CASE STUDY 9
ACME PAINT COMPANY

Advance
Your
World.

To help you prepare for Chapter 9, there is a case to be reviewed and analyzed prior to attending the class. You
should be prepared to share and discuss the following:

• Evaluate the financial health of the company.

• As the officer of the account, you will identify specific issues that are of major concern.

• Note any recognizable problem-loan warning signs.

The case study will address the following issues:

• Case Study Acme Paint Company

– Evaluation of the company

– Identifying problem loans and warning signs

CS 9 – 2

CASE 1: ACME PAINT COMPANY
ACME PAINT COMPANY BALANCE SHEET
(FROM COMPANY RECORDS, PREPARED WITHOUT AUDIT)

Fiscal Year

Assets

6/30/X1 06/30/X2 06/30/X3 06/30/X4 06/30/X5

Cash $30,600 $69,100 $30,000 $21,700 $1,200

Accounts Receivable 209,000 250,100 190,200 213,500 174,700

Inventory 472,800 425,600 388,200 360,000 399,000

Prepaid Expenses 37,000 8,900 500 16,400 8,200

Total Current Assets

749,400

753,700

608,900

611,600

583,100

Land & Buildings (net) 145,100 146,200 282,500 280,100 323,800

Equipment (net) 32,200 33,500 55,000 59,800 96,500

Total Fixed Assets

177,300

179,700

337,500

339,900

420,300

TOTAL ASSETS $926,700 $933,400 $946,400 $951,500 $1,003,400

Liabilities

Notes Payable – Banks $85,000 $77,000 $100,000 $119,500 $132,700

Accounts Payable 230,000 254,400 255,100 257,300 254,500

Other Current Liabilities 31,800 40,400 26,000 27,700 22,900

Total Current Liabilities

346,800

371,800

381,100

404,500

410,100

Mortgage & Contracts Payable 191,400 168,400 164,100 144,200 188,100

TOTAL LIABILITIES $538,200

$540,200

$545,200

$548,700

$598,200

Common Stock

$189,600

$189,600

$189,600

$189,600

$189,600

Retained Earnings 198,900 203,600 211,600 213,200 215,600

TOTAL NET WORTH

$388,500

$393,200

$401,200

$402,800

$405,200

TOTAL LIABILITIES & NET WORTH $926,700 $933,400 $946,400 $951,500 $1,003,400

CS 9 – 3

ACME PAINT COMPANY INCOME STATEMENT

Fiscal Year 06/30/X1 06/30/X2 06/30/X3 06/30/X4 06/30/X5

Sales $2,900,000 $2,400,000 $2,200,000 $1,900,000 $2,000,000

Less:
Cost of Goods Sold

2,262,000

1,800,000

1,700,000

1,450,000

1,500,000

Gross Profit

$638,000

$600,000

$500,000

$450,000

$500,000

Expenses

General & Administrative $574,000 $548,000 $432,000 $389,000 $437,000
Depreciation 10,000 11,000 21,000 22,000 26,000
Interest 33,000 31,000 34,000 32,000 36,000

Total Operating Expenses

617,000

590,000

487,000

443,000

499,000

Operating Profit

21,000

10,000

13,000

7,000

1,000

Other Income -0- -0- -0- -0- 2,000
Other Expenses 6,000 4,000 3,000 5,000 -0-

Net Profit before Tax

15,000

6,000

10,000

2,000

3,000

Income Tax 3,300 1,300 2,000 400 600

Net Profit after Tax

$11,700

$4,700

$8,000

$1,600

$2,400

CS 9 – 4

ACME PAINT COMPANY CASE ANALYSIS

Solvency

Year ’X1 Year ’X2 Year ’X3 Year ’X4 Year ’X5 RMA

1. Current Ratio 2.16 2.02 1.60 1.51 1.42 2.10
2. Quick Ratio .69 .86 .58 .58 .43 1.00

Safety

3. Debt-to-Worth Ratio 1.39 1.37 1.36 1.36 1.47 1.00

Profitability

4. Gross Margin % 22.0 25.0 22.7 23.7 25.0 29.0
5. Net Margin % (pretax) 0.52 0.25 0.45 0.10 0.15 4.1

Asset Management

6. Sales to Assets 3.13 2.57 2.32 2.00 1.99 2.30
7. Return on Assets % 1.30 0.50 0.80 0.20 0.20 9.0
8. Return on Investment % 3.10 1.30 0.80 0.40 0.60 19.4
9. Inventory Turnover 4.78x 4.23x 4.38x 4.03x 3.76x 4.90x
10. Inventory (Days) 75 85 82 89 96 74
11. Accounts Receivable Turnover 13.88x 9.60x 11.57x 8.90x 11.49x 8.90x
12. Collection Period Days 26 38 31 40 31 41

YEARS ’X1 TO ’X5
Trend Analysis

Sales: Down 31%

Net Profit: Down 79%

Working Capital: Down 57%

Total Assets: Up 8%

Gross Margin % Up 14%

Net Margin % Down 71%

CS 9 – 5

ACME PAINT COMPANY HISTORICAL SOURCES AND USES
(WORKING CAPITAL) ($000S)

