Name SHIVAM GUPTA
Question 1
Answer 1A- The estimated profit for the year 2006E is 1534, Net profit is the difference
of revenue and expenditure which the company has earned during the year whether is
in cash or accrual. However, the cash flow statement shows the amount of cash that has
been generated by the company. Out of the net profit, the actual amount of cash that
has been generated from cash flow from operation is 885.
The cash flow statement of the company shows that the total cash generated has been
on a decline after 2003. The reason for such decline is heavy investment in fixed assets
and providing long-term credit to the debtors. Therefore, Cash flow from
operation and cash flow from investing activity have contributed majorly to the
decrease in the 'change in cash' by the company from 2003 to 2006(E).
Cashflow from Operations for year 2006 (E)
Description Amount
Net Income 1,534
Additional Adjustments :
Depreciation & Amortization 669
Increase in Accounts Payable 2,765
Interest Expense* 658
Total Additional Adjustments 4,092
Deductions :
Increase in Accounts Receivable 4,185
Increase in Inventory 556
Total Deductions -4,741
Net Cashflow from Operations 885
Three categories in the cash flow statement has contributed majorly to the decrease
in the 'change in cash' by the company from 2003 to 2006(E):Cashflow from Investing
Activities
Determine first the changes of accounts from 2003 to 2006E
Changes from
Account 2002 2003 2004 2005 2006E
2003 to 2006E
Cash 705 1,542 1,818 2,158 1,955 413
Accounts Receivable 3,485 4,405 6,821 10,286 14,471 10,066
Inventories 3,089 2,795 3,201 3,291 3,847 1,052
Plant, Property, & Equipment
2,257 2,680 2,958 3,617 4,347 1,667
(net)
Other Assets 645 645 645 645 645 -
Land 450 1,750 2,853 2,853 2,853 1,103
Accounts Payable 2,034 2,973 4,899 6,660 9,424 6,451
Current Portion of Long
315 352 525 730 649 297
Term Debt
Long term Debt 3,258 4,400 5,726 7,123 8,480 4,080
Shareholder's Equity 5,024 6,091 7,146 8,336 9,563 3,472
Cashflow from Operations for year 2003 - 2006 (E)
Description Amount
Cashflow from Operating Activities
Net Income 5,594
Additional Adjustments :
Depreciation & Amortization 2,093
Increase in Accounts Payable 6,451
Interest Expense 1,994
Total Additional Adjustments 10,538
Deductions :
Increase in Accounts Receivable 10,066
Increase in Inventory 1,052
Total Deductions -11,118
Net Cashflow from Operating Activities 5,014
Cashflow from Investing Activities
Increased in PPE -3,760
Increased in Land -1,103
Net Cashflow from Investing Activities -4,863
Cashflow from Financing Activities
Increased in Current Portion Debt 297
Increased in Long Term debt 4,080
Payment of Interest -1,994
Decreased in Equity -2,122
Net Cashflow from financing Activities 261
Net Cashflow (Increased) 412
Answer 1B- Cash flow from operating activities: In this section, the amount of change in
accounts receivable has been on increase over the years, this shows that the time taken
by the debtor is too high and the majority of the transaction has been in credit. Apart
from that the current liabilities of the company is also on the increase, this shows that the
company has been using creditors for funding its operation. The cash flow from
operating activity has been declining over the years.
An increase in accounts receivable is leading to a decrease in cash flow, while the
increase in accounts payable is leading to cash inflow. Thus it can be said that the major
change in cash in and outflow is because of the change in its working capital.
Cash flow from investing activity: The Company has been investing heavily in property
plants and equipment over the years which is the reason for cash outflow. This kind of
investment will be beneficial in the future and may bring cash inflow at a future time. The
cash outflow is reducing year by year, as the company needs to invest heavily in fixed
assets in the initial year and this kind of asset is used for many years.
Answer 1C- Cash Position: The overall cash balance at the end of the year has been in
negative balance, this means the company is not having sufficient cash balance to meet is
operational activity. However there are current assets that can be liquidated from
generating cash.
Self-Financing Of Investment: In this method company sales its old assets to buy new
one, this helps reducing the burden on cash outflow of the company. The company can
use its old assets and replace it with new assets.
Funding of investment: Instead of issuing debt and borrowing money, the management
can use the reserve and surplus for investment purpose. This will reduce the cost of
capital and will help the company to maintain positive cash flow.
