Part 1.

Financial Statements

ADAMS STORE INC.

INCOME STATEMENT

FOR THE YEARS ENDING 2016 AND 2017

PARTICULARS 2016 ( $ ) COMMON 2017 ($) COMMON

SIZE SIZE
Sales 3,432,000 100% 5,834,400 100%

Cost of goods sold 2,864,000 83.45% 4,980,000 85.36%

Depreciation 18,900 0.55% 116,000 2%
Interest Expenses 62,500 1.82% 176,000 3.02%
Other Expenses 340,000 9.91% 720,000 12.34%
Total Expenses 3,285,400 95.73% 5,992,960 102.72%

Net Income before taxes 146,600 4.27% (158,560) (2.72%)

Less 40% Tax 58,640 1.71% 63,424 1.09%

Net Income 87,960 2.56% (95,136) (1.63%)

STATEMENT OF RETAINED EARNINGS

PARTICULARS 2016 ($) 2017 ($)

Beginning 115,808 203,768
Add Net Income 87,690 (95,136)
Less; Dividends 0 (11,000)
Ending 203,768 97,632
 ADAMS STORE INC.

BALANCE SHEET

PARTICULARS 2016 ($) COMMON SIZE 2017 ($) COMMON

SIZE

Current Assets
Cash 9,000 0.61% 7,282 0.25%
Short term Investments 48,600 3.31% 20,00 0.69%
Accounts Receivable 351,200 23.91% 632,160 21.90%
Inventory 715,200 48.69% 1,287,360 44.60
Total Current Assets 1,124,000 76.53% 1,946,802 67.44%

Fixed Assets 491,000 33.43% 1,202,950 41.67%

Less; Accumulated Dep. (146,200) 9.95% (263,160) 9.12%
Total Fixed Assets 348,800 23.47% 939,790 32.56%

Total Assets 1,468,800 100% 2,886,592 100%

Current Liabilities
Accounts Payable 145,600 9.91% 324,000 11.22%
Accruals 136,000 9.26% 248,960 9.87%
Total Current Liabilities 281,600 19.17% 608,960 21.10%

Long term Liabilities

Long term debt 323,432 22.02% 1,000,000 34.64%
Notes Payable 200,000 13.62% 720,000 24.94%
Total Long term 523,432 35.64% 1,720,000 59.59%
Liabilities

Owners’ Equity
Share Capital 460,000 31.32% 460,000 15.94%
Retained Earnings 203,768 13.87% 97,632 3.38%
Total Owners Equity 663,768 45.19% 557,632 19.32%

Total Labilities and 1,468,000 100% 2,886,592 100%

Owners Equity

ADAMS STORE INC.

CASH FLOW STATEMENT

PARTICULARS 2017 ($)

Cash flow from Operating Activities
Net Profit After Taxes (95,136)
Add; Non Cash Expenditure
Depreciation 116,960
Add; Non-Operating Expenditure
Interest 176,600
Change in Working Capital
Increase in Accounts Receivable (280,960)
Increase in Accounts Payable 178,400
Increase in Inventory (572,160)
Increase in Accruals 148,960
Net Cash From Operating Activities (327,336)

Cash Flow From Investing Activities

Sale of Short term investments 28,600
Purchase of Fixed Assets (711,950)
Net Cash From Investing Activities (683,350)
Cash Flow from Financing Activities
Increase in L.T debt 676,658
Interest Paid (176,600)
Dividend Paid (11,000)
Notes Issued 520,000
Net Cash From Financing Activities 1,008,968

Net Cash Flow from all activities (1,718)

Add; Opening Cash 9,000
Closing Cash 7,282

Part 2; Financial Statement Analysis.

A. Current ratio = Current Assets / Current Labilities

For 2016 = 1,124,000 / 281,600 = 3.99

For 2017 = 1,946,802 / 608,960 = 3.20

Adam Stores Inc. in 2016 had 3.99 times more current assets than current liabilities and in 2017

it had 3.20 times more current assets than current liabilities. This means that the company had a

better liquidity in 2016 since it displayed more capability to pay current liabilities with current

assets than in 2017.

Quick Ratio = (Current Assets – Stock) / Current Labilities

For 2016 = (1,124,000 - 715,200) / 281,600 = 1.45

 For 2017 = (1,946,802 - 1,287,360) / 608,960 = 1.08

Adam Stores Inc. in 2016 had 1.45 times as many as quick assets than current liabilities and in

2017 it had 1.08 times as many quick assets than current liabilities. This means that the company

had a better liquidity in 2016 since it displayed more capability to pay current liabilities with

quick assets than in 2017.

Inventory Turnover = Cost of Goods Sold / Inventory

For 2016 = 2,864,000 / 715,200 = 4 times

For 2017 = 4,980,000 / 1,287,360 = 3.87 times

Adam Stores in Inventory turnover is 4 times in 2016 and 3.87 times in 2017. This means that

the company sold roughly 4 times of its inventory during the year 2016 and 3.87 times of its

inventory in 2017. In other words, the company does have fairly good inventory control for both

years.

Average Collection Period = (Accounts Receivables / Sales) x 365 days.

For 2016 = (351,200 / 3,432,000) x 365 = 37.4 days

For 2017 = (632,160 / 5,834,400) x 365 = 39.5 days

The collection period has increased by 2 days YoY, showing no improvement. The collection

periods for both years is also relatively very high. The company needs to adjust its credit policies
to lower the collection period which will allow it to get more cash flow thus be able to meet its

short-term obligations.

Total Asset Turnover = Net sales / Total Assets.

