ACCTG Quality Furniture

8/8/2019 ACCTG Quality Furniture

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CASE PRESENTATION

QUALITY FURNITURE COMPANY

MBA 206

Maria Arlene (Bam) T. Disimulacion


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Manufactures a limited line of high-quality homefurnishings

Distributed to department stores, independent

home furnishing retailers and regional chains

Headquarters in Scranton, Pennsylvania, USA

Advertised its lines nationally to maintain

intensive coverage of its trading areas


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Distributed through stores strategically locatedwithin a particular marketing area

Challenges: Quality of product/service; credit

terms and financing of dealers; need to support

numerous customers in order to maintainadequate distribution for its products

Sources of data: Reports


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QUALITY FURNITURE COMPANYCustomers

LLOYDS COMPANY THE EMPORIUM

Has 3 locations(1) in downtown Minneapolis(2) in nearby suburban areas

Medium-sized department store inSt. Paul

Retailed high-quality furnishings in 3locations

Retailed low-quality furniture

Sales:75% cash/credit cards25% on 6-month installment with a25% down payment & 6 equal monthly

payments

Initially a partnership, then incorporated

June 2001, two partners sold theirshares

Customer for more than 30 years Established account in 1993

Terms: 2/10, net 30 Terms: 2/10, net 30

Limit: $50,0000 Limit: $85,000


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LLOYDS COMPANY & THE EMPORIUMRatios

CURRENT RATIO (Liquidity)Current Assets/ Current Liabilities

Measures a companys liquidity and short-term debt paying ability

LLOYDS EMPORIUM NOTES

2002 2001 2002 2001

2.70:1 2.28:1 1.46:1 1.39:1 Current ratios for both companies increased in 2002

For every dollar of current liabilities, Lloyd's has$2.70 of current assets in 2002. This is higher thanthe previous year (2001) which was $2.28 of current

assets to a dollar of current liabilities

For every dollar of current liabilities, The Emporiumhas $1.46 of current assets in 2002 and$1.39 in 2001


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INVENTORY TURNOVERCost of Goods Sold/Average InventoryAverage Inventory = Beg Inv + End Inv/2

Inventory Turnover measures the number of times on averagethe inventory is sold during the period

LLOYDS EMPORIUM NOTES 2002 2001 2002 2001

2.80x 3.57x Lloyd's has an average turnover of 2.79 times and anaverage selling period of 130 days*(* 365/2.8x = 130.43 days: Average selling period)

The Emporium has an average turnover of 3.57 timesand an average selling period of 102 days*(* 365/3.57 = 102 days: Average selling period)

Generally, the faster the inventory turnover, the lesscash is tied up in inventory and the less chance ofinventory obsolescence.



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PROFIT MARGIN RATIO (Profitability)Net Income/Net Sales

Measure of the percentage of each dollar of sales that results in net income

LLOYDS EMPORIUM NOTES 2002 2001 2002 2001

(41.52% (11.79%) 0.02% 1.06% Lloyds: For both periods (2002 & 2001), eachdollar of sales did not add to profit

The Emporium: Although each dollar of sales

produced less in 2002 (0.02%) than in 2001(1.06%), the numbers are positive


These percentages can be seen in the VERTICAL ANALYSIS

of the Income Statements of both customers


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LLOYDS COMPANY & THE EMPORIUM

VERTICAL ANALYSIS Income Statement

Technique for evaluating financial data that expresses each item within a financial statement as apercent of a base amount - NET SALES

It also shows the percentage change in the individual income and expense accounts

LLOYD'S COMPANY

Amount Percent Amount Percent

Gross Sales 9,160 108.66% 9,600 113.14%

Less: Returns and Allowances 730 8.66% 1,115 13.14%Net Sales 8,430 100.00% 8,485 100.00%

Cost of Goods Sold 5,100 60.50% 5,125 60.40%

Gross Margin 3,330 39.50% 3,360 39.60%

Operating Expenses 3,045 36.12% 3,090 36.42%

Operating Profit 285 3.38% 270 3.18%

Other Income 85 1.01% 65 0.77%Net Profit after other income 370 4.39% 335 3.95%

Other Deductions 405 4.80% 345 4.07%

Net Profit (Loss) Before Tax -35 -0.42% -10 -0.12%

Income and Other Tax Expense 0 0.00% 0 0.00%

Net Profit (Loss) -35 -0.42% -10 -0.12%

1/31/2002 1/31/2001


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VERTICAL ANALYSIS Income Statement

Technique for evaluating financial data that expresses each item within a financial statement as a

percent of a base amount - NET SALESIt also shows the percentage change in the individual income and expense accounts

T

E E

RI

Amount ercent Amount ercent

ross Sales 28,970 108.28% 31,265 110.11%

Less: Returns and Allowances 2,215 8.28% 2,870 10.11%

Net Sales 26,755 100.00% 28,395 100.00%

Cost of oods Sold 18,385 68.72% 17,850 62.86%

ross

argin 8,370 31.28% 10,545 37.14%

perating Expenses 9,780 36.55% 8,995 31.68%

perating rofit (Loss) -1,410 -5.27% 1,550 5.46%

Adjustments:

