Reference no: EM131603425
Seven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his position as manager of cost systems for Davis, Cohen, and O'Brien Public Accountants and started Track Software, Inc. In the 2 years preceding his departure from Davis, Cohen, and O'Brien, Stanley had spent nights and weekends developing a sophisticated cost-accounting software program that became Track's initial product offering. As the firm grew, Stanley planned to develop and expand the software product offerings, all of which would be related to streamlining the accounting processes of medium- to large-sized manufacturers. Although Track experienced losses during its first 2 years of operation—2009 and 2010—its profit has increased steadily from 2011 to the present (2015). The firm's profit history, including dividend payments and contributions to retained earnings, is summarized in Table 1. Stanley started the firm with a $100,000 investment: his savings of $50,000 as equity and a $50,000 long-term loan from the bank. He had hoped to maintain his initial 100 percent ownership in the corporation, but after experiencing a $50,000 loss during the first year of operation (2009), he sold 60 percent of the stock to a group of investors to obtain needed funds. Since then, no other stock transactions have taken place. Although he owns only 40 percent of the firm, Stanley actively manages all aspects of its activities; the other stockholders are not active in management of the firm. The firm's stock was valued at $4.50 per share in 2014 and at $5.28 per share in 2015.
TABLE 2Track Software, Inc., Income Statement ($000) for the Year Ended December 31, 2015
Sales revenue $ 1,550
Less: Cost of goods sold $ 1,030
Gross profits $ 520
Less: Operating expenses
Selling expense $ 150
General and administrative expenses 270
Depreciation expense 11
Total operating expense 431
Operating profits (EBIT) $ 89
Less: Interest expense 29
Net profits before taxes $ 60
Less: Taxes (20%) 12
Net profits after taxes $ 48
TABLE 3Track Software, Inc., Balance Sheet ($000)
December 31 Assets 2015 & 2014
Cash $12, $31
Marketable securities 66, 82
Accounts receivable 152, 104
Inventories 191, 145
Total current assets $421, $362
Gross fixed assets $195, $180
Less: Accumulated depreciation 63, 52
Net fixed assets $132, $128
Total assets $553, $490
Liabilities and stockholders' equity
Accounts payable $136, $126
Notes payable 200, 190
Accruals 27, 25
Total current liabilities $363, $341
Long-term debt $38, $40
Total liabilities $401, $381
Common stock (50,000 shares outstanding at $0.40 par value) $20, $20
Paid-in capital in excess of par 30, 30
Retained earnings 102, 59
Total stockholders' equity $152, $109
Total liabilities and stockholders' equity $553, $490
TABLE 5Ratio Actual 2014 Industry average 2015
Current ratio 1.06, 1.82
Quick ratio 0.63, 1.10
Inventory turnover 10.40, 12.45
Average collection period 29.6 days 20.2 days
Total asset turnover 2.66, 3.92
Debt ratio 0.78, 0.55
Times interest earned ratio 3.0, 5.6
Gross profit margin 32.1%, 42.3%
Operating profit margin 5.5%, 12.4%
Net profit margin 3.0%, 4.0%
Return on total assets (ROA) 8.0%, 15.6%
Return on common equity (ROE) 36.4%, 34.7%
Price/earnings (P/E) ratio 5.2 , 7.1
Market/book (M/B) ratio 2.1, 2.2
THE QUESTION I NEED TO ANSWER:
d. Analyze the firm's financial condition in 2015 as it relates to (1) liquidity, (2) activity, (3) debt, (4) profitability, and (5) market, using the financial statements provided in Tables 2 and 3 and the ratio data included in Table 5. Be sure to evaluate the firm on both a cross-sectional and a time-series basis. (Please show the data used to come up with answer as well as formula. I am wanting to verify my answers to make sure they are the same.)