Financial Management BOOK PDF

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CHAPTER 1OVERVIEW OF FINANCIALMANAGEMENTINTRODUCTION TO FINANCEFinance as a subject is very broad and it has close relationship with other business functions such as accounting, economics, management, and marketing. The knowledge of all business disciplines and current economic environment are the p...

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Equipment Acc. Depreciation Net Fixed Assets Total Assets

38000 78000 150000

49000 81920 155460

ZRS COMPANY INCOME STATEMENT FOR YEAR ENDED 31 DECEMBER Sales Revenue Less: Cost of Goods Sold Gross Profit Less: Operating Expenses Selling Expenses General & Administrative Expenses Depreciation Expenses Total Operating Expenses Earnings Before Interest and Tax Less: Interest Earnings Before Tax Less: Taxes Net Profit After Tax

2015 160000 106000 54000

2016 200000 130000 70000

16000 11000 10000 37000

14500 12100 11000 37600

17000 6100 10900 4360 6540

32400 7000 25400 10160 15240

INDUSTRY AVERAGE RATIOS; 2017 Current ratio Quick ratio Average collection period Inventory turnover Total assets turnover

2.00x 0.52x 50 days 3.00x 1.10x

Operating profit margin Net profit margin Return on equity Debt ratio Times interest earned

16.80% 8.00% 25.00% 52.45% 5.00x

Based on the financial statements provided for ZRS Company, along with the industry averages: a) Calculate the relevant ratios and evaluate the strengths and weaknesses of the ratios. b) Ratio analysis of a firm’s financial statements is of interest of the shareholders, creditors and the firm’s own management. Which type of ratio, is the greatest concern to present and prospective creditors?

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Q:9 SURIA INC. Balance Sheet as at 31 December 2014 (RM) Current assets Cash Marketable securities Account receivables Inventories Total current assets

900,000 2,700,000 10,800,000 6,750,000 21,150,000

Fixed assets Building Equipment Furniture Total fixed assets Less accumulated dep. Net fixed assets

9,900,000 18,450,000 7,200,000 35,550,000 11,700,000 23,850,000

Total assets

45,000,000

Current liabilities Accruals Notes payable Account

450,000 7,200,000 7,200,000

Total current liabilities

14,850,000

Long-term liabilities Equities Preferred shares Common shares Paid up capital Retained earnings Total equities

18,000,000

Total Equity

liabilities

2,250,000 4,500,000 3.600,000 1,800,000 12,150,000 &

SURIA INC. Income Statement 31 December 2014 Sales Less: Purchases Gross profit Less: Selling and Admin. Expenses Depreciation Earnings before interest and taxes Less: Interest Earnings before taxes Less: taxes Net income

27,000,000 18,900,000 8,100,000 4,500,000 900,000 2,700,000 900,000 1,800,000 720,000 1,080,000

Required: i) Calculate three ratios each under liquidity, activity, leverage and profitability. ii) Briefly, explain two methods used in analyzing the financial ratios

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45,000,000

Q : 10 The financial statement s of Busha Inc. for 2013 are given below: Busha Inc. Balance Sheet as at 31st December 2013 (RM,000) Cash Accounts receivable Inventory Prepaid expenses Plant & equipment Less: Accumulated Depreciation.

330 2,725 2,000 110 3,040 935

Total Assets

7,270

Accounts payable Short term debt Account liabilities Notes payable Long term debt Mortgage bond Common stock Additional paid in capital Retained earnings Total Liabilities & Equities

630 38 725 550 1,500 284 150 1,555 1,838 7,270

Busha Inc. Income Statement for the Year Ended 31st December 2013 (RM, 000) Net sales Less: Cost of goods sold Gross profit Less: Administrative expenses Depreciation expenses Research and development expenses Earning before interest and taxes Less: Interest expenses Earning before tax Less: Income taxes Net income (EAT) Less: Dividend paid Transferred to retained earnings

11,730 8,175 3,555 1,700 110 390 1,355 105 1,250 600 650 70 580

Industry Average Ratios Current ratio Quick ratio Inventory turnover Times interest earned Total assets turnover a) b) c) d)

1.8x 1.2x 2.0x 4.0x 2.1x

Return on total assets Net profit margin Return on equity Debt ratio Average collection period

47% 5% 52% 52% 38days

Calculate the relevant financial ratios for Busha Inc. for 2013. Based on your answer in (a), do a comparative analysis and interpret your findings. State three limitations of using financial ratios. What are the functions of financial managers?

