Completed Chapter 5 Mini Case Working Papers FA14

CHAPTER 5 MINI CASE: SCANDI HOME FURNISHINGS, INC.
Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2007.

Sales during the first full year (2008) of operation reached $1.3 million. Sales increased
by 15 percent in 2009 and another 20 percent in 2010. However, However, after
increasing in 2009 over 2008, profits fell sharply in 2010, causing Kaj to wonder what was
happening to his pride and joy business venture. After all, Kaj has continued to work as
close as possible to a 24/7 pace beginning with the startup of Scandi and through the first
three full years of operation.
Scandi Home Furnishings, located in eastern North Carolina, designs, manufactures, and
sells to home furnishings retailers Scandinavian-designed furniture and accessories. The
modern Scandinavian design has a streamlined and uncluttered look. While this furniture
style is primarily associated with Denmark, both Norway and Sweden designers have
contributed to the allure of Scandinavian home furnishings. Some say that the inspiration
for the Scandinavian design can be traced to the elegant curves of art nouveau from
which designers were able to produce aesthetically pleasing, structurally strong modern
furniture. Danish, and the home furnishings produced by the other Scandinavian
countriesSweden, Norway, and Finland, are made using wood (primarily oak, maple, and
ash), aluminum, steel, and high-grade plastics.
Kaj grew up in Copenhagen, Denmark and received a college degree from a technical
university in Sweden. As is typically in Europe, Kaj began his business career as an
apprentice at a major home furnishings manufacturer in Copenhagen. After learning the
trade, he quickly moved into a management position in the firm. However, after a few
years, Kaj realized that what he really wanted to do was to start and operate his own
Scandinavian home furnishings business. At the same time, after traveling throughout
the world including the U.S., he was sure that he wanted to be an entrepreneur in the
United States. Thus, while it was hard to give up the Tivoli Gardens with its many
entertainment and dining activities, as well as the other attractions in Copenhagen, Kaj
moved to the U.S. in early 2007. With $140,000 of his personal assets, and $210,000
from venture investors, he began operations in mid-2007. Kaj, with a 40 percent
ownership interest and industry-related management expertise, was allowed to operate
the venture in a way that he thought was best for Scandi. Four years later, Kaj is sure he
did the right thing.
Following (see 2 of 10) are the three years of income statements and balance sheets for
the Scandi Home Furnishings Corporation. Kaj has felt that in order to maintain a
competitive advantage that he would need to continue to expand sales. After first
concentrating on selling Scandinavian home furnishings in the northeast in 2008 and
2009, he decided to enter the west coast market. An increase in expenses associated
with identifying, contacting, and selling to home furnishings retailers in California, Oregon,
and Washington. Kaj Rasmussen was hoping that you could help him better understand
what has been happening to Scandi Home Furnishings both from operating and financial
standpoints.
I HOME FURNISHINGS, INC.
me Furnishings as a corporation during mid-2007.

08) of operation reached $1.3 million. Sales increased
r 20 percent in 2010. However, However, after
fits fell sharply in 2010, causing Kaj to wonder what was
usiness venture. After all, Kaj has continued to work as
eginning with the startup of Scandi and through the first
in eastern North Carolina, designs, manufactures, and

Scandinavian-designed furniture and accessories. The
a streamlined and uncluttered look. While this furniture
Denmark, both Norway and Sweden designers have
navian home furnishings. Some say that the inspiration
e traced to the elegant curves of art nouveau from
uce aesthetically pleasing, structurally strong modern
urnishings produced by the other Scandinavian
inland, are made using wood (primarily oak, maple, and
ade plastics.
ark and received a college degree from a technical

ly in Europe, Kaj began his business career as an
hings manufacturer in Copenhagen. After learning the
anagement position in the firm. However, after a few
ally wanted to do was to start and operate his own
siness. At the same time, after traveling throughout
as sure that he wanted to be an entrepreneur in the
hard to give up the Tivoli Gardens with its many
s, as well as the other attractions in Copenhagen, Kaj
With $140,000 of his personal assets, and $210,000
operations in mid-2007. Kaj, with a 40 percent
lated management expertise, was allowed to operate
ght was best for Scandi. Four years later, Kaj is sure he
ee years of income statements and balance sheets for

oration. Kaj has felt that in order to maintain a
uld need to continue to expand sales. After first
vian home furnishings in the northeast in 2008 and
t coast market. An increase in expenses associated
elling to home furnishings retailers in California, Oregon,
was hoping that you could help him better understand
di Home Furnishings both from operating and financial
Scandi Home Furnishings, Inc.

