Question

Tivoli Home Furnishings Mini Case Anders Jensen founded Tivoli Home Furnishings as a corporation during mid-2015. Sales during the first full year (2016) of operation reached $1.3 million. Sales increased by 15% in 2017 and another 20% in 2018. However, profits, after increasing in 2017 over 2016, fell sharply in 2018, causing Anders to wonder what was happening to his “pride-and-joy” business venture. After all, Anders has continued to work as closely as possible to a 24/7 pace beginning with the startup of Tivoli and through the first three full years of operation. Tivoli Home Furnishings, located in eastern North Carolina, designs, manufactures, and sells Scandinavian-designed furniture and accessories to home furnishings retailers. The modern Scandinavian design has a streamlined and uncluttered 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 the other Scandinavian countries––Sweden, Norway, and Finland–– are made using wood (primarily oak, maple, and ash), aluminum, steel, and high-grade plastics. Anders grew up in Copenhagen, Denmark, and received an undergraduate degree from a technical university in Sweden. As is typical in Europe, Anders 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, Anders realized that what he really wanted to do was to start and operate his own Scandinavian home furnishings business. At the same time, after traveling throughout the world, including the United States, he was sure that he wanted to be an entrepreneur in the United States. Anders moved to the U.S. in early 2015. With $140,000 of his personal assets and $210,000 from venture investors, he began operations in mid-2015. Anders, with 40% ownership interest and industry-related management expertise, was allowed to operate the venture in a way that he thought was best for Tivoli. Four years later, Anders is sure he did the right thing. Following are the three years of income statements and balance sheets for Tivoli Home Furnishings. Anders felt that in order to maintain a competitive advantage, he would need to continue to expand sales. After first concentrating on selling Scandinavian home furnishings in the northeast in 2016 and 2017, he decided to enter the west coast market. An increase in expenses occurred associated with identifying, contacting, and selling to home furnishings retailers in California, Oregon, and Washington. Anders Jensen hopes that you can help him better understand what has been happening to Tivoli Home Furnishings from both operating and financial standpoints.   Tivoli Home Furnishings, Inc. Income Statements 2016 2017 2018 Net sales $ 1,300,000 $ 1,500,000 $ 1,800,000 Cost of goods sold 780,000 900,000 1,260,000 Gross profit 520,000 600,000 540,000 Marketing expenses 130,000 150,000 200,000 General and administrative 150,000 150,000 200,000 Depreciation expense 40,000 53,000 60,000 EBIT 200,000 247,000 80,000 Interest expense 45,000 57,000 70,000 Earnings before taxes 155,000 190,000 10,000 Income taxes (40%) 62,000 76,000 4,000 Net income $ 93,000 $ 114,000 $ 6,000 Tivoli Home Furnishings, Inc. Balance Sheets 2016 2017 2018 Cash $ 50,000 $ 40,000 $ 10,000 Accounts receivable 200,000 260,000 360,000 Inventories 450,000 500,000 600,000 Total current assets 700,000 800,000 970,000 Fixed assets, net 300,000 400,000 500,000 Total assets $1,000,000 $1,200,000 $1,470,000 Accounts payable $ 130,000 $ 170,000 $ 180,000 Accruals 50,000 70,000 80,000 Bank loan 90,000 90,000 184,000 Total current liabilities 270,000 330,000 444,000 Long-term debt 300,000 400,000 550,000 Common stock ($10 par)* 300,000 300,000 300,000 Capital surplus 50,000 50,000 50,000 Retained earnings 80,000 120,000 126,000 Total liabilities and equity $1,000,000 $1,200,000 $1,470,000 * 30,000 shares of common stock were issued to Anders Jensen and the venture investors when Tivoli Home Furnishings was incorporated in mid-2015.   A. Calculate the current ratio and the quick ratio for each of the years. What has happened to Tivoli’s liquidity position? Current Ratio: Quick Ratio: B. Calculate the inventory turnover, days sales in inventory, receivables turnover, and days sales in receivables for each of the years and interpret the results. Inventory Turnover: Day Sales in Inventory: Receivables Turnover: Days Sales in Receivables: C. Creditors as well as management are also concerned about the ability of the venture to meet its debt obligations as they come due. For each year, calculate total debt, debt to equity, equity multiplier, and the times interest earned ratios. Interpret your results and explain what has happened to Tivoli. Total Debt: Debt to Equity: Equity Multiplier: Total Assets /Total Equity (Assets – Liabilities) Times Interest Earned Ratios: D. Of importance to Anders and the venture investors is the profitability of the venture. Calculate the profit margin, ROA, and ROE for each year and describe what is happening to the profitability of Tivoli Home Furnishings. E. Anders and the venture investors are also interested in how efficiently Tivoli is able to convert the firm’s total assets into sales. Calculate the total asset turnover ratio for each year and interpret. F. Perform a Du Pont decomposition for each year and provide an interpretation of your findings. G. Trade association data show an average profit margin of 6.5 percent, a sales to asset ratio of 1.3 times, and a total debt ratio of 55 percent over the 2016-2018 period. Compare the components of the Du Pont analysis with the industry averages – compare each component, as well as the product of the components. How does Tivoli compare with the rest of the industry? H. What is going on with Tivoli and what is the likely solution?

Answer 1

Ratios	Formulas	2014	2015	2016
Debtors turnover ratio	=Total Revenue/Debtors	6.5x	5.8x	5.0x
Creditors turnover ratio	=COGS/Creditors	6.0x	5.3x	7.0x
Inventory turnover ratio	=COGS/Inventory	1.7x	1.8x	2.1x
Days debtors outstanding (Days)	365/Debtors turnover ratio	56	63	73
Days Creditors outstanding (Days)	365/Creditors turnover ratio	61	69	52
Days Inventory outstanding (Days)	365/Inventory turnover ratio	211	203	174
Cash conversion cycle (Days)	Debtors turnover ratio - Creditors turnover ratio + Inventory turnover ratio	206	197	195

The company's days debtors outstaning has increased from 56 days in 2014 to 73 days in 2016, which is not the good sign as the it indicates the days which the company take to recieve its payments from its customers. Moreover, company's days creditors outstaning has also deterioated as it decreased from 61 days in 2014 to 52 days in 2016.

However, the improvement in days inventory outstanding with 211 days in 2014 to 174 days in 2016 has also improved the cash conversion cycle from 206 days in 2014 to 195 days in 2016 which indicates the number of days a company takes to covert its raw materials into actual cash by recieving the payment from its customers.

B. Company,s Days inventory outstaning in 2016 is 174 days which is way lower than the industry average of 200 days which is considered good as compared to industry average. However, days sales outstanding/ days debtors outstanding of the company in 2016 is 73 days which is higher tahn industry average of 60 days and is not considered good.