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Q : 11 You are required to make cross sectional analysis of Maju Jaya Sdn. Bhd., to determine its financial position to be presented in the coming board meeting. Financial statements of the company are presented below: MAJU JAYA SDN. BHD. BALANCE SHEETS AS AT: Assets Cash Marketable securities Account receivable Inventory Prepaid rent Net plant and equipment Total assets

31/12/06 RM 16,000 7,000 42,000 50,000 1,200 286,000 402,200

31/12/07 RM 17,000 7,200 38,000 93,000 1,100 290,000 446,300

Liabilities and Stockholder’s equity Account payable Notes payable Accruals Long-term debt Common stockholders’ equity Total liabilities and equity

RM 48,000 16,000 6,000 160,000 172,200 402,200

RM 55,000 13,000 5,000 150,000 223,300 446,300

MAJU JAYA SDN. BHD. BALANCE SHEETS AS AT 31/12/07 Sales (all credit) Less: Cost of goods sold Gross profit Less: Operating expenses Interest Depreciation Taxes Net profit Less cash dividends Transferred to retained earnings

RM 700,000 500,000 200,000 50,000 10,000 30,000

90,000 27,100 82,900 31,800 51,100

Industry average ratio: Current ratio Acid test ratio Debt ratio Times interest earned 10.75%

1.80x 0.90x 50.00% 10.0X

Average collection period Inventory turnover Return on investment Net profit margin

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20 days 7.00x 8.40%

a) Calculate the relevant financial ratios for Maju Jaya Sdn. Bhd., for 2007. b) Based on your answer in (a) comment on the firm’s liquidity, efficiency, leverage, and profitability for 2007. c) Prepare the sources and uses of funds statement for the year ending 31/12/2007.

Q : 11 The most recent industry average ratios and F.N. Company’s financial statements are as follows: Current ratio Debt ratio Times interest earned Inventory turnover Average collection period

2 times 30 % 7 times 8.5 times 24 days

Fixed asset turnover Total assets turnover Net profit margin Return on total assets Return on equity

6 times 3 times 3% 9% 12.9 %

F.N. COMPANY: BALANCE SHEET AS AT 31 DECEMBER 2007 (Millions of Ringgit) Cash Marketable Securities Net receivables Inventories Gross fixed assets Less : depreciation TOTAL ASSETS

RM 45 33 66 159 225 78 450

Accounts Payable Notes Payable Other current liabilities Long term debt Common stock Retained earnings TOTAL LIABILITIES & EQUITY

F.N. COMPANY: INCOME STATEMENT FOR YEAR ENDED 31 DECEMBER 2007 (Millions of Ringgit) Sales RM 795.0 Cost of goods sold 660.0 Gross Profit 135.0 Selling expense 73.5 Depreciation expense 12.0 Earnings before interest and tax 49.5 Interest expense 4.5 Earnings before taxes 45.0 Taxes (40 %) 18.0 Net Income 27.0 a) Compute the relevant ratios for F.N. Company. b) Do a cross-sectional analysis of the company and interpret your findings. c) What ratios do you think would be important to a supplier who is considering extending credit to a potential customer. Why?