Comparative Income Statements
2006-2008
Net Sales
Cost of Goods Sold
Gross Profit
Marketing
General & Administrative
Depreciation
EBIT
Interest
Earnings Before Taxes
Income Taxes (40%)
Net Income
2008
1,300,000
780,000
520,000
130,000
150,000
40,000
200,000
45,000
155,000
62,000
93,000
% Rev
100.0% $
60.0%
40.0%
10.0%
11.5%
3.1%
15.4%
3.5%
11.9%
4.8%
7.2% $
2009
1,500,000
900,000
600,000
150,000
150,000
53,000
247,000
57,000
190,000
76,000
114,000
% Rev
100.0% $
60.0%
40.0%
10.0%
10.0%
3.5%
16.5%
3.8%
12.7%
5.1%
7.6% $
2010
1,800,000
1,260,000
540,000
200,000
200,000
60,000
80,000
70,000
10,000
4,000
6,000
Scandi Home Furnishings, Inc.

Comparative Income Statements
2006-2008
2008
2009
2010
Assets
Cash
Accounts Receivables
Inventories
Total Current Assets
Fixed Assets, Net
Total Assets
Liabilities & Equity
Accounts Payable
Accruals
Bank Loan
Total Current Liabilities
Long-Term Debt
Common Stock ($10 par)*
Capital Surplus
Retained Earnings
Total Liabilities & Equity
*
50,000
200,000
450,000
700,000
300,000
1,000,000
130,000.0
50,000
90,000
270,000
300,000
300,000
50,000
80,000
1,000,000
40,000
260,000
500,000
800,000
400,000
1,200,000
170,000.0
70,000
90,000
330,000
400,000
300,000
50,000
120,000
1,200,000
10,000
360,000
600,000
970,000
500,000
1,470,000
180,000
80,000
184,000
444,000
550,000
300,000
50,000
126,000
1,470,000
Note: 3350,000 shares of common stock were issued to Kaj Rasmussen and the venture
investors when Scandi Home Furnishings was incorporated in mid-2007.
% Rev
100.0%
70.0%
30.0%
11.1%
11.1%
3.3%
4.4%
3.9%
0.6%
0.2%
0.3%
Chapter 5 Mini Case Question A: Liquidity Ratios

A. Kaj was particularly concerned by the drop in cash from $50,000 in 2008 to $10,000 in 2010.
Calculate the average current ratio, the quick ratio, and the networking capital (NWC) to total assets
ratio for 2008-2009 and 2009-2010. What has happened to Scandis liquidity position?
Note: Ratio calculations involving asset items on the balance sheet are averages of the prior and
current years. For example, the ratios for 2009 use average balance sheet account amounts for 2008
and 2009. Likewise, ratios for 2010 use average balance sheet account amounts for 2009 and 2010.
Note: Using the examples of calculations for 2009, you should complete the ratios for 2010.
Summary for Liquidity Ratios (see below for the calculations):
2009
Current Ratio
2.50
Quick Ratio
0.92
NWC-Total-Asset Ratio
0.41
* Note that "Change" should show one of the following options: "Better" or "Worse"
2010
2.29
0.87
0.37
Change*
Worse
Worse
Worse
Narrative Comment: The company looks like they had a worse year in 2010. There debt is increasing
more so then their assests.
Calculations for 2008-2009:

Current Ratio
Current Ratio
Current Ratio
Quick Ratio
Quick Ratio
Quick Ratio
NWC-to-Total-Asset Ratio
=
=
=
/
/
Avg Current Liabilities

$
300,000
= Avg CA-Avg Inventories

= $
275,000
=
0.92
/
/

$
300,000
=
=
=
/
/
Avg Current Assets

750,000
2.50
Avg CA-Avg CL
450,000
0.41
Avg Total Assets

1,100,000
C. Calculatefor
leverage
ratios (pp. 187-189).
Calculations
2009-2010:
.
Current Ratio
Current Ratio
Current Ratio
Quick Ratio
Quick Ratio
Quick Ratio
=
=
=
Avg Current Assets

