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Finance Evaluate the financial statement for XYZ Inc and write a report of maximum 8 pages following the table of contents below. 1.0 Executive Summary 1.1 Introduction 2.0 Ratio Analysis 3.0 XYZ Financial Situation – A Graphical Look 4.0 Industry Ratio Comparisons 5.0 Recommendations 6.0 References/Index XYZ Inc is a CRM software company. The recommendations section must cover the positive and the negative issues you discovered from reading the financial statements. You will say what the company should do to change some of the problems or build up some of the strengths. Balance Sheet XYZ Inc. - Balance Sheet as of June 30, 2001 June 30/96 June 30/97 June 30/98 June 30/99 June 30/00 June 30/01 Current Assets Cash $ 9,904 18580 30706 321654 7051 557321 Accounts receivable 29370 81372 185667 329550 649832 526027 Work in progress 5538 17329 32983 15000 29678 30000 Prepaid Expenses 2382 5283 21382 43292 78918 80000 Total Current assets $ 47,194 $ 122,564 $ 270,738 $ 709,496 $ 765,479 $ 1,193,348 Capital Assets (note 1) Net capital assets 25380 100372 198392 395283 545997 502626 Total Assets $ 72,574 $ 222,936 $ 469,130 $ 1,104,779 $ 1,311,476 $ 1,695,974 Current Liabilities Bank indebtedness 125000 Accounts payable 18273 89283 143923 304380 458261 473326 Unearned/ deferred revenue 8293 21902 52394 127010 214047 263014 Current portion long term debt 29160 34992 33564 Total Current Liabilities 26566 111185 196317 460550 832300 769904 Long Term Debt (note 2) 115840 80848 78899 Total Debt 26566 111185 196317 576390 913148 848803 Shareholders Equity Common Shares 40000 40000 40000 40000 40000 40000 Retained earnings 6008 71751 232813 488389 358328 807172 Total Owners Equity 46008 111751 272813 528389 398328 847172 Total Liabilities & $ 72,574 $ 222,936 $ 469,130 $ 1,104,779 $ 1,311,476 $ 1,695,975 Shareholders Equity TEAM ASSIGNMENT Analyze it using the ratios analysis and prepare a report to the instructor using the following format: 1. Executive Summary (1 page) 2. Ratio Analysis (1 page) 3. Your understanding of the company financial situation (2-3 pages) Income Statement XYZ Inc. - Income Statement for Year ending June 30 June 30/96 June 30/97 June 30/98 June 30/99 June 30/00 June 30/01 Revenues Software Licensing & installation 215510 958424 1657981 2909272 3879383 4544000 Software Customization & Training 44141 239606 440729 918718 1293128 1856000 Total Revenues 259651 1198030 2098710 3827990 5172511 6400000 Operating Expenses Selling expenses 105621 265771 634819 1102560 1788000 2004000 Customization, installation & Training 54247 296654 542872 698800 892000 1090000 Customer Support 77767 120631 244440 336000 420000 General & Administrative 53626 112896 294000 540000 540000 Research & Development 65840 220693 247212 737760 1080000 926000 Equipment Lease 4000 36000 88934 279096 279096 Rental 18000 72000 85000 197000 240000 240000 Bad Debt 86500 26897 2394 13247 50000 Depreciation/Amortization 7360 27100 62295 85393 170702 200702 Interest 11600 19267 8997 Total operating expenses 251068 1104111 1868622 3462881 5358312 5758795 Income before Taxes 8583 93919 230088 365109 -185801 641205 Provision for Taxes 2575 28176 69026 109533 0 192361 Net Income 6008 65743 161062 255576 -185801 448844 Retained earning, Beginning of year 6008 71751 232813 488389 302588 Retained earning, End of Year 6008 71751 232813 488389 302588 751432 Financial Ratios Compare to 2000 Compare to Industry