This problem Set is based on materials covered in module 1/week 1. It is designed for you to demonstrate your understanding of basic financial statements, financial statement analysis, break-even concepts, and financial and operating leverages. Before you start this assignment, please review weeks 1 and 2 materials thoroughly.

Finance date of Adams Stores, Inc. for the year ending 2016 and 2017.

2016	2017
$3,432,000	$5,834,400
9,000	7,282
340,000	720,000
203,768	97,632
323,432	1,000,000
2,864,000	4,980,000
18,900	116,960
48,600	20,000
491,000	1,202,950
62,500	176,000
100,000	100,000
8.50	6
351,200	632,160
145,600	324,000
715,200	1,287,360
200,000	720,000
146,200	263,160
Items Sales Cash Other Expenses Retained Earnings Long-term debt Cost of goods sold Depreciation Short-term investments Fixed Assets Interest Expenses Shares outstanding (par value = $4.60) Market Price of stock Accounts Receivable Accounts payable Inventory Notes Payable Accumulated Depreciation Accruals	136,000	284,960

Tax Rate

40%

40%

Instructions: 

As a group, complete the following activities using the financial information above: Part 1: Financial Statements 

A. Prepare the income statement for 2016 and 2017. Include a statement of retained earnings for 2017 

B. Prepare the balance sheet for 2016 and 2017 

C. Prepare Common-Size financial statements of income statement and balance sheet. 

D. Prepare Statement of Cash Flows Part 2: 

Financial Statement Analysis 

A. Based on your financial statements (from Part 1), calculate the following ratios for the two years. Show all your calculations in good form. Show your formulas. If you use excel, each calculation needs to show the excel formula Current ratio Quick ratio Inventory turnover (times) Average collection period (days) Total asset turnover (times) Debt ratio Times interest earned Gross profit margin Net profit margin Return on total assets Return on equity P/E ratio Return on equity using DuPont Analysis 

B. Comments on the ratios by comparing 2016 to 2017 ratios. C. Assume Adams Stores, Inc. is a retail company similar to Walmart, Myers, or Target. Compare 2017 ratios to the industry average. Please note that Adams Stores, Inc. is not a real company. To find comparable industry ratios, you need to search for industry ratios for retail. See information on Moodle for instructions on how to find industry ratios. Based on the industry average, how is Adams Stores, Inc. doing financially? 

Part 3: Break-even, Financial, and Operating Leverages

Johnson Products, Inc.
Income Statement
For the Year Ended December 31, 2018
Sales (40,000 bags at $50 each) ..................................	$2,000,000
Less: Variable costs (40,000 bags at $25)................	1,000,000
Fixed costs..............................................................	600,000
Earnings before interest and taxes ..............................	400,000
Interest expense ...........................................................	120,000
Earnings before taxes .................................................	280,000
Income tax expense (20%) ..........................................	56,000
Net income ..................................................................	$ 224,000

Based on the information above, calculate (show all calculations and responses in good form): 

a. Break-even in units (in dollars and units). Explain what your numbers mean. As a manager, how would you use the numbers in financial planning? 

b. What is the degree of financial leverage? Explain what your number means. As a manager, how would you use the numbers in financial planning? 

c. What is the degree of operating leverage? Explain what your number means. As a manager, how would you use the numbers in financial planning?