For 2016 = 3,432,000 / 1,468,800 = 2.34 times

For 2017 = 5,834,400 / 2,886,592 = 2.02 times

Adam Stores Inc. total asset turnover ratio is 2.34 in 2016 and 2.02 in 2017. This means that for

every dollar in assets, the company generates $ 2.34 in 2016 and $ 2.02 in 2017. In other words,

the company was more efficient with its use of assets in 2016 than in 2017.

Debt ratio = (Total Liabilities / Total Assets)

For 2016 = 805,032 / 1,468,800 = 0.55

For 2017 = 2,328,960 / 2,886,592 = 0.81

Adam Stores Inc. debt ratio is 55% in 2016 and 81% in 2017. This means that this company’s

liabilities were only 55 percent of its total assets in 2016 and 81% in 2017.

Times Interest Earned ratio = EBIT / Interest Expense

For 2016 = 146,600 / 62,500 = 2.35

 For 2017 = -158,560 / 176,000 = 0.90

A ratio of 2.35 in 2016 means that the company made enough income to pay for its total interest

expense 2.53 times over. A ratio of 0.90 in 2017 means that the company cannot afford to pay its

interest payments when they come due hence indicate a credit risk.

Gross Profit Margin = (Gross Profit / sales) x 100%

For 2016 = (568,000/ 3,432,000) x 100% = 16.55%

For 2017 = (854,400 / 5,834,400) x 100% = 14.64%

The gross profit margin in 2016 was higher than the gross profit margin in 2017. This means that

after Adams Store Inc. paid off its inventory costs in 2016 and 2017, it still had 16.55% and

14.64% of his sales revenue to cover its operating costs in 2016 and 2017 respectively.

Net Profit Margin = (Net Profit / sales) x 100%

For 2016 = (87,960 / 3,432,000) x 100% = 2.56%

For 2017 = (-95,136 / 5,834,400) x 100% = -1.63%

In 2016, the company was able to covert 2.56% of its sales into net profit. In 2017, the company

was unable to convert any of its net sales into net profit.
 Return on Total Assets = Net Income / Total Assets.

For 2016 = 3,432,000 / 1,468,800 = 2.34 times

For 2017 = 5,834,400 / 2,886,592 = 2.02 times

Adam Stores Inc. return on total assets ratio is 2.34 in 2016 and 2.02 in 2017. This means that for

every dollar in assets invested, the company generates $ 2.34 in 2016 and $ 2.02 in 2017. In

other words, the company was more efficient with its use of assets in 2016 than in 2017.

Return on Equity = Net Income / Shareholder’s Equity

For 2016 = 3,432,000 / (100,000 x $ 46) = 0.75

For 2017 = (5,834,400 – 11,000) / (100,000 x $ 46) = 1.27

This means that every dollar of common shareholder’s equity earned about $0.75 in 2016. In

other words, shareholders saw a 75 percent return on their investment in 2016. After dividends

are removed from net income in 2017, ROE is 1.27. This means that every dollar of common

shareholder’s equity earned about $1.27 in 2017. In other words, shareholders saw a 127 percent

return on their investment.

P/E ratio = Market Value price per share / Earnings per Share

For 2016 = 8.50 / 0.75 = 11.33 times

 For 2017 = 6 / 1.27 = 4.72 times

The Company’s ratio is 11.33 times in 2016 and 4.72 times in 2017. This means that investors

were willing to pay 11.33 dollars for every dollar of earnings in 2016 and 4.72 dollars for every

dollar of earnings in 2017.

C. Retail Trade- Average Industry Financial Ratios

https://www.readyratios.com/sec/industry/G/

Based on the industry average above, how is Adams Stores, Inc. doing financially?

On solvency ratios i.e. debt ratio, seems to be performing poorly since the average for the

industry is 0.67. A higher debt ratio is not advisable.

On Liquidity ratios i.e. Current ratio and Quick Ratio, the company is performing well since it

has higher ratios hence indicating better liquidity of the company.

On Profitability ratios i.e. gross margin, Net profit margin, return on assets and return on equity;

the company seems to be performing not very well as compared to other companies in the retail

business. The ratios are fairly lower than the average industry ratios.

On Activity Ratios ie. Inventory turnover, Average collection period, Total asset turnover; the

company performs poorly compared to the average industry ratios. This means that the company

is not practicing good inventory control compared to the other companies in the industry.

Overall we can say that Adams Stores Inc. is doing not so very well financially as its ratios are

way off below the average industry ratios for retail industry business.
 Part 3. Break-even, Financial and Operating Leverages

(a) Break-even units = fixed cost / contribution per unit

Contribution per unit = Sales per unit - variable cost per unit = 50 - 25 = 25

Break even units = 600,000 / 25 = 24000 units

Break even in dollars = 24000 * 50 = $ 1,200,000

Meaning - That means Johnson products need to sell at least 24000 units to avoid loss and more

than 24000 units to earn profit.

Use in Financial Planning - In financial planning this would help in setting minimum sales target

of $ 1,200,000 to avoid losses.

(b) Degree of financial leverage = EBIT / EBT

EBIT (earnings before interest and tax) = 400000

EBT (earning before tax) = 280000

Degree of financial leverage = 400000/280000 = 1.43

Meaning = for every 1% change in operating profit (EBIT), EBT will change 1.43%

Financial Planning: This can help in deciding capital structure, degree of financial leverage more

than 1 is good if operating profit increases, because interest is a fixed expense and any increase
in operating profit will increase net income and EPS. Therefore for further capital investment

debt can be used till financial leverage reduces to 1.

(c) Degree of operating leverage = Contribution / EBIT

= (2000000-1000000) / 4000000 = 2.5

Meaning - it indicates that if there is 1% change in sales, there will be 2.5% change on profit.

Financial Planning: This will help similarly as break-even point, in deciding minimum sales and

how much sales should be increased without changing fixed cost.