Elimination - Reserves for inventory los 870 3.25% 0 0.00%Reduction - ad debt reserve 105 0.39% 0 0.00%

Tax carryback 445 1.66% 0 0.00%

Federal income and other tax expense 0 0.00% 650 2.29%

Net rofit before dividends 10 0.04% 900 3.17%

ividends aid 5 0.02% 600 2.11%

Net rofit to retained earnings 5 0.02% 300 1.06%

1/31/2002 1/31/2001


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ASSET TURNOVER (Efficiency)Sales Revenue/Total Assets

Asset turnover measures how efficiently assets were used to generate sales


2002 2001 2002 20011.70x 1.85x 1.75x 1.81x The resulting ratios for both companies in two

periods have only slight differences.

But The Emporium generated higher grosssales than Lloyds for both periods.


The gross sales amounts can be seen in the VERTICAL

ANALYSIS of the Income Statements of both customers


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VERTICAL ANALYSIS

Technique for evaluating financial data that expresses each item

within a financial statement as a percent of a base amount - NET SALES

It also shows the percentage change in the individual income and expense accounts

LLOYD'S COMPANY


Gross Sales 9,160 108.66% 9,600 113.14%

Less: Returns and Allowances 730 8.66% 1,115 13.14%Net Sales 8,430 100.00% 8,485 100.00%

Cost of Goods Sold 5,100 60.50% 5,125 60.40%

Gross Margin 3,330 39.50% 3,360 39.60%


Operating Profit 285 3.38% 270 3.18%

Other Income 85 1.01% 65 0.77%

Net Profit after other income 370 4.39% 335 3.95%

Other Deductions 405 4.80% 345 4.07%

Net Profit (Loss) Before Tax -35 -0.42% -10 -0.12%

Income and Other Tax Expense 0 0.00% 0 0.00%

Net Prof it (Loss) -35 -0.42% -10 -0.12%

1/31/2002 1/31/2001



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VERTI

L

L I

Technique for evaluating financial data that expresses each ite

ithin a financial state ent as a percent of a base a ount -

ET

LES

It also sho s the percentage change in the individual inco e and expense accounts

T

EEMPORI M


ross Sales 28,970 108.28% 31,265 110.11%

Le

ss:Re

turns andA

llo

ance

s 2,215 8.28% 2,870 10.11% etSales 26,755 100.00% 28,395 100.00%

ost of oods Sold 18,385 68.72% 17,850 62.86%

ross Margin 8,370 31.28% 10,545 37.14%


Operating Profit (Loss) -1,410 -5.27% 1,550 5.46%

Adjustments:

Elimination - Reserves for inventory los 870 3.25% 0 0.00%Reduction -

ad debt reserve 105 0.39% 0 0.00%

Tax carryback 445 1.66% 0 0.00%

Federal income and other taxexpense 0 0.00% 650 2.29%

etProfit befo re dividends 10 0.04% 900 3.17%

ividends Paid 5 0.02% 600 2.11%

etProfit to retainedearnings 5 0.02% 300 1.06%

1/31/2002 1/31/2001


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DEBT TO TOTAL ASSETS (Solvency)Total Debt/Total Assets

Measures the percentage of total assets provided by creditors.It also provides an indication of the companys ability to withstand losses without impairingthe interests of creditors.


2002 2001 2002 2001

88.88% 89.97% 46.14% 48.33% Lloyds: In 2002, 89% of its total assets wereprovided by its creditors

The Emporium: In 2002, 46% of its total assets

were from creditors


The higher the percentage of debt to total assets, the greater

the risk that the company may be unable to meet its

maturing obligations.


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LIABILITIES

Accounts Payable 925 17.15% 870 16.78%

Notes Payable - Employees 80 1.48% 80 1.54%

Estimated Federal Income Tax 0 0.00% 0 0.00%

Current Maturities on Long-term Debt 220 4.08% 360 6.94%

Miscellaneous Accruals 65 1.20% 205 3.95%

Total Current Liabilities 1,290 23.91% 1,515 29.22%

Notes Payable - Bank 875 16.22% 900 17.36%

Mortgage Notes Payable 2,630 48.75% 2,250 43.39%

TOTAL LIABILITIES 4,795 88.88% 4,665 89.97%

VERTICAL ANALYSIS Balance SheetTechnique for evaluating financial data that expresses each itemwithin a financial statement as a percent of a base amount - TOTAL ASSETS

It also shows the percentage change in the individual asset, liability and stockholder's equity items

LLOYDS


1/31/2002 1/31/2001


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LIABILITIES and NET WORTHNotes Payable - Industrial Finance Corp 4,300 25.97% 5,310 30.77%

