Kim Zairelle BibalBSA –III

P14 – Statement of Cashflows

Requirement No. 1

Debit CreditDebits Cash 39,600 a. 27,610 67,210 Accounts Receivable 112,215 b. 9,035 121,250 Merchandise Inventory 210,930 c. 10,830 200,100 Prepaid Expense 10,875 d. 525 11,400 Plant Assets 315,000 e. 165,000 f. 19,500 460,500 Total 688,620 860,460 Credits Accumulated Depreciation 90,000 h. 7,950 g. 46,500 128,550 Accounts Payable 59,220 i. 3,820 55,400 Salaries Payable 30,000 l. 24,000 54,000 Bonds Payable 105,000 k. 60,000 j. 75,000 120,000 Common Stock, $20 par 210,000 m. 30,000 240,000 Additional paid-in capital 22,500 n. 10,500 33,000 Retained Earnings 171,900 p. 64,000 o. 121,610 229,510 Total 688,620 860,460

Operating Activities SummaryIncrease in Accounts Receivable b. 9,035 Decrease in Mechandise Inventory c. 10,830 Increase in Prepaid Expenses d. 525 Accumulated Depreciation g. 46,500 Decrease in Accounts Payable i. 3,820 Increase in Salries Payable l. 24,000 Net income o. 121,610

189,560 Investing ActivitiesPurchase of New Equipment e. 165,000 Sale of Old Equipment f. 19,500

Accumulated Depreciation of Sold Equipmenth.

7,950 (153,450)

Financing ActivitiesRetirement of Bonds Payable k. 60,000 Issuance of Stocks m. 30,000 Additional Paid-in Capital n. 10,500 Declaration of Dividends p. 64,000

(83,500) Noncash Investing & FinancingIssuance of Bonds for acquired Equipment j. 75,000

75,000 337,940 310,330

Change in cash a. 27,610 27,610 337,940 337,940

Account Balance

12/31/12

Account Balance

12/31/13

Analysis of Transactions for Year Ended 12/31/2013

CASHFLOWStatement of Cash Flow

Prime Sports Gear, Inc.Work Sheet for Statement of Cash FlowsFor the Year Ended December 31, 2013

Requirement No. 2

Cash Flows from Operating ActivitiesNet Income 121,610 Add: Decrease in Merchandise Inventory 10,830 Increase in Salaries Payable 24,000

Depreciation Expense 46,500 Loss on Sale of Equipment 3,550

84,880 Less: Increase in Accounts Receivable 9,035

increase in Prepaid expenses 525 Decrease in accounts Payable 3,820

13,380 Net Cash flow in Operating Activities 193,110

Cash Flows from Investing ActivitiesProceeds from sale of Equipment 8,000 Payment for acquired Equipment (90,000) Net cash Flow from Investing Activities (82,000)

Cash Flows from Financing ActivitiesProceeds from issuance of stocks 40,500 Payment of Dividends (64,000) Retirement of Bonds (60,000) Net cash flow from Financing Activities (83,500) Net increase in cash 27,610

Cash balance, jan 1, 2013 39,600 Cash Balance, December 31, 2013 67,210

Prime Sports Gear, Inc.Statement of Cash Flows

For the Year ended December 31, 2013

What-if Analysis

Cash Flows from Operating ActivitiesNet Income 117,110 Add: Decrease in Merchandise Inventory 15,330 Increase in Salaries Payable 4,000

Depreciation Expense 46,500 Loss on Sale of Equipment 3,550

69,380 Less: Increase in Accounts Receivable 9,035

increase in Prepaid expenses 525 Decrease in accounts Payable 3,820 13,380 Net Cash flow in Operating Activities 173,110

Cash Flows from Investing ActivitiesProceeds from sale of Equipment 8,000 Payment for acquired Equipment (90,000) Net cash Flow from Investing Activities (82,000)

Cash Flows from Financing ActivitiesProceeds from issuance of stocks 40,500 Payment of Dividends (64,000) Retirement of Bonds (60,000) Net cash flow from Financing Activities (83,500) Net increase in cash 7,610

