Question

A B C D E F G H M N O Exercises Twin Oak Corp has the following comparative balance sheet data. $ Cash Receivables (net) Inventory LT Investments Plant and equipment (net) Twin Oak Corp Balance Sheet December 31 2014 $ 25.000 50,000 90,000 75.000 400.000 $6.10.000 70,000 80,000 345.000 145.000 $6.40.000 2013 20.000 45.000 95.000 70,000 370,000 $600.000 75,000 85.000 315.000 125,000 $600.000 2012 $ 18.000 48.000 64,000 45.000 358,000 $533.000 $ 70,000 50.000 300.000 113,000 $933.000 $ Current liabilities Long-term debt Common stock, $10 par Retained Earnings Outstanding shares average 000 Shares BESUCHE Twin Oak Corp Income Statement For the Year Ended December 31 2014 Sales revenue $710.000 Less: Sales returns and allowances 40,000 Net sales 700.000 Cost of goods sold 420.000 Gross profit 280.000 Operating expenses (including income ta 238.000 Net income S2000 2013 $700,000 60.000 640.000 400.000 240,000 208.000 S2000 Exercise 1 Exercise 2 Exercise Exercise 4 Exercises Type here to search

Answer 1

S.No.	Particulars	Formula	Working notes (2014)	2014	Working notes (2013)	2013
1.	Profit Margin	Net income/Net Sales * 100	42000/700000*100	6%	32000/640000*100	5%
2.	Gross Profit rate	(Total Sales - Cost of Goods Sold)/Total Sales *100	(700000-420000)/700000*100	40%	(640000-400000)/640000*100	37.5%
3.	A/R turnover	Net credit sales/Average accounts receivable	50000/47500	1.05	45000/46500	0.97
4.	Inventory turnover ratio	Cost of Goods Sold/ Average inventory	420000/92500	4.54	400000/79500	5.03
5.	EPS	(Net income - Preferred dividend)/Common shares outstanding	42000/33000	1.27	32000/33000	0.97
6.	PE ratio	Price per share/ earnings per share	8.15/1.27	6.40	7.25/0.97	7.48
7.	Debt to Total Assets	(Short-term debt+Long-term debt)/Total Assets	(70000+80000)/640000	0.23	(75000+85000)/600000	0.27
8.	Return on common equity	Net income/ Shareholders' equity *100	42000/ (345000+145000)	9%	32000 / (315000+125000)	7%
9.	Current Ratio	Current assets/ Current Liabilities	(25000+50000+90000) / 70000	2.36	(20000+45000+95000) / 75000	2.13
10.	Quick Ratio	(Cash+marketable securities+receivables)/Current Liabilities	(25000+50000) / 70000	1.07	(20000+45000) / 75000	0.87

Notes :

1. Average accounts receivable = Year end a/c receivables + Year beginning (or previous year end a/c receivables) / 2

Therefore, for 2104 it is 47500 and for 2013 it is 46500

2. Average inventory = Year end inventory + Year beginning (or previous year end inventory) / 2

Therefore, for 2104 it is 92500 and for 2013 it is 79500

Discussion on the financial position of Twin Oak Corp

The profitability ratios,i.e., profit margin, gross profit rate, EPS, ROE have improved in the year 2014 as compared to the year 2013. Accounts receivable ratio which has improved from 2013 to 2014 from 0.97 to 1.05 also reflects a good picture as it means the company is better poised to collect its receivables during the year. Inventory turnover ratio, however, has reduced which means that inventory is rotated (Sold & refurbished) lesser number of times during 2014 as compared to 2013. PE ration here is reflective of market positive sentiment for the stock since EPS has also increased from 0.97 to 1.27, However, PE has reduced owing to increase in price per share,i.e., market is willing to pay more per share. Debt as a percentage of total assets has reduced. Current ratio is well above 1 and liquid ratio is also above 1, which reflects company's current liabilities are fully secured by its current assets position. Overall, the company is in good financial position required to work on improving inventory turnover.