Paper Financial Statements as a Key Source of Information for Financial
Decisions
This assignment addresses the following Module Outcomes:
• Assess a firm's solvency, asset management and profitability using common financial ratios. (CO1)
• Evaluate the financial position of the firm using time and trend or peer-group analysis. (CO1, CO2)
Instructions:
• Your paper should be 4 to 6 pages in length (not including title and reference pages).
• Your paper should be double-spaced, with 1-inch margins, in-text citations and references for all sources following proper APA formatting.
• Use the EC Library resources to properly cite your work: ◦ APA Format Tip Sheet (Links to an external site.)
◦ Citing Sources (Links to an external site.)
◦ Plagiarism & Copyright (Links to an external site.)
• Use the EC Library guide to conduct your research: ◦ Business Research Guide (Links to an external site.)
Background:
Callaway Golf Company was incorporated in 1982 with the purpose of designing, manufacturing and selling high quality golf clubs. The Company became a publicly traded corporation in 1992. Callaway Golf has evolved over time from a manufacturer of golf clubs to one of the leading manufacturers and distributors of golf equipment and accessories.Callaway designs its products to be technologically advanced and invests substantially in research and development each year. The Company’s golf products are designed for golfers of all skill levels including amateur and professional golfers. Callaway Golf generally sells its products to retailers, directly and through its wholly-owned subsidiaries, and to third-party distributors. It also licenses its trademarks and service marks in exchange for a
royalty fee to third parties for use on golf related accessories, including golf apparel and footwear, golf gloves, prescription eyewear and practice aids. The Company’s products are sold in the United States and in over 100 countries around the world. For purposes of this assignment, assume that you focus is Drive It Long, which is a close competitor to Callaway Golf. Drive It Long similarly sells golf clubs, golf balls and golf accessories. These products are recreational in nature and are therefore discretionary purchases for consumers. Both firms are affected by the fact that consumers are generally more willing to make discretionary purchases of golf products during favorable economic conditions and when consumers are feeling confident and prosperous. Discretionary spending is also affected by factors including general business conditions, interest rates, consumer confidence in future economic conditions, and the availability of consumer credit. Purchases of these firms’ products may decline during periods when disposable income is lower, or during periods of actual or perceived unfavorable economic conditions. A significant or prolonged decline in general economic conditions or uncertainties regarding future economic prospects that adversely affect consumer discretionary spending would have a negative impact on these firm’s results of operations, financial condition and cash flows.
This paper is an exercise designed to better acquaint students with the four main categories of ratio analysis. Financial ratios are a standardized means of comparing information presented in financial statements, in order to analyze the operations of a firm, and to compare operations against certain benchmarks that assist us in drawing conclusions about the firm’s performance. This exercise requires students to compute common financial ratios in the four areas in which these are most often applied to analyze firm performance. This will strengthen the student’s ability to understand what aspects of a firm’s activities that a particular ratio characterizes, and where this information can be found in financial statements. The student will additionally be asked to draw conclusions regarding financial performance using computed ratios.
Assume that you are a Senior Financial Manager for Drive It Long Golf, Inc. A close competitor is Callaway Golf Co. (ELY). You are preparing to address the Board of Directors regarding the current financial picture of the firm, following the release of the firm’s Audited Financial Statements. Drive It Long Golf, Inc. has 25,000 shares of common stock outstanding, and the market price for a share of stock at the end of 2016 was $58. Assume that this company’s growth rate is 9%. As Drive It Long’s Senior Financial Manager, you are assumed to be able to offer an authoritative interpretation of the firm’s recent performance.
Financial Ratios, Drive It Long Golf, Inc.
Table 1. Financial Ratios, Drive It Long Golf, Inc.
Drive It Long, Inc.