/
800000+970000/2=88500 /
2.29
= Avg CA-Avg Inventories

= 885000-550000
=
0.87
/
/
=
=
=
/
/
Avg CA-Avg CL
498,000
0.37

330000+444000/2=387000

$
387,000
Avg Total Assets

1,335,000
Chapter 5 Mini Case Question B: Cash Conversion Cycle

B. An analysis
Using
the two years
of the of
cash
financial
conversion
statement
cycle data
should
foralso
the Munich
help KajExport
understand
Corporation
what has
shown
beeninhappening
Problem 3,tomake
the operations
the
following
of
Scandi.calculations
Prepare an analysis
for 2008.of the average conversion periods for the three components of the cash conversion cycle
for 2008-2009 and 2009-2010. In a brief narrative paragraph, explain was has happened in terms of each component of
the cycle.
Summary for Cash Conversion Cycle in Days (see below for the calculations)
2009 in Days
Inventory-to-Sale
192.64
Sale-to-Cash
55.97
(85.17)
Less Purchase-to-Payment
Cash Conversion Cycle (Total Days)
163.44
2010 in Days Change*

159.30
-33.34
62.90
6.93
(72.42)
-12.75
149.78
-13.66
* Note that "Change" should show one of the following options: "Better" or "Worse"
Narrative explanation of change:
All of the changes are to shorter periods except for in sale to cash.
Calculations for Average Conversion Periods for 2009

Inventory-to-Sale Conversion Period
=
=
=
Average Inventories
$
475,000
192.64
/
/
Sales to Cash Conversion Period

=
=
=
Average Receivables
$
230,000
55.97
/
/
=
=
=
Average Payables +
Average Accrued
Liablities
$
210,000
85.17
Purchase-to-Payment Conversion Period

Cost of Goods Sold/365

$
2,465.75
[days]
Net Sales/365
4,109.59
[days]
/
/

$
2,465.75
[days]
Calculations for Average Conversion Periods for 2010

=
=
=
Average Inventories
$
550,000
159.30
/
/

=
=
=
Average Receivables
$
310,000
62.90
/
/
=
=
=
Average Payables +
Average Accrued
Liablities
$
250,000
72.42


$
3,452.10
[days]
Net Sales/365
4,931.50
[days]
/
/

$
3,452.10
[days]
Chapter 5 Mini Case Question C: Cash Build Versus Cash Burn

C. Kaj should be interested in knowing whether Scandi has been building or burning cash. Compare the cash build, cash burn,
and the net cash build/burn positions for 2009 and 2010. In a brief narrative paragraph, describe what, if any, changes have
occurred?.
Cash Build (Source of Cash) =
Net Sales
Less Increase in Receivables
Cash Build = $
2009
1,500,000
(60,000)
1,440,000
2010
$ 1,800,000
100,000
$ 1,700,000
Cash Burn (Use of Cash) =

Operating Expenses
$
Interest
Income Taxes
Total Cash Burn from Income Statement
Change in Inventories
Change in Payables
Change in Accrued Liabilities
Change in Gross Fixed Assets
Add Back Depreciation Expense
Cash Burn = $
1,200,000
57,000
76,000
1,333,000
50,000
(40,000)
(20,000)
100,000
53,000
1,476,000
$ 1,660,000 [Cost of Goods Sold+Mktg+Gen & Admin

70,000
4,000
1,734,000
100,000 Increase/(Decrease)
(10,000) (Increase)/Decrease
(10,000) (Increase)/Decrease
100,000 Increase/(Decrease)
60,000 [Non Cash Expense on Inc Statement]
$ 1,974,000
Notes:
1. The increase in receivables represents a use of cash since credit is extended and no cash is collected.
2. The increases in inventories and gross fixed assets reflect a use of cash for inventory purchases and capital
expenditures.
3. The increases in payables and accrued liabilities represent a source of cash since purchases were made on account
(without cash).
2009
Net Cash Burn =
Cash Burn
Less Cash Build
$
Net Cash Build/(Burn) = $
1,476,000
1,440,000
(36,000)
2010
$ 1,974,000
1,700,000
$
(274,000)
Narrative explanation of change:

the net cash burn from 2009 to 2010 has increased a substantial amount.
B. If your answer in Part A resulted in a net cash burn position, calculate the net cash burn monthly rate and indicate the
number of months remaining until out of cash. If your answer in Part A resulted in a net cash build position, calculate the net
cash build monthly rate and indicate the expected cash balance at the end of 2009.
Monthly Cash Burn =

