Case 1: Darlarna Furniture

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 Industry
Financial Ratios 2016 2017 2018
Average
Current Ratio 688124/272500 769639/360460 960837/569072 2.5
= 2.5 = = 1.7
2.1
Cash Ratio 0.2 0.1 0.02 .5
Inventory Turnover in Days 87 89 92 90 days
A/R Turnover in Days 60 days
A/P Turnover in Days 15 days
Cash Conversion Cycle 135 days
Fixed Assets Turnover 4.01
Total Assets Turnover 2.21
LT Debt to Total Capitalization 30%
Cash Flow Coverage 3.21
Effective Interest Rate 8%
Maximum Borrowing
Gross Profit Margin 45%
Operating Profit Margin 25%
Net Profit Margin 10%
Return on Assets 22%
Return on Equity 31%

Vertical analysis

Vertical analysis shows the relationship of each item to a base amount on financial statement. Income
statement is always expressed as a percentage of net sales while balance sheet is expressed as
percentage of total assets.

2016 2017 2018 2016 2017

2018
Cash 55,000 43,500 11,000 0.05% 0.04% 0.01%
Accounts receivable 220,000 261,000 376,337 0.23% 0.24% 0.27%
Inventories 388,124 437,139 545,000 0.4% 0.4% 0.4%
Prepaid insurance 25,000 28,000 28,500 0.02% 0.02% 0.02%
Total current assets 688,124 769,639 960,837
Fixed assets, net 356,950 498,050 603,450 0.3% 0.3% 0.3%
Total assets 1,045,074 1,267,689 1,564,287 100% 100% 100%

Accounts payable 127,500 196,500 301,523 0.1% 0.1% 0.1%

Other payables 51,000 69,860 79,499 0.02% 0.02% 0.02%
Line of credit 61,500 51,300 130,200 0.01% 0.01% 0.01%
Current portion of long-term
debt 32,500 42,800 57,850 0.03% 0.03% 0.03%

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Total current liabilities 272,500 360,460 569,072 0.3% 0.3% 0.3%
Long-term debt 325,000 428,000 578,500 0.3% 0.3% 0.3%
Shareholders' equity
Common shares 360,000 360,000 360,000 0.2% 0.2% 0.2%
Retained earnings 87,574 119,229 56,715 0.04% 0.04% 0.04%
Total liabilities and equities 1,045,074 1,267,689 1,564,287 100% 100% 100%

Horizontal analysis for balance sheet

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 2016- percenta 2017- percent
2016 2017 2018 2017 ge 2018 age
Cash 55,000 43,500 11,000 -11500 -20.9% - 32500 -74.7%
Accounts
receivable 220,000 261,000 376,337 41000 18.6% 115337 44.2%
Inventories 388,124 437,139 545,000 49015 12.6% 107861 24.67%
Prepaid
insurance 25,000 28,000 28,500 3000 12% 500 1.8%
Total current
assets 688,124 769,639 960,837 81515 11.8% 191198 24.8%
Fixed assets,
net 356,950 498,050 603,450 141100 39.5% 105400 21.2%
Total assets 1,045,074 1,267,689 1,564,287

Accounts
payable 127,500 196,500 301,523 69000 54.1% 105023 53.44%
Other
payables 51,000 69,860 79,499 18860 37% 9639 13.8%
Line of credit 61,500 51,300 130,200 -10200 -16.58% 78900 153.8%
Current
portion of
long-term
debt 32,500 42,800 57,850 10300 31.7% 15050 35.2%
Total current
liabilities 272,500 360,460 569,072 87960 32.3% 141072 39.1%
Long-term
debt 325,000 428,000 578,500 103000 31.7% 150500 35.2%
Shareholders'
equity
Common
shares 360,000 360,000 360,000 0 0 0 0
Retained
earnings 87,574 119,229 56,715 31655 36.2% -62514 -52.4%
Total
liabilities and
equities 1,045,074 1,267,689 1,564,287

5-part analysis of ROE

Debt
EBIT/Sales EBT/EBIT ROE
Ratio
2016 0.26 0.78 0.6 0.2
2017 0.21 0.72 0.6 0.2
2018 0.07 0.13 2.9 0.02

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 Cash flow analysis

2017 2018
Cash 43500 11000
Cash in
Accounts receivable 261,000 376,337
Inventories 437,139 545,000
Prepaid insurance 28,000 28,500
Total current assets 769,639 960,837
Fixed assets, net 498,050 603,450
Total assets 1,267,689 1,564,287
Cash outs
Accounts payable 196,500 301,523
Other payables 69,860 79,499
Line of credit 51,300 130,200
Current portion of long-term debt 42,800 57,850
Total current liabilities 360,460 569,072
Long-term debt 428,000 578,500
Shareholders' equity
Common shares 360,000 360,000
Retained earnings 119,229 56,715
Total liabilities and equities 1,267,689 1,564,287

Part 2: . Prepare a 2-page memorandum as requested by Mr. Blix. The memo should be divided
into sections describing liquidity, asset management, long-term debt ability, profitability, and
recommendations.
To Mr. Blix
From Sally Delaney
CC:
Date:
Subject: CPA to conduct an analysis of Darlarna’s operation and to make recommendations for future
action within the week

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 Evaluation Form

Total: _________ / 100

Letter Grade: _________

Accuracy of Financial Data - 25%

Ratio table /5
Vertical analysis /5
Horizontal analysis /5
Analysis of ROE /5
Cash flow statements /5

One mark will be deducted for each major mistake.

Thoroughness of Analysis – 50%

Liquidity /10
Asset management /10
Long-term debt paying ability /10
Profitability /10
Recommendations /10

Layout and Writing Quality – 25%

Memo layout /5
Grammatical and spelling errors /10
Writing style /10

Comments
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