ACC 151 Lecture Notes - Lecture 21: Cash Conversion Cycle, Asset Turnover, Debt Ratio

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4 Dec 2015

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Acc 151 lecture 21 financial statement analysis. Working capital = current assets current liabilities. Working capital measures the ability to pay current liabilities with current assets. In general, the larger the working capital, the better the ability to pay debts. Recall that capital is total assets minus total liabilities. Working capital is like a current version of total capital. The most common ratio evaluating current assets and current liabilities is the current ratio, which is current assets divided by current liabilities. The current ratio measures the ability to pay current liabilities with current assets. Quick ratio = (cash and cash equivalents + short term investments + net current receivables)/current liabilities. The quick ratio tells us whether the entity could pass the acid test of paying all its current liabilities if they came due immediately (quickly). The quick ratio uses a narrower base to measure liquidity than the current ratio does: measuring turnover and the cash conversion cycle.

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1. The formula for Accounts Receivable turnover is

Select one:

a. Net Sales / average accounts receivable

b. Cost of goods sold / average accounts receivable

c. Net Sales / average merchandise inventory

d. 360 days / average accounts receivable

2. The category of ratios that determine the economic status ofpublicly-traded companies is

Select one:

a. Profitability ratios

b. Market value ratios

c. Liquidity Ratios

d. Solvency ratios

3. The working capital ratio is

Select one:

a. Quick assets / current liabilities

b. Working capital /current liabilities

c. Current assets minus current liabilities

d. Current assets/current liabilities

4. Earnings per share is calculated by

Select one:

a. Dividing net income by the authorized ordinary shares.

b. Dividing net income less preferred dividends by number ofordinary shares outstanding.

c. None of the above.

d. Dividing net income by the total number of ordinary andpreferred shares issued.

5. Which of the following belong to the profitabilityratios?

Select one:

a. Rate of return on equity

b. Rate of return on assets

c. All of the above

d. Gross Profit Margin

6. The category of ratios that shows the ability of the firm topay its long-term obligations is

Select one:

a. Profitability ratios

b. Solvency ratios

c. Market value ratios

d. Liquidity Ratios

7. Operating profit margin equals

Select one:

a. Income from operations / sales

b. Net income / sales

c. Gross profit / sales

d. Profit from operations / cost of sales

8. The following are quick assets except

Select one:

a. Short-term investments

b. Merchandise Inventory

c. Accounts Receivable

d. Cash

9. The following are liquidity ratios except

Select one:

a. Earnings per share

b. Working capital ratio

c. Quick ratio

d. Receivable turnover

10. Quick assets equals

Select one:

a. All current assets

b. Cash and Accounts receivable only.

c. Total assets less non-current assets

d. Current assets minus inventory

jadebear393

Complete one paragraph, profiling each company's business, including information such as brief histories, where each company is located, number of employees, the products each company sells, and so forth. Please reference any websites that you used for the profiles on the Bibliography tab.

Tootsie Roll Industries began in a small candy store in New York in 1896. Tootsie Roll is now headquartered in Chicago and primarily sells its products in the United States, Canada, and Mexico. According to Yahoo! Finance, Tootsie Roll has 2,000 full-time employees. Tootsie Roll sells the following branded candy: Tootsie Roll, Tootsie Roll Pop, Charms Blow Pop, Mason Dots, Andes, Sugar Daddy, Charleston Chew, Double Bubble, Razzles, Caramel Apple Pop, and Junior Mints. Tootsie Roll had 2014 net product sales of $539.9 million.

Hershey Company was founded by Milton S. Hershey in 1893 and is headquartered in Hershey, Pennsylvania. According to Yahoo! Finance, Hershey has 20,800 full-time employees. Hershey is famous for Good & Plenty, Hershey Bar, Hershey's Kisses, Hershey's Bliss, Reese's, Rolo, Twizzlers, Almond Joy, Kit Kat, and Ice Breakers. Hershey had net product sales of $7.4 billion for 2014.

Tootsie Roll			Hershey			Interpretation and comparison between the two companies' ratios (reading Chapter 13 will help you prepare the commentary)
						The comparison of the ratios is an important part of the project. A good approach is to briefly explain what the ratio tells us. Indicate whether a higher or lower ratio is better. Then compare the two companies on this basis. Remember that each ratio below requires a comparison.
		$ 1.05			$ 3.91


$264,621	=	4.11	$2,247,047	=	1.16
$64,459			$1,935,647


$198,962	=	36.9%	$3,336,166	=	45.0%
$539,895			$7,421,768


$63,298	=	11.7%	$846,912	=	11.4%
$539,895			$7,421,768


$340,933		5.2	$4,085,602		5.6
$66,118		times	$730,289		times


365	=	71	365	=	65
5.2		days	5.6		days


$539,895	=	12.9	$7,421,768	=	13.8
$41,987			$537,426

365	=	28.4	365	=	26.4
12.9		days	13.8		days


$539,895	=	0.60	$7,421,768	=	1.35
$899,398			$5,493,502


	=	7.0%		=	15.4%



$219,250	=	24.1%	$4,109,986	=	73.0%
$910,386			$5,629,516


$83,923	=	847.7	1,389,575	=	16.6
$99			83,532


$0.36	=	1.1%	$2.33	=	2.6%
$32.04			$90.32

$63,298	=	9.2%	$846,912	=	54.0%
$685,721			$1,567,791


	=	$78,065			$ 492,274
		$78,065		=


$30.65	=	29	$103.93	=	27
$1.05			$3.91

You all get the chance to play the role of financial analyst below. The summary should be a comparison of each company's performance for each major category of ratios listed below. Focus on major differences as you compare each company's performance. A nice way to conclude is to state which company you feel is the better investment and why.

