Question

Cary Corporation’s forecasted financial statements for next year follow, along with industry average ratios. Cary Corporation: Forecasted Balance Sheet as of December 31 Cash $ 72,000 Accounts and notes payable $ 432,000 Accounts receivable 439,000 Accruals 170,000 Inventories 894,000 Total current liabilities $ 602,000 Total current assets $1,405,000 Long-term debt 404,290 Land and building 238,000 Common stock 575,000 Machinery 132,000 Retained earnings 254,710 Other fixed assets 61,000 Total assets $1,836,000 Total liabilities and equity $1,836,000 Cary Corporation: Forecasted Income Statement Sales $4,290,000 Cost of goods sold (3,580,000) Gross operating profit $ 710,000 General administrative and selling expenses ( 236,320) Depreciation ( 159,000) Miscellaneous ( 134,000) Earnings before taxes (EBT) $ 180,680 Taxes (40%) ( 72,272) Net income $ 108,408 Number of shares outstanding 23,000 Per-Share Data EPS $ 4.71 Cash dividends per share $ 0.95 P/E ratio 5.0× Market price (average) $23.57 Industry Financial Ratios Quick ratio 1.0× Current ratio 2.7 Inventory turnover b 5.8× Days sales outstanding 32 days Fixed assets turnoverb 13.0× Total assets turnoverb 2.6× Return on assets 9.1% Return on equity 18.2% Debt ratio 50.0% Profit margin on sales 3.5% P/E ratio 6.0× aIndustry average ratios have been constant for the past four years.

c. Suppose Cary Corporation is considering installing a new computer system that would provide tighter control of inventories, accounts receivable, and accounts payable. If the new system is installed, the following data are projected (rather than the data given earlier) for the indicated balance sheet and income statement accounts: Accounts receivable $ 395,000 Inventories $ 700,000 Other fixed assets $ 150,000 Accounts and notes payable $ 275,000 Accruals $ 120,000 Cost of goods sold $3,450,000 Administrative and selling expenses $ 248,775 P/E ratio 6.0× How do these changes affect the projected ratios and the comparison with the industry averages? (Note that any changes to the income statement will change the amount of retained earnings; therefore, the model is set up to calculate next year’s retained earnings as this year’s retained earnings plus net income minus dividends paid. The model also adjusts the cash balance so that the balance sheet balances.)
ANSWER E, D , and F PLEASE
d. If the new computer system were even more efficient than Cary’s management had estimated and thus caused the cost of goods sold to decrease by $125,000 from the projections in part (c), what effect would it have on the company’s financial position? CFIN5 © 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. e. If the new computer system were less efficient than Cary’s management had estimated and caused the cost of goods sold to increase by $125,000 from the projections in part (a), what effect would it have on the company’s financial position? f. Change, one by one, the other items in part (c) to see how each change affects the ratio analysis. Then think about and write a paragraph describing how computer models such as this one can be used to help make better decisions about the purchase of such items as a new computer system.

Answer 1

If the new computer system is more efficient, it will have a positive effect on the company's financial position. If it is less efficient, it will have a negative effect. Changing other items in the projections can impact financial ratios in various ways.

Step-by-step explanation:

Answer:

d. If the new computer system were even more efficient than Cary’s management had estimated and thus caused the cost of goods sold to decrease by $125,000 from the projections in part (c), it would have a positive effect on the company’s financial position. The decrease in cost of goods sold would result in higher gross operating profit and net income, improving the company's profitability ratios such as return on assets and return on equity.

e. If the new computer system were less efficient than Cary’s management had estimated and caused the cost of goods sold to increase by $125,000 from the projections in part (c), it would have a negative effect on the company’s financial position. The increase in cost of goods sold would result in lower gross operating profit and net income, impacting the company's profitability ratios negatively.

f. Changing other items in the projections, such as accounts receivable, inventories, accounts and notes payable, and accruals, can impact the company's financial ratios in different ways. For example, increasing accounts receivable could result in higher days sales outstanding and lower liquidity ratios, while increasing inventories could lower inventory turnover. These changes highlight the importance of using computer models to analyze different scenarios and make informed decisions about the purchase of new systems.