Case 1

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ABINGTON-HILL TOYS, INC.

PART I – INTRODUCTION

Due to the death of the last original founder, Lewis Hill, the financial condition was deteriorating under Hill’s last-year control. Owners of the firm decided to find a capable manager to improve the firm’s financial condition and reshape the company as well. Then, Vernon Albright was selected as the new president of this company. Lately, David Hartly became the comptroller assistant and was responsible to analyzing the firm’s financial conditions.

PART II – METHODOLOGY

A. Current Ratio: Current Assets
Current Liabilities

B. Acid-Test Ratio: Current Assets – Inventory
Current Liabilities

C. Average Collection Period: Accounts receivable
(Annual Credit Sales / 365 days)

D. Inventory Turnover: Cost of Goods Sold
Inventory

E. Fixed Asset Turnover: Sales
Net Fixed Assets

F. Total Assets Turnover: Sales
Total Assets

G. Debt Ratio: Total Debt
Total Assets

H. Times Interest Earned : Operating Profit
Interest Expense

I. Gross Profit Margin:Gross Profit
Revenue

J. Net Profit Margin:Net Income
Revenue

K. Return on Total Assets: EBIT
Total Assets

L. Return on Net Worth: Net Income
Shareholder’s Equity

M. Z-Score:
Z = 1.2X1 + 1.4X2 + 3.3X3 +0.6X4 +1.0X5
X1= Working Capital/ Total Assets
X2= Retained Earnings/ Total Assets
X3= EBIT/ Total Assets
X4= Market Value of Preferred and Common Stock/ Total Liabilities
X5= Sales/ Total Assets

PART III - SOLUTION

A. Current Ratio:
280,000 / 290,000 = 0.966

B. Acid-Test Ratio:
(280,000 – 150,000) / 290,000 = 0.448

C. Average Collection Period:
120,000 / (720,000 / 365) = 60.833 Days

D. Inventory Turnover:
900,000 / 150,000 = 6.00X

E. Fixed Asset Turnover:
1,200,000 / 920,000 = 1.30X

F. Total Assets Turnover:
1,200,000 / 1,200,000 = 1.00X

G. Debt Ratio (1991):
290. 200,000) / 1,200,000 = 40.8%

H. Times Interest Earned Ratio:
126,000 / 30,600 = 3.18X

I. Gross Profit Margin:
300,000 / 1,200,000 = 25%

J. Net Profit Margin:
60,480 / 1,200,000 = 5%

K. Return on Total Assets:
126,000 / 1,200,000 =10.5%

L. Return on Net Worth:
60,480 / 910,000 =6.7%

M. Z Score
X1= -10,000/ 1,200,000 = -0.0083
X2= -139,520/ 1,200,000 = -0.116
X3= 126,000/ 1,200,000 = 0.105
X4= 200,000/ 490,000 = 0.4082
X5= 1,200,000/ 1,200,000 = 1
Z = (1.2) (-0.0083) + (1.4) (-0.116) + (3.3) (0.105) + (0.6) (0.4082) + (1.0) (1) = 1.42

PART IV - CONCLUSION

The financial condition of Abington-Hill Toys, Inc. was analyzed by using different ratio calculations which would shows strengths and weakness of the company.
The current ratio is used to measure liquidity. In other words, it shows the ability of the company to meet short-term obligation. The company would be more capable to pay off its short-term obligation if it has a higher current ratio. If the current ratio falls below 1, that means the firm would not be able to pay off its liabilities when they are due to time. Further, the current ratio shows the financial situation of a firm at a short time period, but it does not certainly mean the company would go bankruptcy if its ratio is below 1. The ratio gives a warning to the firm to improve its financial health. In this case, the Abington-Hills Toys, Inc. had a current ratio of 0.966, which was below 1. It showed that the company actually had troubles to meet its obligations in short term.

The Acid-test ratio is the ratio used to determine whether a company is able to pay off its debts without selling inventory. By comparing to the current ratio, the acid-test ratio does not include...
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