Written Assignment Unit 7 University of the People BUS 5110 - Managerial Accounting Dr. Jamal Boubetana August 04, 2021Case study Fashion Forward and Dream Designs, are the final two companies being considered for a merger. I will perform a financial analysis to evaluate which company should be pursued. Financial Analysis Profit Margin Ratio “Profit margin is the ratio of profit remaining from sales after all expenses have been paid” (“How to calculate”, 2021). Profit margin Ratio = (net income / net sales) x 100 Fashion Forward Dream Designs 31/12/38, 31/a2/a {$136,500 / $2,500,000 $212,500 / $5,400,000 5.40% 3.94% = The profit margin ratio is higher for Fashion Forward indicating a more profitable model. Return on Assets (ROA) “This ratio indicates how well a company is performing by comparing the profit (net income) it’s generating to the capital it’s invested in assets” (“Return on assets”, 2021). ROA = (Net income / Average total assets) x 100 Fashion Forward Dream Designs ‘Average toa assets (2,747,000 + 2,805,000) 2= $2,776,000 (6,381,250 + 450,000) /2= 4,415,625 ($136,500 / $2,776,000) 100 (5212500 / $4,435,625) x300 OA 490% aa% - Fashion Forward generates a slightly higher net income from every invested dollar. Current Ratio “The current ratio indicates whether a company has sufficient current assets to cover current liabilities” (Heisinger & Hoyle, n.d).Current Ratio = Current assets / Current liabilities Fashion Forward Fashion Forward Dream Designs Dream Desians sys sya syjz/is syap7 $1,297,000 | $1,170,000 $1,285,000 / $1,085,000 $2,280,500 ) $1,625,750 $2,295,000 $1,675,000 Mt 123 140 437 - Dream Designs has a higher current ratio that has increased in the second year, as opposed to Fashion Forward’s decreased ratio. Quick Ratio “The quick ratio indicates whether a company has sufficient quick, or highly liquid, assets to cover current liabilities” (Heisinger & Hoyle, n.d.). Total current assets - Inventory) / Current liabilities suis syne sys sania rent assets $1,297,000 1,285,000 2.280500 2,295,000 Inventory 112000 $105,000 $200,000 $215,000, $1,185,000 1,180,000 $2,080500, $2,080,000 Curentiabiies —__ $1,170,000, $105,000 $625,750, 675.000, Quick Ratio 108 13 128 128 - Dream Designs has a higher quick ratio that has increased in the second year, as opposed to Fashion Forward’s decreased ratio. Accounts Receivables (AR) Turnover Ratio “This ratio measures how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid” (Murphy, 2021). AR Turnover Ratio = Net credit sales / Average accounts receivable thion Forward Dream Desiens| Average accounts receivable (200,00 + $150,000) /2= $175,000 (5250,000« $275,000)/2 = $262,500 $2,000,000 ) $175,000 $4,320,000 ) $262,500 AR Turnover Ratio. 1143 1648 - Dream Designs has a more efficient model for collecting receivables.Average Collection Period “The receivables turnover ratio can be converted to the average collection period, which indicates how many days it takes on average to collect on credit sales” (Heisinger & Hoyle, n.d.). Average Collection Period = 365 / AR turnover ratio Fashion Forward tens 365) 11.43, 365/ 16.46, 31.93 22.47 ~ Dream Designs has a shorter period of collecting from credit sales. Inventory Turnover Ratio “The inventory turnover ratio indicates how many times inventory is sold and restocked in a given period” (Heisinger & Hoyle, n.d.). Inventory Turnover Ratio = Cost of goods sold / Average inventory Fathion Forward ream Designs 2017-2018 2017-2018 Average inventory (51123000 + $105,000)/2= ($200,000 + $215,000) /2 = $207,500 $1,400,000 $108,500 $3,280,000 $207,500 Inventory Turmover Ratto 12.90 1586 - Dream Designs has a higher inventory ratio, indicating that there is demand for the company’s products. Average Sales Period “The inventory turnover ratio can be converted to the average sale period, which indicates how many days it takes on average to sell the company’s inventory” (Heisinger & Hoyle, n.d.). Average Sales Period = 365 / Inventory turnover ratio- Dream Designs has a shorter average sales period, Debt to Equity Ratio “It is a measure of the degree to which a company is financing its operations through debt versus wholly owned funds” (Femando, 2021). Debt to Eq (D/E) Ratio = Total liabilities / Total shareholders’ equity Fashion Forward Fathion Forward ream Designs ‘Dream Designs syiz/as syap7 syiz/as syap7 $1,345,000 | $1,402,000 $1,120,000 / $1,685,000 $1,801,250 | $2,480,000 $1,970,000 | $2,480,000 096 086 ovr oro - Fashion Forward’s D/E ratio is higher and has significantly increased in the second year, aS opposed to Dream Design’s decreased ratio. Conclusion Fashion Forward has a higher profit margin ratio and a higher debt to equity ratio that has rapidly increased in the second year. Thi s indicates that the company has a profitable upward trend. Dream Design is superior in all other measurements, indicating a sturdy firm. Further analysis would be required to reach an educated conclusion. A comparison with the industry average, and an overall evaluation of each company’s performance (efficiency, staff ing, customer satisfaction, ete.). Based on the given data, I recommend pursuing Dream Design because it appears to have a solid base and market value.References Fernando, J. (2021, April 8). What Is the Debt-to-Equity (D/E) Ratio?. Investopedia, hi www, investopedia,com/terms/d/debtequit Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. hutps://2012books.lardbucket.org/books/accounting-for-managers/index.html How to calculate a profit margin ratio. (2021, February 23). Indeed Career Guide. hitps://www.indeed,com/career-advice/career-developmenvhow-to-calculate-profit-margin-ratio Murphy, C. B. (2021, April 7). What Is the Receivables Turnover Ratio? Investopedia. tps: //w topedia.com/ /receivableturnoverr Return on assets - ROA formula, calculation, and examples. (2021, June 4). Corporate Finance Institute hitps://corporatefinanceinstitute.com/resources/knowledge/finance/return-on-assets-roa-formula/