Question 2
Answer 2A-
Operating Working Capital
2002 2003 2004 2005 2006
Current Assets 7,279.00 8,742.00 11,839.00 15,735.00 20,273.00
Current Liabilities 2,349.00 3,325.00 5,423.00 7,390.00 10,074.00
Operating Working
4,930.00 5,417.00 6,416.00 8,345.00 10,199.00
Capital
Answer 2B-
Operating Working Capital/Sales Ratio
2002 2003 2004 2005 2006
Operating Working Capital 4,930.00 5,417.00 6,416.00 8,345.00 10,199.00
Sales 24,652.00 26,797.00 29,289.00 35,088.00 42,597.00
Operating Working
20.00% 20.21% 21.91% 23.78% 23.94%
Capital/Sales Ratio
Answer 2C-
Days Inventory Outstanding (DIO)
2002 2003 2004 2005 2006
Inventories 3,089.00 2,795.00 3,201.00 3,291.00 3,847.00
COGS 20,461.00 21,706.00 23,841.00 28,597.00 35,100.00
# of days in a 365 365 365 365 365
year
DIO 55 47 49 42 40
Days Sales Outstanding (DSO)
2002 2003 2004 2005 2006
Accounts Receivable 3,485.00 4,405.00 6,821.00 10,286.00 14,471.00
Sales 24,652.00 26,797.00 29,289.00 35,088.00 42,597.00
# of days in a year 365 365 365 365 365
DSO 52 60 85 107 124
Days Payable Outstanding (DPO)
2002 2003 2004 2005 2006
Accounts Payable 2,034.00 2,973.00 4,899.00 6,660.00 9,424.00
COGS 20,461.00 21,706.00 23,841.00 28,597.00 35,100.00
# of days in a
365 365 365 365 365
year
DPO 36 50 75 85 98
Answer 2D-
The long credit period given by the Company to its dealers had a positive impact on the
operating working capital. Assuming there were no other factors affecting sales increase over
the period, then we can say that sales increased as a result of longer paying terms for the
dealers. The dealers were willing to buy more as a result of this.
Question 3
Answer 3-
Capital employed = Total assets - current liabilities
2002= 10,631-2,349=8,282
2003=13,817-3,325=10,492
2004=18,295-5,423=12,872
2005=22,850-7,390=15,460
2006=28,117-10,074=18,043
An economic balance sheet is different from the general accepted accounting principles
(GAAP) since it is constructed using market values rather than the typical assets=liabilities
and equity. Items in an economic balance sheet are classified as; core business operations,
non- operating, debt and other capital claims.
Ceres Gardening Company Economic Balance Sheet As at 31st December
2002 2003 2004 2005 2006
Details
''$000'' ''$000'' ''$000'' ''$000'' ''$000''
Core Business Operations (CBO)
Cash 705 1,542 1,818 2,158 1,955
Accounts receivables 3,485 4,405 6,821 10,286 14,471
Inventories 3,089 2,795 3,201 3,291 3,847
Plant, Property & Equipment (net) 2,257 2,680 2,958 3,617 4,347
Land 450 1,750 2,853 2,853 2,853
Total CBO 9,986 13,172 17,650 22,205 27,472
Non-operating Assets
Other assets 645 645 645 645 645
Debt & Debt Equivalent
Accounts payable 2,034 2,973 4,899 6,660 9,424
Current portion of long term debt 315 352 525 730 649
Long term debt 3,258 4,400 5,726 7,123 8,480
Total debts 5,607 7,726 11,149 14,514 18,554
Other Capital Claims
Shareholders equity 5,024 6,091 7,146 8,336 9,563
Inclusion of all Economic assets, debts
& capital claims 10,631 13,817 18,295 22,850 28,117
Question 4
Answer 4A-
1) Variable margin = (Gross Profit / Sales) x 100
2) Operarting margin = (Operating Profit / Sales) x 100
Calculation of Variable &
Operating margin 2002 2003 2004 2005
A Sales 24,652 26,797 29,289 35,088
B Gross Profit 4,191 5,091 5,448 6,491
C Operating Profit 1,641 2,338 2,408 2,836
B/A
x 100 Variable margin (%) 17.00% 19.00% 18.60% 18.50%
C/A
x 100 Operating margin (%) 6.66% 8.72% 8.22% 8.08%
3) Return on Equity = (Net Income / Total Shareholder's Equity) x 100
Calculation of Return on Equity 2002 2003 2004 2005
A Net Income 1,191 1,293 1,279 1,488
B Total Shareholder's Equity 5,024 6,091 7,146 8,336