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RM 45 45 21 24 114 201 450

Q : 12 The financial statements of EFI Company for 2006 are given below: Balance Sheet as at 31 December 2006 Cash Acc. Receivables Inventory P & Equip. TOTAL ASSETS

400,000 900,000 1,000,000 2,500,000 4,800,000

Accounts payable Notes payable Long term debt Common stock TOTAL CLAIMS

400,000 200,000 1,000,000 3,200,000 4,800,000

Summarized Income Statement for the Year Ended 31 December 2006 Sales Cost of goods sold Operating expenses Interest expense Taxes (30 %)

2,400,000 1,400,000 500,000 100,000

The ratios for the industry average were obtained as follows: Current ratio Inventory turnover Total assets turnover Debt ratio Net profit margin

4.0 times 2.5 times 0.80 times 30 percent 8 percent

Quick ratio Average collection period Fixed asset turnover Times interest earned Return on equity

2.0 times 88 days 1.2 times 6.8 times 9 times

(a) Compute the above ratios for EFI Company. (b) Based on your answers in (a), comment on the firm’s liquidity, efficiency, leverage and profitability. (c) (c) List two functions of a financial manager.

Q : 13 The balance sheet and income statements for JUITA Inc. are as follows: JUITA Inc. : Balance Sheet as at December 31, 2014 2,084 54,900 46,420 1,796 68,288 1,508 174,996 42,088

Cash Accounts Receivable Inventories Prepaid Expenses Fixed Assets Other Assets TOTAL ASSETS Accounts Payable

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2015 376 54,948 48,544 1,664 67,744 1,144 174,420 46,772

Accruals Notes Payable Other current liabilities Long term debt Common stock Retained earnings TOTAL LIABILITIES AND EQUITY

1,620 6,220 6,092 26,400 11,800 80,776 174,996

1,584 5,200 3,440 24,400 11,800 81,224 174,420

JUITA Inc.: Income Statement for the Year Ending December 31, 2014 346,668 242,668 104,000 44,652 3,384 22,732 33,232 4,640 28,592 11,436 17,156

Sales Cost of goods sold Gross Profit Selling and administrative expenses Depreciation Other expenses Interest expenses Taxes Net Income

2015 329,104 235,880 93,224 46,212 3,408 23,288 20,316 5,216 15,100 6,040 9,060

(a) Calculate three ratios under liquidity, activity, leverage, and profitability. (b) Comment on the company’s performance based on the ratios ca lculated. (d) State three limitations of financial ratios.

Q : 14 Below are the balance sheet and statement of income and retained earnings of Syarikat Nusantara as of 31st December 2005. Syarikat Nusantara Balance Sheet, 31st December, 2005 (‘000) ASSETS Cash RM 1,000 A/C Receivable 5,000 Inventory 7,000 Fixed Assets(net) 17,000

TOTAL

30,000

LIABILITIES & EQUITY Overdraft RM 4,000 A/c Payable 2,000 Accrued Wages 2,000 Long term debt 12,000 Preferred stock 4,000 Common stock 2,000 Retained earnings 4,000 TOTAL 30,000

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Syarikat Nusantara statement of income and retained earnings, ended 31st December, 2005 (000) Net sales Credit Cash Total

RM 16,000 4,000 20,000

Cost and expenses: Cost of goods sold RM 12,000 Selling and administrative 2,200 Depreciation 1,400 Interest 1,200 Net Income before taxes Taxes on income Net income after taxes Less: Dividends on preferred stock Net income available to common shareholders Add: Retained earnings at 1/1/05 Subtotal Less: Dividends paid on common stock Retained earnings 31/12/05

16,800 3,200 1,200 2,000 240 1,760 2,600 4,360 360 4,000

(a) Fill in the 2005 column in the table that follows:

1 2 3 4 5 6 7 8 9 1 0

Syarikat Nusantara Ratio Current ratio Acid test ratio Acc. Receivable turnover Inventory turnover Gross Profit Margin Net Profit Margin Return on Equity Return on Investment Total Asset turnover Times interest earned

2003

2004

2.5 X 1.0 X 5.0 X 4.0 X 39.0 % 17.0 % 15.0 % 15.0 % 0.9 X 5.5 X

2.0 X 0.9 X 4.5 X 3.0 X 41.0 % 15.0 % 20.0 % 12.0 % 0.8 X 4.5 X

2005

INDUSTR Y 2.25 X 1.10 X 6.00 X 4.00 X 40.0% 15.0 % 20.0 % 12.0 % 1.0 X 5.0 X

b. Evaluate the position of the company as compared to the industry. c. Indicate which ratios would be of most interest to you and what your decision would be if Syarikat Nusantara wants to buy RM500,000 worth of merchandise inventory from you, with payment due in 90 days.

