Fsa Case Discussion Questions

Topics: Balance sheet, Depreciation, Generally Accepted Accounting Principles Pages: 10 (2385 words) Published: February 2, 2011
Financial Statement Analysis
Case Discussion Questions

CASE: The Case of the Unidentified Industries - 2006

The questions are in the case. However, the following information might be helpful.

1.For purposes of this case the loans of the commercial bank are classified as accounts receivable and the deposits as accounts payable.

2.Unlike most business done on a credit basis where $1 of revenue creates a $1 accounts receivable, in advertising $1 of revenue creates $1/15% = $6.67 of accounts receivable. Note that the advertising agency reports as revenue commission equal to 15% of media purchases. While commissions on media purchases account for less than 50% of the firm’s revenues, this produces a dramatic distortion in the reported collection period for the advertising agency.

3.Firms that transact with customers in cash on a face-to-face basis will have a zero day accounts receivable collection period since an account receivable will never be created. Firms which transact with customers on a credit card basis (with the card issued by an unrelated entity) will usually receive payment from the card issuing bank within a week to ten days of the change date, not when the customer pays the credit card bill. Business to consumer transactions on open account in the US usually have credit terms of 30 days or longer.

Financial Statement Analysis
Case Discussion Questions

CASE: Tire City, Inc. (TCI)

1. Evaluate Tire City’s financial health. How well is the company performing?

2. Based on Mr. Martin’s prediction for 1996 sales of $28,206,000, and for 1997 sales of $33,847,000 and relying on the other assumptions provided in the case, prepare complete pro forma forecasts of TCI’s 1996 and 1997 income statements and year-end balance sheets. As a preliminary assumption, assume any new financing required will be in the form of bank debt. Assume all debt (existing and any new debt) bears interest at the same rate of 10%.

3. Using your set of pro forma forecasts, assess the future financial health of Tire City as of the end of 1997. Will Tire City be in a stronger or weaker financial condition two years from now?

4. What would be the impact on TCI’s external funding needs as of the end of 1996 if:

a. Inventories were not reduced by the end of 1996?
b. Accrued expenses were to grow less than expected in 1996?

5. What would be the impact on TCI’s external funding needs as of the end of 1997 if:

a. TCI depreciated more than 5% of the warehouse’s total cost in 1997? b. Days receivables were reduced to 45 days, or days payables were increased to 45 days?

6. Suppose the proposed terms of the bank credit included a covenant that reads as follows: “The company must maintain net working capital (defined for purposes of this loan as accounts receivable plus inventories minus accounts payable) of at least $4 million. For purposes of this covenant, net working capital will be measured at the end of each fiscal year.” Is TCI likely to be able to satisfy this covenant in both 1996 and 1997?

7.As a lender, would you be willing to loan TCI the funds needed to expand its warehouse facilities and finance its growth? Why or why not?

Note: This case write-up is to be done individually. Your write-up should not exceed 5 pages excluding any exhibits.

Your written assignment will be evaluated in terms of content, technical analysis and presentation. The latter includes grammar, coherence and brevity. Pages should be word processed (11 or 12 pt., 1.5” margins, no less than 1.5 spacing), stapled in the top left corner (NO PEPER CLIPS OR COVERS), and numbered. Financial Statement Analysis

Case Discussion Questions

CASE: Sears, Roebuck and Co. vs. Wal-Mart Stores, Inc.

1. How do the retailing strategies of Sears and Wal-Mart differ?

2. Wal-Mart’s average return on equity for the 1997 fiscal year was 19.7% while Sears’ average return on equity over roughly the same period was...
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