Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 45

Business Analysis Blue Water Yachts is a small company founded by two businesspeople who are friends and avid sailors. At present, they are interested in expanding the business and have asked you to review its financial statements.

Blue Water Yachts sells approximately 100 to 150 sailboats each year, ranging from 14-foot dinghies to 20-foot sailboats. Their sales prices range from $2,000 to more than $10,000. The company has a limited inventory of boats consisting primarily of one or two boats from each of the four manufacturers that supply Blue Water. The company also sells a variety of supplies and parts and performs different types of service. Most sales are on credit.

The company operates from a large building that has offices, storage, and sales for some of the smaller sailboats. The larger sailboats are kept in a fenced area adjacent to the main building, and an ample parking area is nearby. This year Blue Water purchased a boat lift to haul boats. The lift has brought in revenues for boat repairs, hull painting, and related services, as well as the boat hauls.

The balance sheet and income statement for Blue Water Yachts for 2005 through 2009 and for the first eleven months of 2010 follow. The increase in net fixed assets in the recent two years is due to improvements in the building, paving of the parking area, and the purchase of the lift.

The company obtains its debt financing from two sources: a small savings and loan for its short- term funds, and a larger commercial bank, also for short-term loans, but principally for long-term financing. The terms of the loan agreement with the bank include a restriction that its current ratio must remain higher than 1.5.

Required Evaluate the liquidity and profitability of Blue Water Yachts using selected financial ratios. Assess the company’s overall profitability, liquidity, and desirability as an investment. Use a spreadsheet to improve the speed and accuracy of your analysis.

BLUE WATER YACHTS COMPANY Comparative Balance Sheet For the Years Ended December 31,
	2005	2006	2007	2008	2009	2010 (11 months)
Cash	$ 23,260	$ 21,966	$ 18,735	$ 28,426	$ 43,692	$ 31,264
Accounts receivable	99,465	102,834	112,903	125,663	104,388	142,009
Allowance for bad debts	(9,304)	(8,786)	(8,824)	(11,266)	(7,282)	(12,506)
Inventory	35,009	56,784	61,792	67,884	58,994	95,774
Other current assets	11,894	12,894	9,024	11,006	18,923	22,903
Total current assets	$160,324	$185,692	$193,630	$221,713	$218,715	$279,444
Property and equipment	262,195	282,008	299,380	368,565	405,269	498,626
Accumulated depreciation	(65,984)	(93,442)	(122,892)	(158,099)	(187,227)	(226,307)
Total assets	$356,535	$374,258	$370,118	$432,179	$436,757	$551,763
Accounts payable	82,635	78,127	63,346	56,256	40,189	49,544
Taxes payable	11,630	10,983	11,780	14,083	3,738	15,632
Short-term loans	59,876	56,980	37,583	41,093	49,594	76,962
Accrued payroll payable	5,227	4,598	3,649	4,224	4,774	4,779
Total current liabilities	$159,368	$150,688	$116,358	$115,656	$98,295	$146,917
Long-term debt	158,173	172,388	179,490	214,997	229,471	262,258
Equity	38,994	51,182	74,270	101,526	108,991	142,588
Total liabilities and equity	$356,535	$374,258	$370,118	$432,179	$436,757	$551,763

 

BLUE WATER YACHTS COMPANY Comparative Statement of Income and Operating Cash Flow For the Years Ended December 31,
	2005	2006	2007	2008	2009	2010 (11 months)
Sales	$767,580	$724,878	$777,480	$929,478	$764,610	$938,857
Returns and allowances	38,379	35,645	40,334	45,998	32,887	46,380
Cost of sales	473,908	441,298	458,015	545,778	453,669	530,597
Gross margin	$255,293	$247,935	$279,131	$337,702	$278,054	$361,880
Depreciation expense	$ 29,075	$27,458	$ 29,450	$ 35,208	$ 29,128	$ 35,563
Interest expense	18,597	19,557	20,998	21,475	24,889	28,993
Salaries and wages	81,923	73,664	77,846	95,764	92,903	99,447
Accounting and legal	9,304	8,786	9,323	11,834	13,108	11,380
Administration expense	79,666	75,234	80,693	96,469	87,995	97,441
Other expense	12,630	18,927	15,763	22,903	18,934	22,662
Total expense	$231,195	$223,626	$234,073	$283,653	$266,957	$295,486
Net income	$ 24,098	$ 24,309	$ 45,058	$ 54,049	$ 11,097	$ 66,394
Cash flowfrom operations
Depreciation		$ 27,458	$ 29,450	$ 35,208	$ 29,128	$ 35,563
Decrease (increase) in receivables		(3,887)	(10,031)	(10,318)	17,291	(32,397)
Decrease (increase) in inventory		(21,775)	(5,008)	(6,092)	8,890	(36,780)
Decrease (increase) in other current
assets		(1,000)	3,870	(1,982)	(7,917)	(3,980)
Increase (decrease) in current
liabilities		(8,680)	(34,330)	(702)	(17,361)	48,622
		$ 16,425	$ 29,009	$ 70,163	$ 41,128	$ 77,422

Step 1 of 4

Business Analysis:

Business analysis means analysing the financial and non-financial information of an entity. Focus is placed on analysis of financial information through analysis of balance sheet, income statement, cash flow statement and analysis of financial ratios of the company. These ratios are analysed by comparing the result of these ratios with the industry standards.