Accounts Payable 2,660 16.06% 2,440 14.14%

Miscellaneous Accruals 680 4.11% 590 3.42%

Total Current Liabilities 7,640 46.14% 8,340 48.33%

VERTICAL ANALYSIS Balance SheetTechnique for evaluating financial data that expresses each itemwithin a financial statement as a percent of a base amount - TOTAL ASSETS

It also shows the percentage change in the individual asset, liability and stockholder's equity items

THE EMPORIUM1/31/2002 1/31/2001



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HORIZONTAL ANALYSIS Balance SheetTechnique for evaluating a series of financial statements data over a period of time

Its purpose is to determine the increase/decrease that has taken place

LLOYDS

1/31/2002 1/31/2001 Amount Percent

ASSETS

Cash 50 65 (15) (23.08)Accts Receivable, net 1,610 1,565 45 2.88

Inventory 1,825 1,820 5 0.27

Total Current Assets 3,485 3,450 35 1.01

Land 355 355 0 0.00

Buildings, fixtures & Equipment 1,575 1,370 205 14.96

Less: Accumulated Depreciation 395 290 105 36.21

Net Buildings, fixtures & Equipment 1,180 180 1,000 555.56

Investments 65 65 0 0.00

Due from Stockholders 290 215 75 34.88

Deferred Charges 20 20 0 0.00

TOTAL ASSETS 5,395 5,185 210 4.05

Increase/Decrease

duri ng 2002


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LLOYDS

1/31/2002 1/31/2001 Amount Percent

LIABILITIES and NET WORTH

Accounts Payable 925 870 55 6.32

Notes Payable - Employees 80 80 0 0.00 Estimated Federal Income Tax 0 0 0 0.00

Current Maturities on Long-term Debt 220 360 (140) (38.89)

Miscellaneous Accruals 65 205 (140) (68.29)

Total Current Liabilities 1,290 1,515 (225) (14.85)

Notes Payable - Bank 875 900 (25) (2.78)

Mortgage Notes Payable 2,630 2,250 380 16.89

TOTAL LIABILITIES 4,795 4,665 130 2.79

Preferred Stock - 5% Cumulative 190 190 0 0.00

Common Stock 360 360 0 0.00

Additional Paid-in Capital 115 0 115 0.00

Retained Earnings - Deficit -65 -30 (35) 116.67

TOTAL LIABILITIES and NET WORTH 5,395 5,185 210 4.05

Increase/Decrease

duri ng 2002


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THE EMPORIUM

1/31/2002 1/31/2001 Amount Percent

ASSETS

Cash 475 740 (265) (35.81)Notes and Accounts Receivable 5,305 5,500 (195) (3.55)

Inventory 4,925 5,370 (445) (8.29)

Tax Carryback claim 445 0 445 0.00

Total Current Assets 11,150 11,610 (460) (3.96)

Fixed Assets, net 1,325 1,465 (140) (9.56)

Leasehold Improvements, net 3,460 3,590 (130) (3.62)

Cash value life insurance 275 280 (5) (1.79)Investments 55 55 0 0.00

Notes Receivable - Officers and Employees 140 110 30 27.27

Prepaid and deferred items 155 145 10 6.90

TOTAL ASSETS 16,560 17,255 (695) (4.03)

Increase/Decrease

duri ng 2002


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THE EMPORIUM

1/31/2002 1/31/2001 Amount Percent

LIAB ILITIES and NET WORTH

Notes Payable - Industrial Finance Corp 4,300 5,310 (1,010) (19.02)

Accounts Payable 2,660 2,440 220 9.02

Miscellaneous Accruals 680 590 90 15.25

Total Current Liabilities 7,640 8,340 (700) (8.39)

Common Stock and Additional Paid-in Capit 3,420 3,420 0 0.00

Retained Earnings 5,500 5,495 5 0.09

TOTAL LIABILITIES and NET WORTH 16,560 17,255 (695) (4.03)

Increase/Decrease

during 2002


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30-60 days 61-90 days 91-180 days

Current past due past due past due TOTALS

Lloyd's 6,168 34,819

January 5,480

February 21,146

Subtotals, Lloyd's 6,168 26,626 34,819 67,613

Emporium 54,749 29,304 2285 * 2,285

January 6,153

February 26,112

Subtotals, Emporium 54,749 32,265 29,304 116,318

TOTALS 60,917 58,891 64,123 186,216

*Customer claimed damaged merchandise `

Aging of Receivables


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Aging of Receivables

Status, as of March 31, 2002

Amount Estimated Percent Allowance for

Classification Outstanding Uncollectible Doubtful Accounts

Curr nt 60,917 1.00 609Overdue:

30-60 days past due 58,891 5.00 2,945

61-90 days past due 64,123 10.00 6,412

91-180 days past due 2,285 20.00 457

Total 186,216 10,423


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THANK YOU

Maria Arlene (Bam) T. Disimulacion

ACCTG Quality Furniture

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