Cash Balance at End of Period =
Months remaining =
$
$
2009
3,000.00
40,000.00
13.33
2010
$ 22,833.30
$ 10,000.00
0.44 "until out of cash"
Chapter 5 Mini Case Question D: Financial Leverage

D. Creditors, as well as management, are also concerned about the ability of the venture to meet its debt
obligations as they come due, the proportion of current liabilities to total debt, the availability of assets to
meet debt obligations in the event of financial distress, and the relative size of equity investments to debt
levels. Calculate average ratios in each of these areas for the 2008-2009 and 2009-2010 periods. Interpret
your results and explain what has happened to Scandi.
Summary of Calculations (see below for calculations):
Financial Leverage:
2009
Total-Debt-to-Total-Assets
0.59
Equity Multiplier
2.44
Debt-to-Equity Ratio
1.44
Current Liability-to-Total-Debt
0.46
Interest Coverage
5.26
2010
0.65
2.82
1.82
0.45
2.00
Change*
higher
HIgher
higher
lower
lower
*Note that change is indicated by "Higher" or "Lower"
His debt has become larger and his assets have not raised. Similar things are happening in all of
these ratios. However in the past year his current liability to total debt is smaller then the previous
year.
Calculations for leverage ratios for 2009:
Total Debt to Total Assets Ratio
=
=
=
Avg Total Debt

650,000
0.59
/
/
Equity Multiplier
Equity Multiplier
Equity Multiplier
=
=
=
Avg Total Assets

1,100,000
2.44
/
/
Avg Owner's Equity

$
450,000
Debt to Equity Ratio

=
=
=
Avg Total Debt

650,000
1.44
/
/
Avg Owner's Equity

$
450,000
Current Liability-to-Total Debt

=
=
=

$
300,000
0.46
/
/
Interest Coverage Ratio

=
=
=
EBITDA
$
/
/
57,000
Avg Total Assets

1,335,000
300,000
Avg Total Assets

1,100,000
Avg Total Debt

650,000
Interest
5.26
Calculations for leverage ratios for 2010:

=
=
=
Avg Total Debt

862,000
0.65
/
/
Equity Multiplier
Equity Multiplier
Equity Multiplier
=
=
=
Avg Total Assets

1,335,000
2.82
/
/
Avg Owner's Equity

$
473,000

=
=
=
Avg Total Debt

862,000
1.82
/
/
Avg Owner's Equity

$
473,000
ratios
(pp.
191-195).
=
Avg
Current
Liabilities
= $
387,000
=
0.45
/
/
=
=
=
/
/
D.
Calculate
profitability and Debt
Efficiency
Current
Liability-to-Total
.
EBITDA
$
140,000
2.00
Avg Total Debt

862,000
Interest
70,000
Chapter 5 Mini Case Question E: Profitability Ratios

E. Of importance to Kaj and the venture investors is the efficiency of the operations of the venture. Several
profit margin ratios relating to the income statement are available to help analyze Scandis performance.
Calculate average profit margin ratios for 2008-2009 and 2009-2010 and describe what is happening to the
profitability of Scandi Home Furnishings.
Profitability Ratios:
2009
Gross Profit Margin
40.0%
Operating Profit Margin
16.5%
Net Profit Margin
7.6%
NOPAT Margin
9.9%
2010
30.0%
4.5%
0.0%
2.7%
*Note that change is indicated by "Higher" or "Lower"

Narrative explanation:
His profitability is lowering and it shows in all the profitability ratios.
Calculation of Profitability Ratios for 2009
Gross Profit Margin
Gross Profit Margin
Gross Profit Margin
=
=
=

