Case Scenario: Using Jackson’s Financial Statement, analyze the firm’s financial position.
Jackson Products Company's Balance Sheet 31-Dec-08
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Cash
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$240,000
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Accounts payable
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$380,000
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Accounts receivable
|
380,000
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Notes payable (9%)
|
450,000
|
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Inventory
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1,040,000
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Other current liabilities
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50,000
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Total current assets
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$1,660,000
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Total current liabilities
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$880,000
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Net plant and equipment
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900,000
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Long-term debt (10%)
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930,000
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Total assets
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$2,560,000
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Stockholders' equity
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750,000
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|
|
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Total liabilities and
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|
|
|
|
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Stockholders' equity
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$2,560,000
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Income Statement for the Year Ended December 31, 2008
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Net sales (all on credit)
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$3,400,000
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Cost of sales
|
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1,825,000
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Gross profit
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$1,575,000
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Selling, general, and administrative expenses
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1,200,000
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Earnings before interest and taxes
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$375,000
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Interest:
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|
|
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Notes
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$37,800
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|
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Long-term debt
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80,000
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|
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Total interest charges
|
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117,800
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Earnings before taxes
|
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$257,200
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Federal income tax (40%)
|
102,880
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Earnings after taxes
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$154,320
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Company Ratios Ind Averages
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Current ratio
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2.5:1
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Quick ratio
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1.1:1
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Average collection period (365-day year)
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35 days
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Inventory turnover ratio
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2.4 times
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Total asset turnover ratio
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1.4 times
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Times interest earned ratio
|
3.5 times
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Net profit margin ratio
|
4.0%
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Return on investment ratio
|
5.6%
|
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Total assets/stockholders' equity (equity multiplier) ratio
|
3.0 times
|
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Return on stockholders' equity ratio
|
16.8%
|
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P/E ratio
|
9.0 times
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Question 1. Evaluate the liquidity position of Jackson relative to that of the average firm in the industry. Consider the current ratio and the quick ratio for Jackson. What problems, if any, are suggested by this analysis?
Question 2. Evaluate Jackson's performance by looking at key asset management ratios. Are any problems apparent from this analysis?
Question 3. Evaluate the financial risk of Jackson by examining its times interest earned ratio and its equity multiplier ratio relative to the industry average ratios.