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ACC501 VU Assignment No. 2 Spring 2012 Solution

Question No.1 (10 Marks)
ABC Company Limited and XYZ Company Limited are involved in the manufacturing of Leather products. Following are the balance sheets of both the companies for the year 2010.

Balance Sheets
As on 31
st
December 2010
Particulars ABC Company XYZ Company
Rs. (in millions) Rs. (in millions)
Cash 86 20
Account Receivable 172 27
Inventory 396 45
Total Current Assets 654 92

Net Plant and Equipment 2,735 49

Total Assets 3,389 141

Accounts payable 315 8
Notes payable 232 10
Total Current Liabilities 547 18

Long term debt 532 50

common stock and paid in surplus 510 55
Retained earnings 1800 18
Total owners’ equity 2,310 73

Total Liabilities & Owners’ Equity 3,389 141
Although both the firms are involved in the same kind of business but their balance sheets represent a huge difference in their financial strength. As a finance student, you are required to analyze these balance sheets by using the common size analysis technique. Also provide comments on the liquidity and leverage position of both the companies with the help of your analysis. Note: Your solution should be in the following form of single comparative statement followed by the comparative comments regarding the liquidity and leverage position of both companies.

                    Solution:

Particular ABC Company XYZ Company
Cash 2.5% 14.2%
Account Receivable 5.1% 19.15%
Inventory 11.7% 31.9%
Net Plant and Equipment 81% 34.75%
Account Payable 9.3% 5.67%
Notes Payable 6.85% 7.1%
Long-Term Debit 15.69% 35.5%
Common Stock and Paid Surplus 15.0% 39.0%
Retain Earning 53.1% 12.76%

 

COMPARISON OF LIQUIDITY POSITION

 

ABC COMPANY ABC Company Position is Good Because ABC Company Has More Current Assets than Current Liabilities

 

 

XYZ COMPANY XYZ Company Liquidity Position is Too Much Because Current Assets are 5 times of Current Liabilities

 

COMPARISION OF LEVERAGE POSITION

 

ABC COMPANY Leverage Position of ABC Company Shows Company is Less Financed with Debits.
XYZ COMPANY Leverage Position of XYZ Company Shows Company is more Financed with Debits.

Question # 2 (10 Marks)

Fawad Farooq is working as Chief Financial Officer (CFO) in a manufacturing concern. One of his job responsibilities is to analyze the company’s financial results every year in order to make necessary improvements. While analyzing the financial results for the current year, he noticed that Return on Equity (ROE) of the company is lower than that of previous year. He called up Faiq Aslam, the Finance Manager of the company, to discuss the matter but Faiq remained failed to provide any reasonable justification in this regard. Fawad was well aware of the fact that the technique of Du-Pont Analysis is widely used to analyze ROE of the company by looking at its different aspects. He asked Faiq to provide him with some information and Faiq presented him the following information related to the current year and previous years:

ROE (DU-POINT MODEL) =

Current Year

ROE (DU-Point Model)

 ROE (DU-Point MODEL) = 30.39%

Previous Year 

ROE (DU-POINT MODEL) = Profit Margin * Total Assets Turn over * Financial Leverage

ROE (D_-Point Model) = 0.52 * 0.50 * 1.55

ROE (DU-Point Model) = 40.3%

 Reason

ROE is Unsatisfactory for the current year because for current year profit margin is less which is 37%


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