CASE STUDY 9 ACME PAINT COMPANY
Advance Your World.
To help you prepare for Chapter 9, there is a case to be reviewed and analyzed prior to attending the class. You should be prepared to share and discuss the following:
• Evaluate the financial health of the company.
• As the officer of the account, you will identify specific issues that are of major concern.
• Note any recognizable problem-loan warning signs.
The case study will address the following issues:
• Case Study Acme Paint Company
– Evaluation of the company
– Identifying problem loans and warning signs
CS 9 – 2
CASE 1: ACME PAINT COMPANY ACME PAINT COMPANY BALANCE SHEET (FROM COMPANY RECORDS, PREPARED WITHOUT AUDIT)
Fiscal Year Assets
6/30/X1 06/30/X2 06/30/X3 06/30/X4 06/30/X5
Cash $30,600 $69,100 $30,000 $21,700 $1,200
Accounts Receivable 209,000 250,100 190,200 213,500 174,700
Inventory 472,800 425,600 388,200 360,000 399,000
Prepaid Expenses 37,000 8,900 500 16,400 8,200 Total Current Assets
749,400
753,700
608,900
611,600
583,100
Land & Buildings (net) 145,100 146,200 282,500 280,100 323,800
Equipment (net) 32,200 33,500 55,000 59,800 96,500 Total Fixed Assets
177,300
179,700
337,500
339,900
420,300
TOTAL ASSETS $926,700 $933,400 $946,400 $951,500 $1,003,400
Liabilities
Notes Payable – Banks $85,000 $77,000 $100,000 $119,500 $132,700
Accounts Payable 230,000 254,400 255,100 257,300 254,500
Other Current Liabilities 31,800 40,400 26,000 27,700 22,900 Total Current Liabilities
346,800
371,800
381,100
404,500
410,100
Mortgage & Contracts Payable 191,400 168,400 164,100 144,200 188,100
TOTAL LIABILITIES $538,200
$540,200
$545,200
$548,700
$598,200
Common Stock
$189,600
$189,600
$189,600
$189,600
$189,600
Retained Earnings 198,900 203,600 211,600 213,200 215,600 TOTAL NET WORTH
$388,500
$393,200
$401,200
$402,800
$405,200
TOTAL LIABILITIES & NET WORTH $926,700 $933,400 $946,400 $951,500 $1,003,400
CS 9 – 3
ACME PAINT COMPANY INCOME STATEMENT
Fiscal Year 06/30/X1 06/30/X2 06/30/X3 06/30/X4 06/30/X5
Sales $2,900,000 $2,400,000 $2,200,000 $1,900,000 $2,000,000
Less: Cost of Goods Sold
2,262,000
1,800,000
1,700,000
1,450,000
1,500,000
Gross Profit
$638,000
$600,000
$500,000
$450,000
$500,000
Expenses
General & Administrative $574,000 $548,000 $432,000 $389,000 $437,000 Depreciation 10,000 11,000 21,000 22,000 26,000 Interest 33,000 31,000 34,000 32,000 36,000
Total Operating Expenses
617,000
590,000
487,000
443,000
499,000
Operating Profit
21,000
10,000
13,000
7,000
1,000
Other Income -0- -0- -0- -0- 2,000 Other Expenses 6,000 4,000 3,000 5,000 -0- Net Profit before Tax
15,000
6,000
10,000
2,000
3,000
Income Tax 3,300 1,300 2,000 400 600 Net Profit after Tax
$11,700
$4,700
$8,000
$1,600
$2,400
CS 9 – 4
ACME PAINT COMPANY CASE ANALYSIS
Solvency
Year ’X1 Year ’X2 Year ’X3 Year ’X4 Year ’X5 RMA
1. Current Ratio 2.16 2.02 1.60 1.51 1.42 2.10 2. Quick Ratio .69 .86 .58 .58 .43 1.00
Safety
3. Debt-to-Worth Ratio 1.39 1.37 1.36 1.36 1.47 1.00
Profitability
4. Gross Margin % 22.0 25.0 22.7 23.7 25.0 29.0 5. Net Margin % (pretax) 0.52 0.25 0.45 0.10 0.15 4.1
Asset Management
