Question

Please and in full as well as number thr answer

PROFORMA STATEMENTS AND RATIOS The BIB-HOP Manufacturing Company was very satisfied with their ox performance The company had only begun operations the prior year, and as a result sales had been slow However things had picked up considerably in x wie sales more than doubing in volume B8-HOP had changed none of its business practices during the year and had managed to hold its cost of goods sold to 78% of sales A1 sales were made on credit, and payment was requred within 30 days ofthe sale The company pad for its purchases r, 30 days and mantained acash balance of 20% in sales The only thing that had changed during the year was the company's inventory tumover, which had jumped from 3x to 6x. While possble necessity of increasing its short-term debt. In order to assess the situation, the company was in the process of completing the financial statements shown below. (iv Tum Co.G.Sanw as the balancing account (a plug 4,080 ost of 1,560 320 before tax 120.00 Taxes @ 40% after tax sheet 400.00 164 ash otal cument assets t property. plant and otal assets counts payabl 1 6 12821 otal current liabilities tem debt stock 372 480 800 480 800 otal long-term debt otal Labiities and urrent assets urrent liablities et asset tunover for he years xxxo and xxxt 2. Build the common size income statements for years xxxo and ox tps imail-attachment a9, 90 11AMM Page 1 of 2 3. What is your assessment of BIB-HOP Manufacturing Company based on the figures obtained in questions 1 and 2 Will the company need to raise external funds (EFN or AFN) in xoox1, and how much? 4. Complete the statements for xxx1 assuming that cost of goods sold is 83%, that the company mantans cash balance of 15% of sales, everything else remains as stated before in the problem And do guestions 1.2anda FIN350 Spreadsheet Project #2 Five Points of Clarification Accounts Receivable and Accounts Payable 1. The problem specifies that it takes the firm 30 days to collect its sales. This means that the days of sales outstanding (DSO), sometimes also called average collection period (ACP), equal 30 days. The ratio that measures DSO or ACP = A. R/(credit Sales/360). You use this ratio to find A.R. (accounts receivable) This problem assumes that all sales are made on credit 2. The problem also says that the firm takes 30 days to pay their purchases. Thus, the Average Payment Period (APP) for the firm is 30 days. The ratio that measures APP is APP A·P/(credit Purchases/360). You use this ratio to find A.P. (accounts payable). Assume that all the firms purchases are made on credit. However, the problem does not say how much purchases the firm plans to make in the year XXXI. You need to calculate the expected purchases first. You can follow exactly the same steps that we followed in class when we worked out the "Jordan Stores" example to illustrate the Financial Planning and Forecasting approach that we labeled the "Composite Method". This example is posted on "Canvas" in the Module on Financial Planning and Forecasting. The illustration example (Jordan Stores" that is in the section titled "Composite Method") provides all the steps to follow in order to calculate the forecasted purchases. In any case, this is briefly how you would calculate the We know that for Inventories, we can generally write the following: Beginning Inventories+ Purchases-Ending Inventories Cost of Goods Sold () From (1) you can estimate Purchases for the forecast /41, 10 11 AM Page 1 of 2 period as Purchases = Cost of Goods Sold Beginning Inventories (2) Ending inventories- "Plug Account" 3. Furthermore the problem says that the additional funds needed (AFN) will be raised as Short term Debt. Thus, you should use the account "Short-Term Notes Payable" as a plug account" It means that after completing your profoma Balance Sheet, use the "Short-Term Notes Payable" account to make it balance by entering the appropriate dollar amount that will make the firm's Total Liabilities and Net Worth" equal its "Total Assets". Do just as you did with the "Cash and Equivalents" account in spreadsheet project # 1 . As a result, an AFN (or EFN) account does not have to show on your proforma balance sheet as a separate item even though you have to provide the Samount of the EFN/AFN Dividend 4. Finally, the problem does not mention any dividend payout rate. Thus, assume no dividend payment. That is, the company retains all of its Net Profit. Do not hesitate to ask if you have more questions on the spreadsheet assignment 5. Spreadsheet projects must be completed with excel. Thus this project must be completed with excel. Projects that are not done with excel will be downgraded. 6. No handwritten submission is accepted. 10-11 AM

Answer 1

Completed forms for both the years is shown in the table below:

	xxx0	xxx1
Income Statement
Sales	2,000,000	4,080,000
Cost of Goods Sold	1,560,000	3,182,400
Gross Margin	440,000	897,600
Other expenses	320,000	320,000
Profit before tax	120,000	577,600
Taxes @40%	48,000	231,040
Profit after tax	72,000	346,560
Balance Sheet
Cash	400,000	816,000
Accounts receivable	164,384	340,000
Inventory	520,000	530,400
Total current assets	1,084,384	1,686,400
Net property, plant and equipment	640,000	608,000
Total assets	1,724,384	2,294,400
Accounts payable	128,216	266,067
Short-term Notes Payable	244,168	329,773
Total current liabilities	372,384	595,840
Long-term debt	480,000	480,000
Common stock	800,000	800,000
Retained earnings	72,000	418,560
Total long-term debt and equity	1,352,000	1,698,560
Total liabilities and equity	1,724,384	2,294,400
Net working capital:
Current assets	1,084,384	1,686,400
Current liabilities	372,384	595,840
Net working capital	712,000	1,090,560

Working notes:

1. COGS is computed as 78% of Sales i.e. (4,080,000*78%)

2. Cash is computed as 20% of Sales i.e. (4,080,000*20%)

3. Account receivable is computed as=Days of sales outstanding*Credit sales/360

=30*4,080,000/360

=340,000

4. Inventory is computed as COGS/Inventory turnover

=3182400/6

=530400

5. Account payable is computed as=Average payment period*credit purchases/360

Where Credit purchases=COGS+Closing inventory-Beginning inventory

=3182400+530400-520000

=3192800

Therefore, Account payable=30*3192800/360

=266,067

6. Retained earning is computed as Opening retained earnings+net profit for the year

=72000+346560

=418560

1. Comparison of key ratios for both the years:

Ratios	Formula	xxx0	xxx1
ROE	Net profit/Total equity	8.26%	28.44%
ROA	Net profit/Total assets	4.18%	15.10%
EM	Total assets/Net equity	1.98	1.88
PM	Profit before tax/Sales	6.00%	14.16%
A/R turnover	Sales/Account receivable	12.17	12.00
Inventory turnover	COGS/Inventory	3	6
Fixed asset turnover	Sales/Net property, plant and equipment	3.13	6.71

1. Return on equity (ROE) has increased in year 2 by a substantial margin. This implies that the company is offering high returns to the equity shareholders on their investment in the company.

2. Return on assets (ROA) has increases from 4.18% to 15.10% which indicate that company has become more efficient in generating revenues from assets applied in the business. This indicate operational efficiency for the company.

3. Equity multiplier (EM) represents financial leverage i.e. the proportion for assets financed by its shareholders. The ratio has declined from 1.98 to 1.88 which implies that the company is majorly financial through equity. This is due to increase in retained earnings of the company which is favorable for the company.

4. Profit margin (PM) is computed as the ratios of operating profit to sales. Despite the same gross profit margin of 28%, the profit margin has increased for the year. This is due to control on operating expenses along with increase in sales revenues.

5. The account receivable turnover has decreased marginally from 12.17 to 12. This implies that the account receivable has increased more in comparison to increase in sales.

6. The inventory turnover for the company has doubled during the year which implies that it has been able to sell the inventory faster reducing the period of operating cycle.

7. The fixed assets turnover has increased from 3.13 to 6.17 which implies that company has been more efficient in generating revenues through application of its fixed assets.

2. Common size income statement for both the years:

Common size Income Statement
	xxx0		xxx1
	Amount	Percentage	Amount	Percentage
Sales	2,000,000	100%	4,080,000	100%
Cost of Goods Sold	1,560,000	78%	3,182,400	78%
Gross Margin	440,000	22%	897,600	22%
Other expenses	320,000	16%	320,000	7.84%
Profit before tax	120,000	6%	577,600	14.16%
Taxes @40%	48,000	2.40%	231,040	5.66%
Profit after tax	72,000	3.60%	346,560	8.49%

3. Based on the financial statements and ratios for both the years, it can be stated that the company's performance has enhanced significantly in year 2 of its operations. The profitability of the company has improved which is evident from then profit margins reflected in the common size income statements. Also, the operational efficiency of the company has improved as it able to generate increased revenues from the same quantum of assets applied in the business.

However, to financial to achieve this level of sales and to maintain the cash balance at 20% of sales, the company needs to raise additional funds. Company raises External Funds Needed (EFN)/ Additional Funds NEeded (AFN) through short-term notes payable. The amount of short-term notes payable has increased from $244,168 to $329,773. Hence, the additional funds needed by the company is $85,605 in year 2.

4. If the cost of goods sold was 83% of sales and cash balance was 15% of sales, the income statement and balance sheet for both the years would be as follows:

	xxx0	xxx1
Income Statement
Sales	2,000,000	4,080,000
Cost of Goods Sold	1,560,000	3,386,400
Gross Margin	440,000	693,600
Other expenses	320,000	320,000
Profit before tax	120,000	373,600
Taxes @40%	48,000	149,440
Profit after tax	72,000	224,160
Balance Sheet
Cash	400,000	612,000
Accounts receivable	164,384	340,000
Inventory	520,000	564,400
Total current assets	1,084,384	1,516,400
Net property, plant and equipment	640,000	608,000
Total assets	1,724,384	2,124,400
Accounts payable	128,216	285,900
Short-term Notes Payable	244,168	262,340
Total current liabilities	372,384	548,240
Long-term debt	480,000	480,000
Common stock	800,000	800,000
Retained earnings	72,000	296,160
Total long-term debt and equity	1,352,000	1,576,160
Total liabilities and equity	1,724,384	2,124,400
Net working capital:
Current assets	1,084,384	1,516,400
Current liabilities	372,384	548,240
Net working capital	712,000	968,160

The key ratios would be as follows:

Ratios	xxx0	xxx1
ROE	8.26%	20.45%
ROA	4.18%	10.55%
EM	1.98	1.94
PM	6.00%	9.16%
A/R turnover	12.17	12.00
Inventory turnover	3	6
Fixed asset turnover	3.13	6.71

Comparison:

The ROE, ROA and Profit margin would decline due to increase in proportion of cost of goods sold. Hence, if the cost increases in higher proportion than increase in sales, the returns would increase by a lower rate. Despite this, the company can manage to increase its profitability and returns by a significant margin.

The common size balance sheet would be as follows:

Common size Income Statement
	xxx0		xxx1
	Amount	Percentage	Amount	Percentage
Sales	2,000,000	100%	4,080,000	100%
Cost of Goods Sold	1,560,000	78%	3,182,400	78%
Gross Margin	440,000	22%	897,600	22%
Other expenses	320,000	16%	320,000	7.84%
Profit before tax	120,000	6%	577,600	14.16%
Taxes @40%	48,000	2.40%	231,040	5.66%
Profit after tax	72,000	3.60%	346,560	8.49%

In this scenario also, the company is profitable. The profit margin is considerable higher than the previous year. The performance of the company seems to be favorable for the business and for the investors.

The company would still needs to raise additional funds through external financing. However, it is significantly lower as compared to the previous scenario. The short-term notes payable has increased from $244,168 to $262,340. Hence, the additional funds needed by the company in year 2 would be $18,172.