=
=
=
Net Profit Margin

Net Profit Margin
Net Profit Margin
=
=
=
NOPAT Margin
NOPAT Margin
NOPAT Margin
=
=
=
Gross Profit
600,000
40.0%
/
/
Net Sales
1,500,000
/
/
Net Sales
1,500,000
Net Income
114,000
7.6%
/
/
Net Sales
1,500,000
[(EBIT)(1-tax rate)
148,200
9.9%
/
/
Net Sales
1,500,000
/
/
Net Sales
1,800,000
/
/
Net Sales
1,800,000
/
/
Net Sales
1,800,000
/
/
Net Sales
1,800,000
EBIT
247,000
16.5%
Calculation of Profitibility Ratios for 2010
Gross Profit Margin

Gross Profit Margin
Gross Profit Margin
=
=
=
Gross Profit
540,000
30.0%

=
=
=
Net Profit Margin

Net Profit Margin
Net Profit Margin
=
=
=
NOPAT Margin
NOPAT Margin
NOPAT Margin
=
=
=
[(EBIT)(1-tax rate)
80000(.60)
2.7%
EBIT
80,000
4.5%
Net Income
6,000
0.0%
Change*
lower
lower
lower
lower
Chapter 5 Mini Case Question F: Efficiency and Return Ratios

F. Kaj and the venture investors are also interested in how efficiently Scandi is able to convert their equity
investment, as well as the ventures total assets, into sales. Calculate several ratios that combine data from
the income statements and balance sheets and compare what has happened between the 2008-2009 and
2009-2010 periods.
Efficiency & Return Ratios:
2009
Sales-to-Total-Assets
1.36
Operating Return on Assets
22.45%
Return on Assets (ROA)
10.36%
Return on Equity (ROE)
25.33%
2010
1.35
6.00%
0.45%
1.30%
Change*
lower
lower
lower
lower
*Note that change is indicated by "Higher" or "Lower" or "Same"

Narrative explanation: This set of ratios shows the same trend as all the others. That the
company is struggling and needs some internal reform.
Calculation of Efficienty and Return Ratios for 2009
Sales-to-Total-Assets Ratio
=
=
=
Operating Return on Total Assets

=
=
=

=
=
=

=
=
=
Sales
1,500,000
1.36
/
/
Avg Total Assets

1,100,000
EBIT
/
/
Avg Total Assets

1,100,000
Net Profit
114,000
10.36%
/
/
Avg Total Assets

1,100,000
Net Profit
114,000
25.33%
/
/
Avg Owners' Equity

$
450,000
Sales
1,800,000
1.35
/
/
Avg Total Assets

1,335,000
EBIT
/
/
Avg Total Assets

1,335,000
6,000
/
/
Avg Total Assets

1,335,000
6,000
/
/
Avg Owners' Equity

(300000+50000+120000)+300000+50000+126000/2
247,000
22.45%
Calculation of Efficienty and Return Ratios for 2010
=
=
=

=
=
=

=
=
=

=
=
=
80,000
6.00%
Net Profit
0.45%
Net Profit
1.30%
Chapter 5 Mini Case Question G: ROA Model and ROE Model

G. A ROA model consisting of the product of two ratios provides an overview of a ventures efficiency and
profitability at the same time. A ROE model consists of the product of three ratios and simultaneously shows
an overview a ventures efficiency, profitability, and leverage performance. Calculate ROA and ROE models
for the 2008-2009 and 2009-2010 periods. Provide an interpretation of your findings.

Efficiency & Return Ratios:
2009
ROA Model
10.26%
ROE Model
25.03%
2010
0.05%
0.11%
Narrative explanation:
The models indicate that 2010 is less sucessfull than 2009.
Calculations of ROA Model and ROE Model for 2009
ROA Model
ROA Model
ROA Model
=
=
=
Net Profit Margin

7.6%
10.26%
X
X
Sales-to-Total Assets
1.35
Return on Equity
Return on Equity
Return on Equity
=
=
=
Net Profit Margin

