Jim Connor is the owner of Wave Riders, a surf shop located inWest Palm Beach, Florida. Jim has just received his end of the yearfinancial statements from his accountant. When he sees his grossand net income he is dismayed. With almost $250,000 in gross profithe just doesn’t understand why he is always short on cash to payhis employees and suppliers. One of his largest suppliers of surfboards notified him just last month that they would no longerextend him credit and he would have to pre-pay all of his orders.He puts a call into his accountant to set up a meeting with her todiscuss the financial health of his business
. Questions Part 1
1. Using the financial statements provided, calculate the 12financial ratios discussed in your text using the financialinformation that is provided below for Wave Riders,
2. Looking at these ratios, are there any of them that looksuspicious? If so, which ratios are they and what about them do youbelieve is cause for concern?
Part 2
1. Using the industry ratios that have been provided, compareWave Rider’s ratios with those for the industry. What “red flagsâ€do you see when making this comparison?
2. What do you think might be causing the deviations that yousee between Wave Riders ratios and the industry ratios?
Part 3
1. What recommendations would you make to Jim to help himimprove the financial performance of Wave Riders in the future?
Prepare a memo to Jim outlining your recommendations, makingcertain to include your reasons for the recommendation (i.e. ratioanalysis and/or comparison to industry ratios). FinancialStatements Wave Riders Income Statement For the year ended December31, 20XX
Merchandise Sales $500,000
Cost of Goods Sold $255,000
Gross Profit $245,000
Wage Expense $140,000
Rent Expense $45,000
General and Administrative $45,000
Total Expenses $230,000
Earnings Before Interest & Taxes (EBIT) $15,000
Interest $5,000
Income before tax $10,000 Tax (@ 25% rate)
$2,500 Net Income/(Loss)
$7,500
Wave Riders Statement of Owner's Equity For the year endedDecember 31, 20XX
Beginning Capital $0
Owner Contributions $5,000
Net Income/(Loss) $7,500
$12,500 Owner Withdrawal $0
Ending Capital $12,500
Wave Riders Balance Sheet As of December 31, 20XX
Assets Current Assets Cash and Cash Equivalents $29,500
Accounts Receivable $10,000
Merchandise Inventory $100,000
Prepaid Expenses $7,500
Total Current Assets $147,000
Property, Plant, and Equipment $5,000
Total Assets $152,000
Liabilities Current Liabilities Accounts Payable $74,250
Wages Payable $10,250
Total Current Liabilities $84,500
Long-Term Debt $55,000
Total Liabilities $139,500
Owner's Equity $12,500
Total Liabilities and Owner's Equity $152,000
Wave Riders Statement of Cash Flows For the year ended December31, 20XX
Cash provided by operating activities Net Income (loss)$7,500
Changes in operating assets & liabilities Inventories($100,000)
Accounts Receivables ($10,000)
Accounts Payable $10,250
Accrued expenses $7,500
Cash provided by (used by) operations ($85,000)
Cash provided by investing activities Purchases of fixed assets($5,000)
Cash provided by (used by) investing ($5,000)
Cash provided by financing Long-term borrowing $55,000
Owner contributions $5,000 Payment of Debt and Financing Costs($5,000)
Cash provided by (used by) financing $55,000
Change in cash ($35,000)
Beginning cash balance $0
Ending cash balance ($35,000)
Industry Ratios Liquidity & Solvency Ratios Current Ratio2.1
Quick Ratio 0.95
Debt Ratio 1.05
Debt to Net Worth Ratio 8.5
Times Interest Earned Ratio 4.2
Return on Equity (ROE) 5.25
Operating Ratios Average Inventory Turnover Ratio 6.85
Average Receivables Turnover Ratio 10
Average Collection Period Ratio 36.5
Payables Turnover Ratio 5.8
Average Payable Period Ratio 62.9
Net Sales to Total Assets Ratio 3.3
Profitability Ratios Net Profit on Sales Ratio 4.8%
Net Profit to Assets Ratio 4.55%
Net Profit to Equity Ratio 1.8