Short-Term Solvency (liquidity) June 30/96 June 30/97 June 30/98 June 30/99 June 30/00 June 30/01 Industry Averages Current Ratio 1.7765 1.1023 1.3791 1.5405 0.9197 1.5500 + + 0.8100 Current Ratio = CA/CL Quick Ratio 1.4784 0.8990 1.1022 1.4140 0.7892 1.4071 + + 0.7000 Quick Ratio = (CA-Inventory)/Cl Cash Ratio 0.3728 0.1671 0.1564 0.6984 0.0085 0.7239 + Cash Ratio = Cash / CL Net Working Capital 0.2842 0.0510 0.1586 0.2253 -0.0510 0.2497 + + 0.2000 NWC=( CA-CL)/TA Interval Measure (days) 70.6822 41.5371 54.7074 76.9384 54.0598 84.2769 + Interval measure = CA/AVG daily operating cost Inventory turnover 30.7712 47.6301 33.2259 57.7419 47.5924 46.9849 - Inventory Turnover = Cost of Goods sold / Inventory Day's sales in inventory 11.8617 7.6632 10.9854 6.3212 7.6693 7.7684 - Day's Sales in Inventory Turnover= 365/Inventory turn over Receivables turnover 8.8407 14.7229 11.3036 11.6158 7.9598 12.1667 - Recievable Turn over = Sales / Accounts Recievable NWC turnover 12.5873 105.2843 28.2005 15.3768 -77.4085 15.1142 + + 6.1300 NWC Turnover = Sales/NWC Fixed Asset turnover 10.2305 11.9359 10.5786 9.6842 9.4735 12.7331 + Fixed Asset Turnover = Sales / Net Fixed Assets Total Asset turnover 3.5777 5.3739 4.4736 3.4649 3.9440 3.7736 - + 3.2800 Total Asset Turnover = Sales / Total Assets Total debt ratio 0.3661 0.4987 0.4185 0.5217 0.6963 0.5005 + + 1.65 Total Debt Raio = (TA-TE)/TA Debt/equity 0.5774 0.9949 0.7196 1.0908 2.2925 1.0019 + - 0.8600 Debt/Equity = TD/TE Equity multiplier 1.5774 1.9949 1.7196 2.0908 3.2925 2.0019 + Equity Multiplier = TA/TE=1+D/E Long-term debt ratio 0.0000 0.0000 0.0000 0.1798 0.1687 0.0852 + + 0.5700 Long term debt ratio=long term debt / (long term debt+TE) Times interest earned 32.4749 -8.6435 72.2688 + Times + 1.7100 Times Interest earned = EBIT / Interest Cash coverage ratio 39.8364 0.2163 94.5764 + Times Cash Coverage = (EBIT + Depreciation) / Interest Profit margin 2.31% 5.49% 7.67% 6.68% -3.59% 7.01% + + 0.77% Profit Margin = Net Income / Sales ROA 8.28% 29.49% 34.33% 23.13% -14.17% 26.47% + + 2.52% Return on Assets = Net Income / Total Assets ROE 13.06% 58.83% 59.04% 48.37% -46.65% 52.98% + + 1.80% Return on Equity = Net Income / Total Equity Assumptions: Inventory = Work in progress and prepaid expenses Net Capital assets = Net Fixed Assets navjit: EBIT=Income before taxes n interest so add interest here as it has been deducted while calculating the operating expences Financial Ratios Year current ratio Common-size Balance Sh Year Quick ratio Common-size Income St. Net Working Capital Formulas NWC turnover Diagram Balance Sheet Total Asset turnover Diagram Income St. Day's sales in inventory Total debt ratio Times interest earned Cash coverage ratio Profit margin ROA ROE Year current ratio Year Quick ratio Net Working Capital NWC turnover Total Asset turnover Day's sales in inventory Total debt ratio Times interest earned Cash coverage ratio Profit margin ROA ROE June 30/96 June 30/97 June 30/98 June 30/99 June 30/00 June 30/01 Current Assets Cash 13.65% 8.33% 6.55% 29.11% 0.54% 32.86% Accounts receivable 40.47% 36.50% 39.58% 29.83% 49.55% 31.02% Work in progress 7.63% 7.77% 7.03% 1.36% 2.26% 1.77% Prepaid Expenses 3.28% 2.37% 4.56% 3.92% 6.02% 4.72% Total Current assets 65.03% 54.98% 57.71% 64.22% 58.37% 70.36% Capital Assets (note 1) Net capital assets 34.97% 45.02% 42.29% 35.78% 41.63% 29.64% Total Assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Current Liabilities Bank indebtedness 