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Q : 14 Perangsang Delima Bhd., a manufacturer and wholesaler of high-quality home furnishing has been experiencing low profitability in recent years. Consequently, the board of directors has replaced the president of the firm with a new president. The new president has been asked to make an analysis of the firm’s financial positions. The most recent industry average ratios and Perangsang’s financial statements, are as follows: Industry Average Ratios Current ratios Debt to Total Asset Times-Interest-Earned Inventory turnover

2X 30 % 7X 10X

Average Collection Period Net Profit Margin Return on total assets Return on common equity

24 days 3% 9% 12.9 %

Perangsang Delima Bhd: Balance Sheet as of December 31, 2015 (millions of RM) Cash Marketable Securities Accounts Receivable Inventories Gross fixed assets Less: Depreciation TOTAL ASSET

45.0 33.0 66.0 159.0 225.0 78.0 450.0

Accounts Payable Notes Payable Other current liabilities Long term debt Common stock Retained earnings TOTAL LIABILITIES & EQUITY

Income Statement for Year Ended Dec. 31, 2015 (millions of RM) Net Sales Cost of goods sold Gross Profit Selling expenses Depreciation expenses Earnings before interest & tax Interest expense Earnings before taxes Taxes (40%) Net Income

795.0 660.0 135.0 73.5 12.0 49.5 4.5 45.0 18.0 27.0

i. Calculate the relevant ratios. ii. Compare the company’s performance to the industry average.

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45.0 45.0 21.0 24.0 114.0 201.0 450.0

Q : 15 DRB Company’s financial statements for the most recent years are as follows: Balance Sheet as at 31st March 2014 2015 (RM 000’s) (RM 000’s) Assets Cash Marketable Securities Accounts Receivable Inventories Net fixed assets

150.0 157.5 275.0 325.0 650.0 1,557.5

125.0 160.0 262.5 362.5 750.0 1,660.0

Liabilities and Owner’s Equity Accounts Payable 225.0 Notes Payable 150.0 Taxes Payable 50.0 Accruals 29.0 Long term debt 175.0 Common stock 200.0 Paid in capital 325.0 Retained earnings 403.5 1,557.5

275.0 174.0 51.0 26.5 175.0 200.0 325.0 433.5 1,660.0

Income Statement for the year ended 31st March (RM 000’s) Sales Cost of goods sold Gross Profit Operating expenses Depreciation Net operating expense Interest expense Earnings before tax Taxes (34 %) NET INCOME

2014 1,300.0 800.0 500.0 230.0 40.0 230.0 60.0 170.0 57.8 112.2

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2015 1,500.0 900.0 600.0 210.0 50.0 340.0 70.0 270.0 91.8 178.2

a) Using the financial statement information above, compute the following ratios for both years: - current ratio - quick ratio - total assets turnover - inventory turnover - average collection period - debt ratio - debt to equity ratio b) Summarize your trend analysis on liquidity, efficiency, and leverage.

Q : 16 You are given the following balance sheet and income statement of a particular company for 2012 and 2013. Balance Sheet as at 31st December (all values in RM’000) 2012

2013

Assets Cash Marketable Securities Accounts Receivable Inventories Net fixed assets TOTAL ASSETS

200 300 800 1,200 3,300 5,800

300 200 1,000 1,000 3,700 6,200

Liabilities and Owner’s Equity Accounts Payable Notes Payable Other Current liabilities Long term debt Common Equity TOTAL LIABILITIES & EQUITY

300 200 1,000 1,000 3,300 5,800

200 300 800 1,200 3,700 6,200

Income Statement for Year Ended Dec. 31, 2013 Net Sales Cost of goods sold Gross Profit Operating expenses Earnings before interest & tax Interest expense Earnings before taxes Taxes (40%) NET INCOME

RM

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1,000,000 550,000 450,000 150,000 300,000 100,000 200,000 80,000 120,000

*Depreciation amounts to RM50,000 in 2013. (a) i)

Using the above balance sheet, calculate the following ratios for 2012: Current Ratio, Debt/Equity Ratio, and Acid test ratio ii) Analyze each of the above ratios. iii) Analyzing both the income statement and balance sheet above, calculates the following ratios for 2013.