Cash balance, jan 1, 2013 39,600 Cash Balance, December 31, 2013 47,210

Prime Sports Gear, Inc.Statement of Cash Flows

For the Year ended December 31, 2013

P15 – Ratio Analysis

Requirement No. 1

2013 2012Net Sales 3,753,000 3,516,075 Cost of Merchandise Sold 3,102,000 2,820,000 Gross Profit 651,000 696,075 Selling Expense 132,000 123,000 General Expense 84,750 81,600 Total Operating Expenses 216,750 204,660 Operating Income 434,250 491,415 Other Expenses (Interest) 36,000 36,000 Income Before Income Tax 398,250 455,415 Income Tax 135,300 164,400 Net Income 262,950 291,015

2013 2012Retained Earnings, January 1 1,628,610 1,420,095 Net Income for Year 262,950 291,015 Total 1,891,560 1,711,110 Common Stock Dividends 102,000 82,500 Retained Earnings, December 31 1,789,560 1,628,610

Assets 2013 2012Cash 41,700 34,830 Accounts Receivable 206,400 232,500 Merchandise Inventory 814,500 825,480 Prepaid Expenses 4,500 22,500 Plant Assets (net) 2,025,000 1,800,000 Total Assets 3,092,100 2,915,310

Liabilities & Stockholders' EquityAccounts Payable 342,240 326,400 Bonds Payable, 10% due 2010 360,000 360,000 Total Liabilities 702,240 686,400 Common Stock 600,300 600,300 Retained Earnings 1,789,560 1,628,610 Total Stockholders' Equity 2,389,860 2,228,910 Total Liabilities and Stockholders' Equity 3,092,100 2,915,310

Global TechnologyComparative Balance Sheet

December 31, 2013 and 2012

Global TechnologyComparative Income Statement

For Year Ended December 31, 2013 and 2012

Global TechnologyComparative Retained Earnings Statement

For Years Ended December 31, 2013 and 2012

Requirement No. 2

2013 2012 20110.72 0.82 1.073.12 3.42 3.02

17.10 13.24 11.053.78 3.86 4.00

17.35% 19.80% 22.73%7.01% 8.28% 8.91%8.75% 10.64% 11.51%

11.39% 13.70% 14.55%

0.23 0.24 0.2112.06 13.65 27.40

Gross Profit RatioNet income to Sales

Liquidity Ratios:Acid-test(quick) ratio

Accounts Receivable turnover

Current RatioActivity Ratios:

Inventory TurnoverProfitability Ratios:

Rate earned on Total AssetsRate earned on Common Stock Equity

Leverage Ratios:Debt to Total AssetsTimes Interest Earned

Computation for 2012:

A. Liquidity Ratio

Acid Test = 34,840 + 232500 Current Ratio = 1,115,310

326,400 326, 400

= 267,330 = 3.42

326, 400

= 0.82

B. Activity Ratio

Accounts Receivable = 3,516,075 Inventory Turnover = 2,820, 000

Turnover 232,500 + 298,575 825,480 + 637,500

2 2

= 3,516,075 = 2,820,000

265,537.5 731, 490

= 13.24 = 3.86

C. Profitability Ratio

Gross Profit = 696,075 Net Income to Sales = 291,015

3,516,075 3,516,075

= 19.79% = 8.28%

Return on Assets = 291, 015 Return on Equity = 291, 015

2,733,942.5 2,124, 652.5

= 10.64% = 13.70%

D. Coverage Ratio

Debt to Total Asset = 686,400 Time Interest Earned = 491,415

2,915,310 36,000

= 0.23 = 13.65

Requirement No. 3

a. What information does comparison of the current ratio and acid test ratio provide?

The current ratio and quick ratio are both designed to estimate the ability of a business to pay for its current liabilities. The difference between the two ratios is the use of inventory.

Current ratio measures the short-term liquidity of a business; it gives an indication of the ability of a business to pay its bills. A declining ratio can specify a deteriorating financial condition while an increasing ratio states an improving financial situation. On the other hand, quick or acid test ratio is used to see if a business has sufficient assets that are immediately convertible to cash to pay its bills. Inventory is not included in the quick ratio, since it can be quite difficult to sell off in the short term. Because of the exclusion of inventory from the formula, the quick ratio is a better indicator than the current ratio of the ability of a company to pay its obligations.

b. Is the company using leverage to its advantage? Explain.