6. Sales to Assets 3.13 2.57 2.32 2.00 1.99 2.30 7. Return on Assets % 1.30 0.50 0.80 0.20 0.20 9.0 8. Return on Investment % 3.10 1.30 0.80 0.40 0.60 19.4 9. Inventory Turnover 4.78x 4.23x 4.38x 4.03x 3.76x 4.90x 10. Inventory (Days) 75 85 82 89 96 74 11. Accounts Receivable Turnover 13.88x 9.60x 11.57x 8.90x 11.49x 8.90x 12. Collection Period Days 26 38 31 40 31 41
YEARS ’X1 TO ’X5 Trend Analysis
Sales: Down 31%
Net Profit: Down 79%
Working Capital: Down 57%
Total Assets: Up 8%
Gross Margin % Up 14%
Net Margin % Down 71%
CS 9 – 5
ACME PAINT COMPANY HISTORICAL SOURCES AND USES (WORKING CAPITAL) ($000S)
ID 1: Fiscal Year-end: June 30 ID 2: Date: X6-Sept.- X5 SOURCES
Company Year ’X3
Company Year ’X4
Company Year ’X5
1. Net Income (Loss) before Nonrecurring. G/L 8 2 2 2. Nonrecurring G/L 0 0 0 3. Depreciation Expense 21 22 26 4. Amortization Expense 0 0 0 5. Deferred Taxes 0 0 0 6. FUNDS FROM OPERATIONS 29 24 28 7. Increase (Decr.) Minority Interest 0 0 0 8. Increase (Decr.) Preferred Stock 0 0 0 9. Increase (Decr.) Cap. Stock & Surpl. 0 0 0 10. Adjustments to Retained Earnings 0 0 0 11. Increase (Decr.) Long-term Debt (4) (20) 44 12. Increase (Decr.) Subordinated Debt 0 0 0 13. Increase (Decr.) Other Noncurr. Liabs. 0 0 0 14. TOTAL SOURCES OF FUNDS 25 4 72
APPLICATIONS 15. Preferred Dividend
0
0
0
16. Common Dividend 0 0 0 17. Increase (Decr.) Treasury Stock 0 0 0 18. Increase (Decr.) Fixed Assets 179 24 106 19. Increase (Decr.) Intangible Assets 0 0 0 20. Increase (Decr.) Other Noncurr.Assets 0 0 0 21. Increase (Decr.) in Working Capital (154) (21) (34)
22. TOTAL USES OF FUNDS 25 4 72 CURRENT ASSETS 23. Increase (Decr.) Cash & Equivalents
(39)
(8)
(21) 24. Increase (Decr.) Marketable Sec. 0 0 0 25. Increase (Decr.) Accounts Rec.-Trade (60) 23 (39) 26. Increase (Decr.) Notes Rec.-Trade 0 0 0 27. Increase (Decr.) Inventories (37) (28) 39 28. Increase (Decr.) Prepaids (8) 16 (8) 29. Increase (Decr.) Other Curr. Assets 0 0 0
30. TOTAL CHANGE IN CURRENT ASSETS (145) 3 (29) CURRENT LIABILITIES 31. Increase (Decr.) N/P-Bank
23
20
13 32. Increase (Decr.) CPLT & Sub. Debt 0 0 0 33. Increase (Decr.) Accounts Payable 1 2 (3) 34. Increase (Decr.) Income Tax Payable 0 0 0 35. Increase (Decr.) Other Accrued Exp. (14) 2 (5) 36. Increase (Decr.) Other Curr. Liabs. 0 0 0
37. TOTAL CHANGE IN CURR. LIABS. 9 24 5 38. INCREASE (DECR.) IN WORKING CAPITAL (154) (21) (34
39. TOTAL CHANGE CURR. LIABS. & WC (145) 3 29
CS 9 – 6
ACME PAINT COMPANY HISTORICAL CASH FLOW ($000S) ( ) = Cash Outflow
ID 1: Fiscal Year-end: June 30
LESS DISBURSEMENTS 6. Cost of Goods Sold (Less Depr.) (1,700) (1,450) (1,500) 7. Inventories-Decr. (Incr.) 37 28 (39) 8. Accounts Payable-Incr. (Decr.) 1 2 (3) 9. Operating Exp. (Exc. Depr. & Amort.) (432) (389) (437) 10. Interest Expense (34) (32) (36) 11. Income Taxes (Paid) (2) (0) (1) 12. Fixed Assets-Decr.(Incr.) (179) (24) 106) 13. Net Other Cash Disbursements* (6) (14) 0 14. TOTAL DISBURSEMENTS (2,315) (1,880) (2,122) 15. CASH FLOW BEFORE FINANCING (58) (8) (78) 16. CASH SURPLUS (DEFICIT) 11 22 (56)
FINANCING SOURCES 17. Notes Payable Bank-Incr. (Decr.)
