Written Assignment Unit 7

BUS 5110: MANAGERIAL ACCOUNTING

Master of Business Administration

BUS 5110 - AY2021-T3

Wednesday, March 17, 2021

Melissa Bartlett (Instructor)

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Case study:

You work in the mergers and acquisitions department of a large conglomerate who is looking to

invest in a retail business. Two companies, Fashion Forward and Dream Designs, are the final

two options being considered. You have the most recent available income statements and two

years of balance sheets for each company.

Income Statements
Fashion Forward Dream Designs
12/31/2018 12/31/2018
Revenue
Credit Sales 2,000,000 4,320,000

Non-Credit Sales 500,000 1,080,000

Total Revenue 2,500,000 5,400,000

Cost of Sales 1,400,000 3,250,000

Gross Profit 1,100,000 2,150,000

Operating Expenses

Research and Development 50,000 200,000

Selling, General, and Administrative 750,000 1,600,000

Total Operating Expenses 800,000 1,800,000

Earnings Before Interest and Taxes 300,000 350,000

Interest Expense (18,000) (50,000)

Income Before Tax 282,000 300,000

Income Tax Expense (145,500) (87,500)

Net Income 136,500 212,500

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 Balance Sheets
Fashion Fashion Dream Dream
Forward Forward Designs Designs
12/31/2018 12/31/2017 12/31/2018 12/31/2017
Current Assets

Cash and Cash Equivalents 950,000 980,000 1,710,000 1,705,000

Accounts Receivable 200,000 150,000 250,000 275,000

Inventory 112,000 105,000 200,000 215,000

Other Current Assets 35,000 50,000 120,500 100,000

Total Current Assets 1,297,000 1,285,000 2,280,500 2,295,000

Property, Plant and Equipment 635,000 700,000 850,000 900,000

Goodwill 750,000 750,000 1,150,000 1,150,000

Other Long-Term Assets 65,000 70,000 100,750 105,000

Total Assets 2,747,000 2,805,000 4,381,250 4,450,000

Current Liabilities

Accounts Payable 545,000 535,000 845,750 875,000

Short-Term Debt 25,000 - 50,000 60,000

Other Current Liabilities 600,000 510,000 730,000 740,000

Total Current Liabilities 1,170,000 1,045,000 1,625,750 1,675,000

Long-Term Debt 75,000 - 120,500 130,000

Other Long-Term Liabilities 100,000 75,000 155,000 165,000

Total Liabilities 1,345,000 1,120,000 1,901,250 1,970,000

Stockholders Equity

Common Stock 500,000 775,000 749,500 942,750

Preferred Stock 150,000 294,500 390,000 409,250

Retained Earnings 752,000 615,500 1,340,500 1,128,000

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 Total Stockholders Equity 1,402,000 1,685,000 2,480,000 2,480,000

Total Liabilities and

Stockholders Equity 2,747,000 2,805,000 4,381,250 4,450,000

Computation Fashion Forward Dream Designs

Profit Margin Ratio 5.46 3.94
Return on Assets 4.92 4.81
Current Ratio 1.11 1.4
Quick Ratio 1.01 1.28
AR Turnover Ratio 11.43 16.46
Average Collection Ratio 31.93 22.18
Inventory Turnover Ratio 12.9 15.66
Average Sales Period 28.29 23.3
Debt to equity Ratio 0.96 0.77

After evaluating the ratios profit margin shows 5.46% for the fashion forward company and

3.94% for Dream design company which means the profit margin ratio is higher for Fashion

forward compared to Dream Designs. Profit margin is calculated by dividing Gross profit by Net

sales. As we can see selling expense for Dream design is twice higher than that of Fashion

forward and this has to be considered by the management to reduce the cost and thus improving

the profit margin. Annual turnover ratio is also higher in Dream Design than that of Fashion

forward. In the cash flow statements, operating expense is higher for Dream design than the

Fashion Forward company but still Dream Design manage to have higher net income hence we

can assume that Dream Design is doing efficiently in its management.

All calculation was done using the below formula.

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
Profit Margin Ratio =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠

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 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
Return On Assets =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠
Current Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦

Quick Ratio =
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠

𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠

AR Turnover Ratio =
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠

365 𝐷𝑎𝑦𝑠
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑃𝑒𝑟𝑖𝑜𝑑 =
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒𝑠 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 𝑅𝑎𝑡𝑖𝑜

𝐶𝑜𝑠𝑡 𝑜𝑓 𝐺𝑜𝑜𝑑𝑠 𝑆𝑜𝑙𝑑

Inventory Turn Over Ratio =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑖𝑒𝑠

𝑇𝑜𝑡𝑎𝑙 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝐷𝑒𝑏𝑡 𝑡𝑜 𝐸𝑞𝑢𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦

Based all the above calculations and assumptions, it is advisable to acquire or merge with Dream

design company which will help to maintain the financial position and increase the revenue.

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