Short-term solvency ratios: 2015 2016
a. Current ratio 1.1 1.15
b. Quick ratio 0.65 0.68
c. Cash ratio 0.43 0.42
Asset utilization ratios: Period
d. Total asset turnover 0.88
e. Inventory turnover 8.93
f. Receivables turnover 23.09
Long-term solvency ratios: 2015 2016
g. Total debt ratio 0.37 0.38
h. Debt–equity ratio 0.58 0.6
i. Equity multiplier 1.58 1.6
Period
j. Times interest earned ratio 5.73
k. Cash coverage ratio 7.99
Profitability ratios: Period
l. Profit margin 11.94%
m. Return on assets 10.53%
n. Return on equity 16.85%
Statement of Cash Flows for 2016
Cash, beginning of the year $26,450
Table 2. Statement of Cash Flows, Drive It Long, Inc.
Drive It Long, Inc.
Operating activities
Net income $50,376
Plus:
Depreciation $37,053
Increase in accounts payable 4,883
Increase in other current liabilities 5,161
Less:
Increase in accounts receivable ($4,589)
Increase in inventory (4,655)
Net cash from operating activities $88,229
Investment activities
Fixed asset acquisition ($78,233)
Net cash from investment activities ($78,233)
Financing activities
Increase in notes payable ($2,340)
Dividends paid (20,000)
Increase in long-term debt 15,000
Net cash from financing activities ($7,340)
Net increase in cash $2,656
Cash, end of year $29,106
2014 and 2015 Balance Sheets
Table 3. Balance Sheets, Drive It Long Golf, Inc.
Drive It Long, Inc.
2014 2015 2014 2015
Current assets Current Liabilities
Cash $26,450 $29,106 Accounts payable$30,602 $35,485
Accounts receivable 13,693 18,282
Notes payable 15,840 13,500
Inventory 27,931 32,586 Other 15,280 20,441
Total $68,074 $79,974 Total $61,722 $69,426
Long-term debt $95,000 $110,000
Owner's equity
Common stock & paid-in surplus $45,000 $45,000
Fixed assets Accumulated retained earnings 223,517 253,893
Net plant & equipment $357,165 $398,345
Total $268,517 $298,893
Total assets $425,239 $478,319 Total liabilities & owners’ equity $425,239 $478,319
2015 Income Statement
Sales $422,045
Cost of Goods Sold $291,090
Depreciation 37,053
Earnings Before Interest and Taxes $93,902
Interest Paid $16,400
Table 4. Income Statement, Drive It Long Golf, Inc.
1. Analyze the financial performance of Drive It Long Golf, Inc. using the following tools:
a. time and trend analysis b. peer-group analysis c. two or more ratios financial ratios (introduced in Module Two’s
assigned readings) in each area that will allow you to evaluate the following four aspects of performance:
i. Short-term solvency ii. Asset Utilization iii. Long-term solvency iv. Profitability 2. Evaluate the firm’s financial position using the firm’s DuPont Identity,
considering: a. operating efficiency (as measured by profit margin), b. asset use efficiency (as measured by total asset turnover), and c. financial leverage (as measured by the equity multiplier).
3. Determine PEG ratio. a. Construct Drive It Long’s PEG ratio, and b. Evaluate this PEG ratio.
Your paper should be 4–6 pages long with a minimum of 2 references in a double-spaced document using 12 pt. Times New Roman font, utilizing APA format.
References
Callaway Golf. (2016). Annual Report.
Taxable Income 77,502
Taxes (35%) 27,126
Net Income $50,376
Dividends $20,000
Retained Earnings 30,376
(Links to an external site.) Callaway Golf. (n.d.). Callaway Golf.
(Links to an external site.)
NASDAQ. (2016). Company List (NASDAQ, NYSE, & AMEX).
(Links to an external site.) Valuepro. (2016). Valuepro.
(Links to an external site.) Yahoo. (2009). Key Statistics – Yahoo.com.
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Turnitin®
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Evaluation
This assignment will be graded using the located on the Course Rubrics page within the Start Here section of the course. Please review the rubric prior to beginning your work so that you ensure your submission meets the criteria in place for this assignment. This assignment is worth 15% of your final course grade.