency ratio (debt to total assets ratio). The lower the debt asset ratio the higher will be survival chances and solvency of Biscuits.

(4): For profitability Natalie will look at Biscuit’s income statement. She can evaluate its profitability through margin ratios like net income margin, EBITDA margin, EBIT margin etc. She can also look out for EPS (i.e. earnings per share). EPS = net income for the year/no. of average shares outstanding.

(5): To find out about outstanding debt Natalie can look at Biscuit’s balance sheet. The outstanding debt can be seen as a part of liabilities of the company. Outstanding debt will be shown as short term debt and long term debt in the liability side of the Balance Sheet.

To determine if Biscuit can meet its interest payments Natalie can make use of ‘times interest earned’ ratio. Times interest earned = earnings before interest and taxes/interest expenses.

Debt paying ability will be determined through equity ratio debt asset ratio. Equity ratio = total equity/total assets and debt asset ratio = total debt/total assets.

(6): This can be determined from the cash flow statement. If dividends are paid they will be shown under the ‘cash flow from financing activities’ section of the cash flow statement.

(7): Natalie should also be aware of the management of Biscuits, its internal control and corporate governance policies. She should also be aware of efficiency ratio like accounts payable turnover ratio for Biscuits. This ratio indicates the speed with which a company pays its suppliers and vendors.