question archive Your company experienced some cash flow issues during your last project that caused the project to be terminated early without achieving all its original objectives
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Your company experienced some cash flow issues during your last project that caused the project to be terminated early without achieving all its original objectives. Despite being told there is nothing to worry about, you decide to investigate the company's financial status.
1. What three financial statements should you look at first? What will they tell you?
2. You find the company has assets of $22M, total equity of $12M, and net cash flow of $6M per month, what are the company's total liabilities?
3. You also note the company depreciated an asset, purchased for $6M, over seven years using the straight-line method. What is the total depreciation expense (to the nearest dollar) at the end of year 4?
4. Based on the depreciation notes, you conclude that depreciation expense is:
A. A cash expense
B. Equal each year the asset is depreciated
C. A non-cash expense
D. A and B above
Note: Disregard question 10 when answering question 11.
5. You calculate the company's Current Ratio and find it to be 3.5. What specifically does this tell you?
6. You calculate Return on Assets (ROA) and find it to be 5.39% based on net income (available to common stockholders) of $350,000 and total assets of $6,500,000. You dig further and find that sales were $10,000,000. What does this information tell you about the company's net profit margin and total asset turnover? Provide values to support your assessment.
1.
To evaluate business performance, the manager should assess the income statement (Statement of Revenue, Expenses and Income), balance sheet (Statement of Asset, Equity and Liabilities) and the statement of cash flows.
Income statement would report the annual revenue, associated operating expenses and other costs and the net profit at the end of the year.
Balance sheet would indicate the account balance for current assets, fixed assets, current liabilities, long-term liabilities and owner capital at one point of time. Or, these account would change its balance day by day.
The statement of cash flows would represent how the firm manages its cash inflows and cash outflow during the year to generate revenue and profit.
2.
Total assets
= Total liabilities + Total equity
Total liabilities
= Total assets - Total equity
= $22M - $12M
= $12M
3. Depreciation expense:
Annual deprecation expense
=$6M/7
=$857,142.86
Accumulated deprecation expense years 4
=$857,142.86×4
=$3,428,571.42
4. The depreciation expense is considered as the non-cash expense since it is the recovery cost of the initial purchase of the long-term assets.
5. Current ratio = 3.5
The current ratio of 3.5 indicates that the business would be able to cover its short term liabilities. It also indicates that the firm manages its liquidity effectively.
6. Estimate the net profit margin and the asset turnover:
Netprofitmargin
=Netincome/Sales
=$350,000/$10,000,000
=3.5%
Asset turnover= Sales/Net assets
=$10,000,000/6,500,000
=1.5 times