0.00% 0.00% 0.00% 0.00% 9.53% 0.00% Accounts payable 25.18% 40.05% 30.68% 27.55% 34.94% 27.91% Unearned/ deferred revenue 11.43% 9.82% 11.17% 11.50% 16.32% 15.51% Current portion long term debt 0.00% 0.00% 0.00% 2.64% 2.67% 1.98% Total Current Liabilities 36.61% 49.87% 41.85% 41.69% 63.46% 45.40% Long Term Debt (note 2) 0.00% 0.00% 0.00% 10.49% 6.16% 4.65% Total Debt 36.61% 49.87% 41.85% 52.17% 69.63% 50.05% Shareholders Equity 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Common Shares 55.12% 17.94% 8.53% 3.62% 3.05% 2.36% Retained earnings 8.28% 32.18% 49.63% 44.21% 27.32% 47.59% Total Owners Equity 63.39% 50.13% 58.15% 47.83% 30.37% 49.95% Total Liabilities & 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Shareholders Equity June 30/96 June 30/97 June 30/98 June 30/99 June 30/00 June 30/01 Revenues Software Licensing & installation 83.00% 80.00% 79.00% 76.00% 75.00% 71.00% Software Customization & Training 17.00% 20.00% 21.00% 24.00% 25.00% 29.00% Total Revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Operating Expenses Selling expenses 40.68% 22.18% 30.25% 28.80% 34.57% 31.31% Customization, installation & Training 20.89% 24.76% 25.87% 18.26% 17.25% 17.03% Customer Support 0.00% 6.49% 5.75% 6.39% 6.50% 6.56% General & Administrative 0.00% 4.48% 5.38% 7.68% 10.44% 8.44% Research & Development 25.36% 18.42% 11.78% 19.27% 20.88% 14.47% Equipment Lease 0.00% 0.33% 1.72% 2.32% 5.40% 4.36% Rental 6.93% 6.01% 4.05% 5.15% 4.64% 3.75% Bad Debt 0.00% 7.22% 1.28% 0.06% 0.26% 0.78% Depreciation/Amortization 2.83% 2.26% 2.97% 2.23% 3.30% 3.14% Interest 0.00% 0.00% 0.00% 0.30% 0.37% 0.14% Total operating expenses 96.69% 92.16% 89.04% 90.46% 103.59% 89.98% Income before Taxes 3.31% 7.84% 10.96% 9.54% -3.59% 10.02% Provision for Taxes 0.99% 2.35% 3.29% 2.86% 0.00% 3.01% Net Income 2.31% 5.49% 7.67% 6.68% -3.59% 7.01% Retained earning, Beginning of year 0.00% 0.50% 3.42% 6.08% 9.44% 4.73% Retained earning, End of Year 2.31% 5.99% 11.09% 12.76% 5.85% 11.74% RATIOS FORMULA PURPOSE LIQUIDITY RATIOS Working Capital Current Assets - Current Liabilities measures short term debt paying ability Current Ratio Current Assets / Current Liabilities measures short term debt paying ability Acid Test (quick ratio) Cash + short-term investments + net receivables / Current Liabilities Measures immediate short term liquidity Cash Current Debt Coverage Ratio Cash provided by operating activities / average current liabilities Measures short-term debt-paying ability Credit Risk Ratio Allowance for doubtful acconts / accounts receivable Measures overall credit risk Receivables Turnover Ratio Met Credit Sales / Average net receivables Measures liquidity of receivables Average Collection period 365 days / receivables turnover ratio Measures number of days inventory is on hand SOLVENCY RATIOS Debt to Total Assets Ratio Total liabilities / Total assets Measures % of total assets provided by creditors Times interest earned ratio Earnings before interest expense & income tax expense (EBIT) / Interest Expenses Measures ability to meet interest payments as they come due Cash interest coverage ratio Earnings before interest expense & income tax expense & amortization (EBITDA) / Interest expense Measures ability to meet interest payments as they come due Cash TOTAL DEBT coverage ratio Cash from operating activities / Average total liabilities Measures long-term debt-paying ability (cash) Free Cash Flow Cash from operating activities - capital