C=A/Bx
100 Return on Equity (ROE) 23.71% 21.23% 17.90% 17.85%
4) Return on Average Capital Employed = (EBIT / Average Capital Employed) x 100
Calculation of Return on
Average Capital Employed 2002 2003 2004 2005
A EBIT 1,641 2,338 2,408 2,836
Average Capital Employed
Total Shareholder's Equity 5,024 6,091 7,146 8,336
Long term Debt 3,258 4,400 5,726 7,123
Total Capital Employed 8,282 10,491 12,872 15,459
Capital Employed at beginning
of year 8,282 8,282 10,491 12,872
Capital Employed at end of year 8,282 10,491 12,872 15,459
B Average capital employed 8,282 9,387 11,682 14,166
C = A / B x Return on Average Capital
100 Employed 19.81% 24.91% 20.61% 20.02%
Answer 4B-
Trend for ROE and Drivers for ROE
Calculation of Return on Equity 2002 2003 2004 2005
A Net Income 1,191 1,293 1,279 1,488
B Total Shareholder's Equity 5,024 6,091 7,146 8,336
C=A/Bx
100 Return on Equity (ROE) 23.71% 21.23% 17.90% 17.85%
We can see from the above table that the ROE has declined over the last few years. It has declined
from 23.71% in 2002 to 16.04% in 2006E.
The drivers of ROE can be analysed with the help of the dupont analysis which breaks down the
ROE as follows -
ROE = (Net Profit / Sales) x (Sales / Assets) x (Assets / Total Shareholder's Equity)
ROE = Net profit margin x Asset Turnover x Equity multiplier
Net profit margin shows the net profitability, asset turnover shows the efficiency in usage of assets for
generating sales and equity multiplier shows the degree of leverage.
2002 2003 2004 2005
A Net Income 1,191 1,293 1,279 1,488
B Sales 24,652 26,797 29,289 35,088
C=A/Bx
100 Net Profit margin 4.83% 4.83% 4.37% 4.24%
D Sales 24,652 26,797 29,289 35,088
E Total Assets 10,631 13,817 18,295 22,850
F=D/E Asset Turnover 2.32 1.94 1.60 1.54
G Assets 10,631 13,817 18,295 22,850
H Total Shareholder's Equity 5,024 6,091 7,146 8,336
I=G/H Equity multiplier 2.12 2.27 2.56 2.74
As can be seen from the above table, the reasons for the declining ROE can be attributed to -
1) Declining net profitability as shown by a declining net profit margin.
2) Declining asset turnover ratio which shows the company is no longer using its assets efficiently (as
compared to previous years).
Answer 4C-
Trend in ROACE and drivers
Calculation of Return on Average
Capital Employed 2002 2003 2004 2005
A EBIT 1,641 2,338 2,408 2,836
B Average capital employed 8,282 9,387 11,682 14,166
C=A/Bx
100 Return on Average Capital Employed 19.81% 24.91% 20.61% 20.02%
As can be seen from the above table, ROACE (except for 2003) has followed a declining trend over
the years. It has declined from 19.81% in 2002 to 18.02% in 2006E.
The decling in ROACE is mainly due to -
1) Although the EBIT has increased over the years, the declining trend in ROACE is mainly due to
icrease in average capital employed over the years. This has resulted in lowering over ROACE over
the years. This shows that in order to grow its business (sales), the company was required to increase
its capital employed.
2) Also a declining assets turnover shows inefficiency in utilisation of assets for generating sales and
hence higher capital requirements.
Question 5
Answer 5-
Two Pros for GetCeres program for Ceres Gardening Company
1- Reduce indoor temperature by 6- 8 degree and can reduce air conditioning cost
2- Reduce overall heat absorption of buildings and insulate the building against heat and
cold
Two Cons for GetCeres program for Ceres Gardening Company
1- The process of receiving payment from dealers. They are allowing longer time frame
for retailers to pay for their products
2- Ceres uses debt to finance their business.
