Question

MINICASE Scandi Home Furnishings, Inc. high grade plastics Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid 2013. Sales during the first full year (2018) of operation reached $1.3 million Sales increased by 15 percent in 2015 and another 20 percent in 2016. However, after increasing in 2015 over 2014, profits fall sharply in 2016, causing Kaj to wonder what was happening to his "pride and ay business venture. After all, Kaj worked as closely as possible to a 24/7 pace, beginning with the startup of Scandi and continuing through the first three full years of operation Scandi Home Furnishings, located in eastern North Carolina, designs, manufactures, and sells Scandinavian-designed humiture and accessories to home furnishings retailers. The modern Scandinavian design has a streamlined and unclut hered look. While this furniture style is primarily associated with Denmark, both Norwegian and Swedish designers have contributed to the allure of Scandinavian home furnishings. Some say that the inspiration for the Scandinavian design can be traced to the elegant curves of art nouveau from which designers were able to produce aesthetically pleasing. structurally strong modern furniture. Danish furnishings and the home furnishings produced by other Scandinavian countries -Sweden, Norway, and Finland-are made using wood (primarily oak, maple, and ashl, aluminum, steel, and Kaj grew up in Copenhagen, Denmark, and received an undergraduate degree from a technical university in Sweden. As is typical in Europe. Kaj began his business career as an apprentice at a major home furnishings manufacturer in Copenhagen. After learning the trade, he quickly moved into a management position in the firm. However, after a few years, Kaj realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business. At the same time, after travelling throughout the world, he was sure that he wanted to be an entrepreneur in the United States. Kaj moved to the United States in early 2013. With $140,000 of his personal assets and $210,000 from venture investors, he began operations in mid-2013. Kaj, with a 40 percent ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Scandi. Four years later, Kaj is sure he did the right thing. Following are the three years of income statements and balance sheets for Scandi Home Furnishings. Kaj felt that he would need to continue to expand sales to maintain a competitive advantage. After first concentrating on selling Scandinavian home furnishings in the Northeast in 2014 and 2015, he decided to enter the West Coast market. An in- crease in expenses occurred associated with identifying. contacting, and selling to home furnishings retailers in California, Oregon, and Washington. Kaj Rasmussen hopes that you can help him better understand what has been happening to Scandi Home Furnishings from both operating and financial standpoints. SCANDI HOME FURNISHINGS, INC. INCOME STATEMENTS 2014 2016 Net sales Cost of goods sold Gross profit Marketing General and administrative Depreciation EBIT Interest Earnings before taxes Income taxes (40%) Net income Cash Dividends $1,300,000 780,000 520,000 130,000 150,000 40.000 200.000 45,000 155,000 62.000 $ 93.000 2015 $1,500,000 900.000 600.000 150.000 150.000 53,000 247.000 57.000 190,000 76,000 $ 114,000 $ 74,000 $1,800,000 1.260,000 540.000 200.000 200.000 60.000 80,000 70,000 10,000 4,000 $ 6.000 $ $ 0 (continued on next page)

I need help on part B (C-F) please. I will rate the question if I get it wrong or right on my homework.

Answer 1

C. For checking the liability obligations, various ratios can be used such as Current liab. to Total debt ratio, Total debt to Total Asset Ratio and Debt to Equity ratio.

• Current liab. to Total debt ratio :- The current liability to debt ratio of the company is .47 (270000/570000) in year 2014, .45(330000/730000) in 2015 and .44(444000/994000) in 2016. This indicated that the portion of the long term debt in total debt has been increasing rapidly which increases interest cost.
• Total Debt to Total Asset Ratio:- This ratio indicates that how much assets are available to fulfill total liabilities.The Debt to Asset ratio of the company is .57 (570000/1000000) in year 2014, .608(730000/1200000) in 2015 and .676(994000/1470000) in 2016. This indicated that the portion of the long term has been increasing rapidly as compared to the assets which increases interest cost and burden over the company. If this continues then company assets may fall low compared to liabilities.
• Debt to Equity ratio:- This ratio indicated that how much finance is invested through owners fund and how much through taking loans and credits. The lower rate is better. The Debt to Asset ratio of the company is 1.32 (570000/430000) in year 2014, 1.55(730000/470000) in 2015 and 2.08(994000/476000) in 2016. This indicated that the portion of the Debt has been increasing rapidly as compared to the Equity portion which increases interest cost and burden over the company.

D. To calculate the profitability of the company net profit margin ratio has been used. The net profit to net sale ratio is 7.15% (92000/1300000) in 2014, 7.6% (114000/1500000) in 2015 and 0.33% (6000/1800000). The profit and sale both are increasing in year 2015 as compared to year 2014 and company perform better and achieve higher profit. In year 2016,the sale is still increasing but the profit has been decreasing very drastically. This is happened due to poor management of the company which results in increasing Cost of good sold, indirect expenses and interest expenses.

E. To measure the efficiency of the business , so many ratios can be used. here use 2 ratio to explore it.

• Inventory turnover ratio (COGS / Inventory) :- The COGS to Inventory ratio of the company is 1.7(780000/450000) in year 2014, 1.8(900000/500000) in 2015 and 2.1(1260000/600000) in 2016. This ratio has been increasing year by year.
• Asset Turnover ratio (Revenue/Total Asset):- This ratio indicated how much revenue is generated from limited Asset. Higher the ratio, better will be. The Revenue to Total Asset ratio of the company is 1.3 (1300000/1000000) in year 2014, 1.25(1500000/1200000) in 2015 and 1.224(1800000/1470000) in 2016. The ratio has been decreasing year by year this indicated that less revenue has been generating from same asset. This shows efficiency has been reducing.

F. ROA and ROE both ratios has been used to judge the efficiency of the company.

• ROA (Net Income / Total Asset):- This ratio is used to check how much revenue has been generating from use of asset. Higher the ratio, better it is. The Revenue to Total Asset ratio of the company is 9.3% (93000/1000000) in year 2014, 9.5%(114000/1200000) in 2015 and 0.41(6000/1470000) in 2016. The ratio has increased in year 2015 which shows that company improved in year 2015 but in next year it reduced drastically which shows efficiency has been reduced in year 2016.
• ROE (Net Income / Total Equity):- This ratio is used to check how much return company provided in response of owners fund. Higher the ratio, better it is. The Revenue to Total Equity ratio of the company is 21.62% (93000/430000) in year 2014, 24.25%(114000/470000) in 2015 and 1.26%(6000/476000) in 2016. The ratio has increased in year 2015 which shows that company improved in year 2015 but in next year it reduced drastically which shows efficiency has been reduced in year 2016.