expenditures - dividends paid Measures cash available for paying more dividends or expanding operations Capital expenditure ratio Cash provided by operating activities / capital expenditures Measures ability to generate sufficient cash to finance new capital assets PROFITABILITY RATIOS Profit Margin Ratio Net Earnings / Net Sales Measures net earnings generated by each dollar of sales Return on assets ratio Net Earnings / Average Total Assets Measures overall profitability of assets Average age of Capital Assets Accumulated Amortization / Amortization expense Measures average age of capital assets Return on common shareholders' equity ratio Earnings available to common shareholders / average common shareholders' equity Measures profitability of shareholders' investment Asset Turnover Ratio Net Sales / Average Total Assets Measures how efficiently assets are used to generate by each dollar of sales. Gross Profit Ratio Gross Profit / Net Sales Measures margin between selling price and cost of goods sold Operating Expenses to Sales Ratio Operating Expenses / Net Sales Measures the cost incurred to support each dollar of sales Cash Return on Sales Ratio Cash provided by Operating Activities / Net Sales Measures the net cash flow generated by each dollar of sales. Earnings per share Earnings available to common shareholders / average number of common shares outstanding Measures net earnings earned on each common share Book Value per share Common Shareholders' Equity / Number of Common Shares outstanding Measures the equity (net assets) per common share Cash Flow per share Net Cash Flow from all activities / Average number of common shares outstanding Measures net cash flow per common share Price-earnings Ratio Share price / Earnings per share Measures relationship between market price per share and earnings per share Payout Ratio Cash Dividends / Net Earnings Measures % of earnings distributed in the form of cash dividends Dividend Yield Cash Dividends per common share / Year-end share price Measures rate of return earned from dividends Cost of Goods Sold Cost of goods purchased + cost of goods on hand (beginning inventory) = cost of goods available then Cost of Goods available for sale - ending inventory = Cost of Goods Sold Assets = liabilites + shareholder equity Breakeven Point volume of sales rqd to generate zero profit Fixed costs / profit margin per unit There are two key strategies to keep your breakeven point at a manageable level. The first is to increase the company's overall gross margin. Simply put, increase your profit level on every sale. The most obvious way to accomplish this is to raise prices, but for some companies and products that is not an option. Instead they should look to either decrease variable costs or concentrate more heavily on the products with the highest gross margin. The second way to manage the breakeven point is simply to cut overhead. Nobody likes to do it, but if the company fails, then all holdings will be lost anyway. If managed early enough, a company can cut the fat without touching an ounce of the bone. Often there is plenty of unnecessary overhead to be cut without touching a single employee. How many dotcom jobs could have been saved if companies had simply served generic coffee every morning instead of specially imported European blends? We all want our companies to be happy, comfortable places, but paying attention to our breakeven points can help alert us when it's time to give