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STUDY QUESTIONS : ( SOURCES AND USES OF FUNDS ) Q:1 Sofea Florist Berhad has the following financial statements. Sofea Florist Bhd Balance Sheet as at 31 December 2011 and 2012

Cash Marketable securities Accounts receivable Inventories Gross fixed assets Less: Depreciation Total assets

2011 (RM) 5,020 950 17,470 30,420 108,674 45,120 117,414

2012 (RM) 6,334 1,250 18,840 27,040 126,996 53,826 126,634

Accounts payable Notes payable Accrued expenses Long-term debt Common stock Retained earnings Total liabilities and Equity

6,624 9,000 4,438 50,000 10,000 37,352 117,414

8,996 8,000 5,690 49,000 10,000 44,948 126,634

Sofea Florist Bhd Income Statement for the year ended 31 December 2011 and 2012

Sales Less: Cost of goods sold Gross profit Less: Selling expense Depreciation Other expenses Earnings before interest and tax Less: Interest expenses Earnings before tax Less: Taxes Net Profit after taxes

2011 (RM) 520,002 364,002 156,000 66,978 5,076 34,098 49,848 6,960 42,888 17,154 25,734

2012 (RM) 493,656 353,820 139,836 69,318 7,824 34,932 27,762 7,824 19,938 9,060 10,878

Based on the above financial statements, prepare a statement of sources and uses of funds on a cash basis for Sofea Florist Berhad for the year 2012.

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Q:2 Prepare a Statement of Sources and Uses of funds, ending 31 December 2013 on a cash basis. Syarikat Sri Zamrud Consolidated Balance Sheet (RM ‘000)

Cash Accounts receivable Inventory Prepaid expenses Fixed assets Less: Accumulated Depreciation Patents Total assets Accounts payable Taxes payable Mortgages Preferred shares Paid in capital Common stock Retained earnings Total liabilities and Equity Net income

2001 82.5 90.0 165.0 13.5 468.0 129.0 52.5 742.5

2000 75.0 102.0 168.0 12.0 325.5 94.5 61.5 649.5

112.5 105.0

65.6 92.0 56.9 150.0 10.0 225.0 50.0 649.5

225.0 6.0 225.0 69.0 742.5 34.5

Q:3 ZRS COMPANY BALANCE SHEET AS AT 31, DECEMBER Assets Cash Marketable Securities A/C Receivables Inventories Total Current Assets

2012

2013

500

1115

1000 25000 45500 72000

1825 26000 44600 73540

Liabilities & Owner’s Equity Accounts Payable

2012

2013

22000

22800

Notes Payable Total Current Liabilities

47000 69000

47160 69960

Long Term Debt

22950

24450

Common Stock

31500

33500

54

Land

26000

28800

Building&Equipment

90000

102120

Acc. Depreciation

38000

49000

Net Fixed Assets

78000

81920

150000

155460

Total Assets

Retained Earnings Total Liab. & Owners Equity

26550

27550

150000

155460

ZRS COMPANYINCOME STATEMENT FOR YEAR ENDED 31 DECEMBER Sales Revenue Less: Cost of Goods Sold Gross Profit Less: Operating Expenses Selling Expenses General & Administrative Expenses Depreciation Expenses Total Operating Expenses Earnings Before Interest and Tax Less: Interest Earnings Before Tax Less: Taxes Net Profit After Tax

2012 160000 106000 54000

2013 200000 130000 70000

16000 11000 10000 37000

14500 12100 11000 37600

17000 6100 10900 4360 6540

32400 7000 25400 10160 15240

Based on the financial statements provided for ZRS Company, along wit...