question P2-10 The financial statements of Access Corporation for the year ended
ID: 2732705 • Letter: Q
Question
question P2-10
The financial statements of Access Corporation for the year ended December 31, 2012, follow. Access Corporation's annual purchases are estimated to equal 75% of cost of goods sold. The firm's 3,000 outstanding shares of common stock closed 2012 at a price of $25 per share. Use the preceding financial statements to complete the following table. Assume that the industry averages given in the table are applicable for both 201 I and 2012. Analyze Access Corporation's financial condition as it relates to (1) liquidity, (2) activity, (3) debt, (4) profitability, and (5) market value. Summarize the company's overall financial condition. Based on a 365-day year and on end-of-year figures.Explanation / Answer
Access Corporation:
a.
b.
1. Liquidity: The corporation was outperforming the industry in 2011. Current ratio, quick ratio, inventory turnover, average collection period and the average payment period were all favorable as compared to the industry averages. But during 2012, things have gone downhill for the company as far as the liquidity aspect is concerned. Current and quick assets have decreased drastically over the year, and it is underperforming the industry in all parameters of liquidity.
2. Activity : Average collection period has gone up from 36 days to 57 days, while the industry average is 37 days, indicating that the collection of accounts receivable is sluggish. Inventory turnover has decreased from 2.59 to 2.33, suggesting slowing demand or operational ineffiencies. This, if not taken care of immediately, would lead to accumulation of slow-moving inventories, which is not desirable from the operating cycle point of view. The liquidity problem is reflected in the average payment period going up from 78 days to 101 days.
3. Debt: There is a very steep increase in financial leverage as the debt-to-equity ratio has spiked up from a moderate 51% to 158%. As a result, the times interest earned ratio has gone down from a comfortable 4 to a non so comfortable 2.8
4. Other than the gross profit margin, all the profitability measures have improved. That could probably have been acheived due to better control and management of operating expenses. However, the decrease in gross profit margin is a matter of serious concern. Obviously the cost of goods sold has increased without a commensurate increase in sales revenues.
5. Market value: Market to book ratio has increased from 1.2 in 2011 to 1.3 in 2012, indicating that the equity market is of the opinion that a bright financial future awaits the company, and the the poor 2012 performance will not continue.
Industry Average Actual Ratio 2011 Actual Ratio 2012 Current Ratio 1.80 1.84 1.04 Quick ratio 0.70 0.78 0.38 Inventory turnover 2.50 2.59 2.33 Average collection period 37 days 36 days 57 days Average payment period 72 days 78 days 101 days Debt-to-equity ratio 50% 51% 158% Times interest earned ratio 3.8 4.0 2.8 Gross profit margin 38% 40% 34% Net profit margin 3.5% 3.6% 4.1% Return on total assets 4.0% 4.0% 4.4% Return on common equity 9.5% 8.0% 11.3% Market/book ratio 1.1 1.2 1.3Related Questions
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