Measuring Ability to Pay Current Liabilities: Tootsie Roll has the advantage for the current ratio. Tootsie Roll has $4.11 in current assets for every dollar in current liabilities, while Hershey has only $1.16 in current assets for every dollar in current liabilities.

Measuring Turnover: Hershey has the advantage for the inventory turnover and accounts receivable turnover ratios. Hershey turns over its inventory 5.6 times to Tootsie Roll's 5.2 times, and Hershey turns over its accounts receivable 13.8 times to Tootsie Roll's 12.9 times.

Measuring Leverage - Overall Ability to Pay Debts: Tootsie Roll has significantly less debt than Hershey as evidenced by Tootsie Roll's 24.1% debt-to-asset ratio as compared to Hershey's 73% debt-to-asset ratio. Tootsie Roll can cover its interest expense 847.7 times with income before interest and taxes, while Hershey can only cover its interest expense 16.6 times with their income before interest and taxes. Tootsie Roll has the advantage for each of these ratios.

Measuring Profitability: Hershey has the advantage for 4 of the 5 profitability ratios. Hershey has a significant edge in return on common stockholders' equity, with a 54% return on common stockholders' equity, as compared to Tootsie Roll's 9.2% return on common stockholders' equity. Hershey has a higher gross profit rate (45.0%â36.9%), while Tootise Roll has a higher net profit margin ratio (11.7%â11.4%). Hershey also has a significant advantage for asset turnover (1.35â.60) and rate of return on total assets (15.4%â7.0%).

Analyzing stock as an investment: Hershey returns a 2.6% dividend yield to its investors, while Tootsie Roll's yield is 1.1%. Hershey has positive free-cash flow of $492.2 million, whereas Tootsie Roll has positive free-cash flow of $78.1 million. Free-cash flow can be used to undertake acquisitions, pay additional dividends, pay down debt, or buy back stock.

Conclusion: Tootsie Roll is the safer investment when you examine the ability to pay current liabilities and overall liabilities, but Hershey has the advantage for the turnover and profitability ratios. For the conservative investor, Tootsie Roll looks like the way to go because of its strong current and times interestâearned ratios. For the growth-oriented investor, Hershey is the way to go because of its stronger profitability ratios and large amount of free-cash flow.

Evaluate the financial performance of Coca-Cola; (KO) and Pepsi (PEP) for the year ended December 31, 2016. Follow the instructions below to access each companyâs information and perform a financial analysis based on the financial measures we have learned in this course.

Select Http://www.yahoo.com/ and then select Finance. In the Search section at the top of the screen select KO for Coca-Cola and PEP for Pepsi

Select âFinancialsâ and select Income Statement when accessing the Income Statement

Select âFinancialsâ and select Balance Sheet when accessing the Balance Sheet

Do the following for KO and PEP for the year ended 12/31/16 only

Perform a vertical analysis of the Income Statement for KO and PEP for the year ended 12/31/16.

Include in your vertical analysis all of following as a % of total revenue:

Cost of Revenue as a % of Total Revenue

Gross Profit as a % of Total Revenue

Selling, gen and administrative expenses as a % of Total Revenue

Operating Income as a % of Total Revenue

Net Income as a % of Total Revenue

Current Ratio

Accounts Receivable turnover. Assume the total revenue on the income statement represents all sales on account for the year

Average collection period

Merchandise Inventory turnover. Assume the Cost of Revenue on the Income Statement is the same as the Cost of Goods Sold

Debt to Asset Ratio

Return on Assets Ratio

Asset Turnover

In preparing the vertical analysis and other financial analysis above; define each measure and identify the strengths and weaknesses of KO and PEP as related to each other. Below is an example of you should set it up.

Working Capital	KO	PEP
Current Assets	$ 34,010,000	$ 27,089,000
- Current Liabilities	$ 26,532,000	$ 21,135,000
Net Working Capital =	$ 7,478,000	$ 5,954,000

Strength or Weakness

Working Capital measures the ability of a company to meet its short-term obligations with current assets. Pepsi is and Coke are performing at about the same level. Cokes working capital is a little higher because they have higher current assets and current liabilities.

Requirements for Each Group

1.The vertical analysis prepared in 4 A above.

2.All of your computations for the financial analysis. (4 B through 4 H)

3.Identification of strengths and weaknesses. (Include a definition of each financial measure, a description of which company is doing better in each financial measure including the vertical analysis and explain why)

4.All group members must submit the Report Project Team Assessment

5.If the requirements above are not met, points will be deducted from Parts of the group projects.

Enter all requirements on the Group Project Problem 4 Tab.

Submit one set of answers per group for all four problems. Make sure to include each group members name at the top of each spreadsheet.

Each group member should download the Group Team Assessment and evaluate themselves and everyone else in their group. This evaluation should be submitted anonymously.

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ACC 151 Lecture Notes - Lecture 21: Cash Conversion Cycle, Asset Turnover, Debt Ratio

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