23
20
13
18. Long-Term Debt-Incr. (Decr.) (4) (20) 44 19. Subordinated Debt-Incr. (Decr.) 0 0 0 20. Capital Stock and Miscellaneous Income-Incr. (Decr.) 0 0 0 21. Dividends Paid 0 0 0 22. Adjustment to Retained Earnings 0 0 0 23. CASH BALANCE ENDING 30 22 1
CUMULATIVE BALANCES 24. Notes Payable Bank
100
120
133
25. Long-term Debt 164 144 188 26. Subordinated Debt 0 0 0 * OTHER CASH RECEIPTS (DISBURSEMENTS) 27. Nonrecurr. Gains (Losses) 0 0 0 28. Marketable Securities-Decr. (Incr.) 0 0 0 29. Oth. Rec., Prepaids, Oth. Curr.Assets-Decr. (Incr.) 8 (16) 8 30. Interest Accrual, LT Inv. & Oth. NCA-Decr. (Incr.) 0 0 0 31. Accruals & Other Curr. Liabs.-Incr. (Decr.) (14) 2 (5) 32. Noncurr. Liabs.-Incr. (Decr.) 0 0 0 33. * NET OTHER CASH RECEIPTS (DISBURSEMENTS) (6) (14) 3
C re
di t E
ss en
tia ls
C ou
rse
ID 2: Date: X6-Sept.-X5
Company Year ’X3
Company Year ’X4
Company Year ’X5
1. Cash Balance Beginning Plus Receipts 69 30 22 2. Accounts Receivable Collections 2,260 1,877 2,039 3. Other Income (Expense) (3) (5) 2 4. Net Other Case Receipts* 0 0 3 5. TOTAL RECEIPTS 2,257 1,872 2,044
CS 9 – 7
ACME PAINT COMPANY HISTORICAL FINANCIAL RATIOS
ID 1: ID 2:
Company
Company
Fiscal Year-end: June 30 Company Company
Date: X6-Sept. X5 Year X2 Year X3 Year X4 Year X5
LIQUIDITY & SOLVENCY RATIOS 1. Current Ratio (x)
2.03
1.60
1.51
1.42
2. Quick Ratio (x) 0.86 0.58 0.58 9.43 3. Working Capital ($) 382.00 228.00 207.00 173.00 4. Working Capital (% Sales) 15.91 10.35 10.87 8.65
SAFETY RATIOS 5. Debt/Worth (x)
1.37
1.36
1.36
1.48
6. Debt/Worth (w/Sub.debt)(x) 1.37 1.36 1.36 1.48 7. Break-even Sales ($) 2,360.00 2,143.00 1,870.00 1,996.00 8. Actual Sales/Break-even Sales (x) 1.02 1.03 1.02 1.00 9. Z Factor (#) 4.43 3.39 3.17 2.80
GROWTH RATIOS 10. Sales (Annual %)
NA
-8.33
-13.64
5.26
11. Pretax Income (Annual %) NA 66.67 -80.00 50.00 12. Sust. Growth-same D/W (%) 1.21 2.03 0.40 0.60 13. Sust. Growth-new D/W 2.20 37.01 39.43 36.15 30.22 14. Sust. Growth-No New Debt (%) 0.84 1.44 0.29 0.41
PROFITABILITY RATIOS 15. Gross Margin (%)
25.00
22.73
23.68
25.00
16. Operating Expense (%) 23.29 20.59 21.63 23.15 17. Operating Profit Margin (%) 1.71 2.14 2.05 1.85 18. Pretax Profit Margin (%) 0.25 0.45 0.11 0.15 19. Net Profit Margin (%) 0.20 0.36 0.08 0.12
BALANCE SHEET MANAGEMENT RATIOS 20. Sales to Assets (x)
2.57
2.32
2.00
1.99
21. Assets to Sales (%) 38.89 43.02 50.08 50.17 22. Sales to Net Fixed Assets (x) 13.36 6.52 5.59 4.76 23. Return on Assets (Pretax %) 0.64 1.06 0.21 0.30 24. Return on Equity (Pretax %) 1.53 2.49 0.50 0.74 25. A/R Collection Period (Days) 0.00 0.00 0.00 0.00 26. Inventory Turnover (Days) 0.00 0.00 0.00 0.00 27. A/P Payment Period (Days) 0.00 0.00 0.00 0.00
FINANCING RATIOS 28. Net Profit Bank to Sales (%)
3.21
4.55
6.32
6.64
29. Interest Coverage (x) 1.19 1.29 1.06 1.08 30. Principal & Interest Coverage (x) NA 1.29 1.06 1.08 31. Net Profit to A/R (%) 75.00 30.79 52.58 56.21 75.96 32. Inv. Reliance (%) 60.00 0.00 0.00 0.00 0.00 33. Credit Based on Inv. and A/R 443.00 376.00 376.00 370.00 34. Credit Avail. (Deficit) ($) 366.00 276.00 258.00 238.00 35. LTD to Net Fixed Assets (%) 93.71 48.62 42.42 44.75 36. LTD with Sub. Debt/Net Fixed Assets (%) 93.71 48.62 42.42 44.75
( ) = Cash Outflow
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