Financial leverage is favorable when the uses to which debt can be put generate returns greater than the interest expense associated with the debt. Therefore, the answer is yes because the rate of return of equity is higher than the rate of return of equity where you can classify that the company used its leverage in an efficient way.

c. What other observations can be made comparing Global Technology’s ratios to the following industry norms:

Acid Test Ratio 1.0Current Ratio 2.0Account Receivable Turnover 12.0Inventory Turnover 4.0Gross Profit Ratio 40%Net Income to Sales 7%Rate Earned on Total Assets 12%Rate Earned on Common Stock Equity 20%Debt to Total Assets .35Times Interest Earned 8

The results in the 2012 acid test ratio of the company seems to have a least danger that the company wouldn’t be able to meet its obligations without having to liquidate or depend to heavily on its inventory since it has a less than one result unlike to the other industry norm which had a equal to one result. When it comes to the current ratio, the company has a better financial condition during 2012 than the other industry because it has an above one result. The high value of accounts receivable turnover in 2012 is more favorable compared to the other industry. Increase in accounts receivable turnover overtime generally indicates improvement in the process of cash collection on credit sales. Inventory turnover measures efficiency of the firm in managing and selling inventory and the industry fallouts into a higher inventory turnover that indicates a better liquidity, but it can also indicate a shortage or inadequate inventory levels, which may lead to a loss in business. The gross profit ration is much lower than the ration states above and it means that the company has a less ability to control costs and inventories to pass along price through the sales to customer. Company’s 2012 net income to sales is slightly higher than the other industry which indicates a more profitable company that has better control over its costs compared to its competitors. Both the return on assets and equity are lower than the percentage stated above because the company do not rely that much on its debt in financing matters. And lastly, the Global Technology’s time interest earned ratio is higher than the industry which specifies that the company has a greater ability to cover its annual interest expense from operating earnings.

What-if Analysis

Computation for 2013:

A. Liquidity Ratio

Acid Test = 41,700 + 206, 400 Current Ratio = 1,067,100

342,240 342, 240

= 248,100 = 3.11

342, 240

= 0.72

B. Activity Ratio

Accounts Receivable = 3,753,000 Inventory Turnover = 3,102, 000

Turnover 232,500 + 206,400 825,480 + 814,500

2 2

= 3,753,000 = 3,102,000

219,450 1,232,480

= 17.10 = 3.78

C. Profitability Ratio

Gross Profit = 651,000 Net Income to Sales = 262,950

3,753,000 3,753,000

= 17.34% = 7.00%

Return on Asset = 262, 015 Return on Equity = 262, 950

3,003,705 2,309, 385

= 8.75% = 11.39%

D. Coverage Ratio

Debt to Total Asset = 702,240 Time Interest Earned = 434,250

3,092,100 36,000

= 0.23 = 12.06

2013 2012 20110.72 0.82 1.073.12 3.42 3.02

17.10 13.24 11.053.78 3.86 4.00

17.35% 19.80% 22.73%7.01% 8.28% 8.91%8.75% 10.64% 11.51%

11.39% 13.70% 14.55%

0.23 0.24 0.2112.06 13.65 27.40

Gross Profit RatioNet income to Sales

Liquidity Ratios:Acid-test(quick) ratio

Accounts Receivable turnover

Current RatioActivity Ratios:

Inventory TurnoverProfitability Ratios:

Rate earned on Total AssetsRate earned on Common Stock Equity

Leverage Ratios:Debt to Total AssetsTimes Interest Earned

From the two set of ratios, what conclusions can be drawn concerning changes from 2012 and 2013?

As you observe, most of the ratios resulted between 2012 and 2013 declines except to the Accounts Receivable Turnover which is a good effect because the company’s extension of credit and collection of accounts receivable are efficient. It also means that high ratio reflects a short lapse of time between sales and the collection of cash. The decrease in current ratio and acid or quick test ratio point out that Global Technology was having some deterioration in their short-term liquidity. The ratios related to the profitability of the company decreases that causes to some failures in generating profits from its investment and management strategies. The debt to total asset decreased which is an advantage to the company because has a minor reliance on debt.

TICKLERS

Compute for the two additional activity ratios: Number of days’ sales in receivables and number of days ’sales in merchandise inventory. Use the 2012 and 2013 data and assume a 365-day year.

For 2013:

Average Collection Period = 365 Average Sales Period = 365

17.10 3.78

= 21 days = 96.56 days

For 2012:

Average Collection Period = 365 Average Sales Period = 365

13.24 3.85

= 27 days = 94.68 days