Question Details

Company D operates a small chain of wholly owned home centers selling to consumers and
contractors. Sales volume varies among the individual stores and ranges between $11
million and $20 million per year. The company is organized as a corporation and does not
operate as a sub-chapter S corporation.
Given:
Consolidated financial statements for Company D are shown on the attached “Statement
Analysis Template.”
• All figures on the income statements and the balance sheets are shown in thousands
of dollars.
• Sales volume shown is net sales.
• During Year 11 60% of net sales were on a credit basis.
• Inventory is stated at cost on a first-in, first-out basis.
• Depreciation expense totaled $1,875,000 for Year 11 and $1,644,000 for Year 10.
• Depreciation expense is not shown as a separate item on the income statements but
is included in store operating expense and general and administrative expense.
• Depreciable assets are depreciated using the straight-line method over the estimated
useful life of the assets.
• The market value for the company common stock at the end of Year 10 was
$3.50/share and at the end of Year 11 it was $5.25/share.
Your task is to use the financial statements and pertinent industry data to interpret
Company D- financial condition, as related to specific financial ratios and as changed during
Year 11. The required ratios have been calculated for Year 10 and are shown on the
“Statement Analysis Template.” Also shown on the template are ratio data gathered from
financial statements submitted to banks and other financing institutions by a large number
of home centers. Where available, the ratios are shown by first, second, and third quartiles.
The industry ratios were generated from statements submitted by stores with annual sales
between $10 million and $24 million.
As you develop your response on this requirement, you should consider the trends for
Company D as indicated by each ratio for Year 11 compared to the same ratio for Year 10,
consider what is depicted by the horizontal analysis, and benchmark Company D-
performance and condition by comparing Company D- Year 11 ratios with the same ratios
for the home center industry.
Task:
A. Calculate each of the thirteen indicated ratios for Year 11 indicated in the attached
“Statement Analysis Template.” Complete the attached spreadsheet with this
information.
B. Complete a horizontal analysis of the income statements using the attached spreadsheet
with this information.
C. Complete a horizontal analysis of the balance sheets using the attached spreadsheet
with this information.
D. Write a business memorandum to the CEO of Company D (suggested length of 2-3
pages) in which you:
1. Explain for each ratio and trend whether the ratio or trend indicates a strength of the
company; a likely weakness, threat, or emerging problem; or a satisfactory condition
that management should not view as a strength or weakness.
2. Justify your identification of each ratio or trend as a strength, weakness, or
satisfactory condition.
3. Evaluate company ratios and trends against ratios and trends for the home center
industry.
Note: Information on trends can be gathered through Internet research.
 

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