Watson Leisure Time Sporting Goods

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  • Topic: Balance sheet, Financial ratios, Generally Accepted Accounting Principles
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Watson Leisure Time Sporting Goods
Devry University
BUSN 379

Exhibit 1
WATSON LEISURE TIME SPORTING GOODS|
Income Statement|
| 200X| | 200Z|
Sales (all on credit)| $1,500,000| | $2,160,000|
Cost of goods sold| 950,000| | 1,300,000|
Gross profit| 550,000| | 860,000|
Selling and administrative expense*| 380,000| | 590,000| Operating profit| 170,000| | 270,000|
Interest expense| 30,000| | 85,000| Net income before taxes| 140,000| | 185,000|
Taxes| 46,120| | 64,850|
Net income| $ 93,880| | $ 120,150|
Shares| 40,000| | 47,000|
Earnings per share| $2.35| | $2.56|
*Includes $20,000 in lease payments for each year.| | |

Exhibit 2
WATSON LEISURE TIME SPORTING GOODS|
Balance Sheet|
| 200X| | 200Z|
Assets|
Cash| $ 20,000| | $ 20,000|
Marketable securities| 30,000| | 50,000|
Accounts receivable| 150,000| | 330,000|
Inventory| 250,000| | 325,000|
Total current assets| 450,000| | 725,000|
Net plant and equipment| 550,000| | 1,169,000| Total assets| $1,000,000| | $1,894,000|
Liabilities and Stockholders’ Equity|
Accounts payable| $ 100,000| | $ 200,000|
Notes payable (bank)| 100,000| | 300,000|
Total current liabilities| 200,000| | 500,000|
Long-term liabilities| 250,000| | 550,740|
Total liabilities| 450,000| | 1,050,740|
Common stock ($10 par)| 400,000| | 460,000|
Capital paid in excess of par| 50,000| | 80,000|
Retained earnings| 100,000| | 303,260| Total stockholders’ equity| 550,000| | 843,260| Total liabilities and stockholders’ equity| $1,000,000| | $1,894,000| Exhibit 3

Selected Industry Ratios|
| 200X| | 200Z|
Growth in sales| —| | 10.02%|
Profit margin| 5.75%| | 5.81%|
Return on assets (investment)| 8.22%| | 8.48%|
Return on equity| 13.26%| | 14.16%|
Receivable turnover| 10X| | 10.1X|
Average collection period| 36 days| | 35.6 days| Inventory turnover| 5.71X| | 5.84X|
Fixed asset turnover| 2.75X| | 2.20X|
Total asset turnover| 1.43X| | 1.46X|
Current ratio| 2.10X| | 2.15X|
Quick ratio| 1.05X| | 1.10X|
Debt to total assets| 38%| | 40.1%|
Times interest earned| 5.00X| | 5.26X|
Fixed charge coverage| 3.85X| | 3.97X|
Growth in EPS| —| | 9.8%|

Exhibit 4
Watson Leisure Time Sporting Goods

| 200X| 200Z|
Growth in sales| ----| 44%|
Profit margin| 6.3%| 5.6%|
Return on assets| 9.4%| 6.3%|
Return on equity| 17%| 14.2%|
Receivable turnover| 10X| 6.5X|
Average collection period| 36 days| 55 days|
Inventory turnover| 6X| 6.6X|
Fixed asset turnover| 3.33X| 3X|
Total asset turnover| 1.5X| 1.1X|
Current ratio| 2.25X| 1.45X|
Quick ratio| 1X| .8X|
Debt to total assets| 45%| 55.5%|
Times interest earned| 5.7X| 3.2X|
Fixed charge coverage| 3.8X| 2.8X|
Growth in E.P.S.| ----| 8.9%|
After comparing your calculations to the industry ratios presented in Exhibit 3, and after reviewing the ratio trends of Watson Leisure Time Sporting Goods, what comments and recommendations do you offer to Mr. Thomas? Financial ratio analysis is the calculation and comparison of ratios which are derived from the information in a company's financial statements. The level and historical trends of these ratios can be used to make inferences about a company's financial condition, its operations and attractiveness as an investment. [ (http://www.finpipe.com/equity/finratan.htm) ] The financial analysis will consist of the 13 most significant ratios plus the growth in sales and E.P.S- [ (Block, Hirt, & Danielsen, 2009) ] After taking a really...
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