7.6%
25.03%
X
X
Asset Turnover*
1.35
*Note the Asset Turnover = Sales-to-Total-Assets Ratio
X
X
Equity Multiplier
2.44
Chapter 5 Mini Case Question H: Industry Comparables Analysis
Kaj has been able to obtain some industry ratio data from the home furnishings industry trade
association of which he is a member. The industry association collects proprietary financial informa
from members of the association, compiles averages to protect the proprietary nature of the
information, and provides averages for use by individual trade association members.
Over the 2008-2009 and 2009-2010 periods, the inventory-to-sale conversion period has averaged
days, while the sale-to-cash conversion period (days of sales outstanding) for the industry has avera
60 days.
In addition, trade association data for the home furnishings industry shows an average net profit m
of 6.5 percent, a sales-to-assets ratio of 1.3 times, and a total-debt-to-total-assets ratio of 55 perce
over the 2008-2009 and 2009-2010 time periods.
How did Scandis operations in terms of these ratios compare with these industry averages?
Scandi Home Furnishings Industry Comparable Analysis
2008
2008
Industry
Average
Conversion Period Ratios

Inventory-to-sale conversion period
Sale-to-cash Conversion period
192.64
55.97
200 days
60 days
Profitability Ratio
Net profit margin
0.03%
6.5%
Leverage Ratio
Total debt to total assets
65.0%
55.0%
Efficiency and Return Ratio

Sales to total assets
1.35
1.3
*Note that change is indicated by "Higher" or "Lower" or "Same"
10
io data from the home furnishings industry trade

ustry association collects proprietary financial information
verages to protect the proprietary nature of the
y individual trade association members.
the inventory-to-sale conversion period has averaged 200

d (days of sales outstanding) for the industry has average
me furnishings industry shows an average net profit margin

mes, and a total-debt-to-total-assets ratio of 55 percent
ods.
e ratios compare with these industry averages?
shings Industry Comparable Analysis
Comparison with
Industry*
lower
lower
lower
higher
higher
10

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CHAPTER 5 MINI CASE: SCANDI HOME FURNISHINGS, INC.

Kaj Rasmussen founded Scandi Home Furnishings as a corporation during mid-2007.

I HOME FURNISHINGS, INC.

me Furnishings as a corporation during mid-2007.

in eastern North Carolina, designs, manufactures, and

ark and received a college degree from a technical

ee years of income statements and balance sheets for

Scandi Home Furnishings, Inc.

Scandi Home Furnishings, Inc.

Chapter 5 Mini Case Question A: Liquidity Ratios

Calculations for 2008-2009:

Avg Current Liabilities

= Avg CA-Avg Inventories

Avg Current Liabilities

Avg Current Assets

Avg Total Assets

Avg Current Assets

= Avg CA-Avg Inventories

Avg Current Liabilities

Avg Current Liabilities

Avg Total Assets

Chapter 5 Mini Case Question B: Cash Conversion Cycle

2010 in Days Change*

Calculations for Average Conversion Periods for 2009

Sales to Cash Conversion Period

Purchase-to-Payment Conversion Period

Cost of Goods Sold/365

Cost of Goods Sold/365

Calculations for Average Conversion Periods for 2010

Sales to Cash Conversion Period

Purchase-to-Payment Conversion Period

Cost of Goods Sold/365

Cost of Goods Sold/365

Chapter 5 Mini Case Question C: Cash Build Versus Cash Burn

Cash Burn (Use of Cash) =

$ 1,660,000 [Cost of Goods Sold+Mktg+Gen & Admin

Narrative explanation of change:

Monthly Cash Burn =

Chapter 5 Mini Case Question D: Financial Leverage

*Note that change is indicated by "Higher" or "Lower"

Avg Total Debt

Avg Total Assets

Avg Owner's Equity

Debt to Equity Ratio

Avg Total Debt

Avg Owner's Equity

Current Liability-to-Total Debt

Avg Current Liabilities

Interest Coverage Ratio

Avg Total Assets

Avg Total Assets

Avg Total Debt

Calculations for leverage ratios for 2010:

Avg Total Debt

Avg Total Assets

Avg Owner's Equity

Debt to Equity Ratio

Avg Total Debt

Avg Owner's Equity

Avg Total Debt

Chapter 5 Mini Case Question E: Profitability Ratios

*Note that change is indicated by "Higher" or "Lower"

Operating Profit Margin

Net Profit Margin