up some of our toys and which, if any, we can afford to keep. June 30/06 June 30/07 June 30/08 June 30/09 June 30/10 June 30/11 Current Assets Cash 0.00 8,676.00 12,126.00 290,948.00 -314,603.00 550,270.00 Accounts receivable 0.00 52,002.00 104,295.00 143,883.00 320,282.00 123,805.00 Work in progress 0.00 11,791.00 15,654.00 -17,983.00 14,678.00 322.00 3.46 Prepaid Expenses 0.00 2,901.00 16,099.00 21,910.00 35,626.00 1,082.00 Total Current assets 0.00 75,370.00 148,174.00 438,758.00 55,983.00 427,869.00 Capital Assets (note 1) Net capital assets 0.00 74,992.00 98,020.00 196,891.00 150,714.00 -43,371.00 Total Assets 0.00 150,362.00 246,194.00 635,649.00 206,697.00 384,498.00 Current Liabilities Bank indebtedness 0.00 0.00 0.00 125,000.00 -125,000.00 Accounts payable 0.00 71,010.00 54,640.00 160,457.00 153,881.00 15,065.00 Unearned/ deferred revenue 0.00 13,609.00 30,492.00 74,616.00 87,037.00 48,967.00 Current portion long term debt 0.00 0.00 0.00 29,160.00 5,832.00 -1,428.00 Total Current Liabilities 0.00 84,619.00 85,132.00 264,233.00 371,750.00 -62,396.00 Long Term Debt (note 2) 0.00 0.00 0.00 115,840.00 -34,992.00 -1,949.00 Total Debt 0.00 84,619.00 85,132.00 380,073.00 336,758.00 -64,345.00 Shareholders Equity Common Shares 0.00 0.00 0.00 0.00 0.00 0.00 Retained earnings 0.00 65,743.00 161,062.00 255,576.00 -130,061.00 448,844.00 Total Owners Equity 0.00 65,743.00 161,062.00 255,576.00 -130,061.00 448,844.00 Total Liabilities & 0.00 150,362.00 246,194.00 635,649.00 206,697.00 384,499.00 Shareholders Equity June 30/06 June 30/07 June 30/08 June 30/09 June 30/10 June 30/11 Revenues Software Licensing & installation 0.00 742,914.00 699,557.00 1,251,291.00 970,111.00 664,617.00 Software Customization & Training 0.00 195,465.00 201,123.00 477,989.00 374,410.00 562,872.00 Total Revenues 0.00 938,379.00 900,680.00 1,729,280.00 1,344,521.00 1,227,489.00 Percentage growth compare to last Year 461.40% 175.18% 182.40% 135.12% 123.73% Operating Expenses Selling expenses 0.00 160,150.00 369,048.00 467,741.00 685,440.00 216,000.00 Customization, installation & Training 0.00 242,407.00 246,218.00 155,928.00 193,200.00 198,000.00 Customer Support 0.00 77,767.00 42,864.00 123,809.00 91,560.00 84,000.00 General & Administrative 0.00 53,626.00 59,270.00 181,104.00 246,000.00 0.00 Research & Development 0.00 154,853.00 26,519.00 490,548.00 342,240.00 -154,000.00 Equipment Lease 0.00 4,000.00 32,000.00 52,934.00 190,162.00 0.00 Rental 0.00 54,000.00 13,000.00 112,000.00 43,000.00 0.00 Bad Debt 0.00 86,500.00 -59,603.00 -24,503.00 10,853.00 36,753.00 Depreciation/Amortization 0.00 19,740.00 35,195.00 23,098.00 85,309.00 30,000.00 Interest 0.00 0.00 0.00 11,600.00 7,667.00 -10,270.00 Total operating expenses 0.00 853,043.00 764,511.00 1,594,259.00 1,895,431.00 400,483.00 Percentage growth compare to last Year 439.77% 169.24% 185.32% 154.74% 107.47% Income before Taxes 0.00 85,336.00 136,169.00 135,021.00 -550,910.00 827,006.00 0.00 0.00 0.00 0.00 0.00 0.00 Provision for Taxes 0.00 25,601.00 40,850.00 40,507.00 -165,274.00 248,102.00 Net Income 0.00 59,735.00 95,319.00 94,514.00 -385,636.00 578,904.00 Percentage growth compare to last Year 1094.26% 244.99% 158.68% -172.70% 341.57% Retained earning, Beginning of year 0.00 6,008.00 65,743.00 161,062.00 255,576.00 -130,060.00 Retained earning, End of Year 0.00 65,743.00 161,062.00 255,576.00 -130,060.00 448,844.00 Customization, installation & Training Customer Support General & Administrative