ID 1: Fiscal Year-end: June 30
ID 2:
Date: X6-Sept.-
X5 SOURCES

Company
Year ’X3

Company
Year ’X4

Company
Year ’X5

1. Net Income (Loss) before Nonrecurring. G/L 8 2 2
2. Nonrecurring G/L 0 0 0
3. Depreciation Expense 21 22 26
4. Amortization Expense 0 0 0
5. Deferred Taxes 0 0 0
6. FUNDS FROM OPERATIONS 29 24 28
7. Increase (Decr.) Minority Interest 0 0 0
8. Increase (Decr.) Preferred Stock 0 0 0
9. Increase (Decr.) Cap. Stock & Surpl. 0 0 0
10. Adjustments to Retained Earnings 0 0 0
11. Increase (Decr.) Long-term Debt (4) (20) 44
12. Increase (Decr.) Subordinated Debt 0 0 0
13. Increase (Decr.) Other Noncurr. Liabs. 0 0 0
14. TOTAL SOURCES OF FUNDS 25 4 72

APPLICATIONS
15. Preferred Dividend

0

0

0

16. Common Dividend 0 0 0
17. Increase (Decr.) Treasury Stock 0 0 0
18. Increase (Decr.) Fixed Assets 179 24 106
19. Increase (Decr.) Intangible Assets 0 0 0
20. Increase (Decr.) Other Noncurr.Assets 0 0 0
21. Increase (Decr.) in Working Capital (154) (21) (34)

22. TOTAL USES OF FUNDS 25 4 72

CURRENT ASSETS
23. Increase (Decr.) Cash & Equivalents

(39)

(8)

(21)
24. Increase (Decr.) Marketable Sec. 0 0 0
25. Increase (Decr.) Accounts Rec.-Trade (60) 23 (39)
26. Increase (Decr.) Notes Rec.-Trade 0 0 0
27. Increase (Decr.) Inventories (37) (28) 39
28. Increase (Decr.) Prepaids (8) 16 (8)
29. Increase (Decr.) Other Curr. Assets 0 0 0

30. TOTAL CHANGE IN CURRENT ASSETS (145) 3 (29)

CURRENT LIABILITIES
31. Increase (Decr.) N/P-Bank

23

20

13
32. Increase (Decr.) CPLT & Sub. Debt 0 0 0
33. Increase (Decr.) Accounts Payable 1 2 (3)
34. Increase (Decr.) Income Tax Payable 0 0 0
35. Increase (Decr.) Other Accrued Exp. (14) 2 (5)
36. Increase (Decr.) Other Curr. Liabs. 0 0 0

37. TOTAL CHANGE IN CURR. LIABS. 9 24 5
38. INCREASE (DECR.) IN WORKING CAPITAL (154) (21) (34

39. TOTAL CHANGE CURR. LIABS. & WC (145) 3 29

CS 9 – 6

ACME PAINT COMPANY HISTORICAL CASH FLOW ($000S)
( ) = Cash Outflow

ID 1: Fiscal Year-end: June 30

LESS DISBURSEMENTS
6. Cost of Goods Sold (Less Depr.) (1,700) (1,450) (1,500)
7. Inventories-Decr. (Incr.) 37 28 (39)
8. Accounts Payable-Incr. (Decr.) 1 2 (3)
9. Operating Exp. (Exc. Depr. & Amort.) (432) (389) (437)
10. Interest Expense (34) (32) (36)
11. Income Taxes (Paid) (2) (0) (1)
12. Fixed Assets-Decr.(Incr.) (179) (24) 106)
13. Net Other Cash Disbursements* (6) (14) 0
14. TOTAL DISBURSEMENTS (2,315) (1,880) (2,122)
15. CASH FLOW BEFORE FINANCING (58) (8) (78)
16. CASH SURPLUS (DEFICIT) 11 22 (56)

FINANCING SOURCES
17. Notes Payable Bank-Incr. (Decr.)

23

20

13

18. Long-Term Debt-Incr. (Decr.) (4) (20) 44
19. Subordinated Debt-Incr. (Decr.) 0 0 0
20. Capital Stock and Miscellaneous Income-Incr. (Decr.) 0 0 0
21. Dividends Paid 0 0 0
22. Adjustment to Retained Earnings 0 0 0
23. CASH BALANCE ENDING 30 22 1

CUMULATIVE BALANCES
24. Notes Payable Bank

100

120

133

25. Long-term Debt 164 144 188
26. Subordinated Debt 0 0 0
* OTHER CASH RECEIPTS (DISBURSEMENTS)
27. Nonrecurr. Gains (Losses) 0 0 0
28. Marketable Securities-Decr. (Incr.) 0 0 0
29. Oth. Rec., Prepaids, Oth. Curr.Assets-Decr. (Incr.) 8 (16) 8
30. Interest Accrual, LT Inv. & Oth. NCA-Decr. (Incr.) 0 0 0
31. Accruals & Other Curr. Liabs.-Incr. (Decr.) (14) 2 (5)
32. Noncurr. Liabs.-Incr. (Decr.) 0 0 0
33. * NET OTHER CASH RECEIPTS (DISBURSEMENTS) (6) (14) 3

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ID 2:
Date: X6-Sept.-X5

Company
Year ’X3

Company
Year ’X4

Company
Year ’X5

1. Cash Balance Beginning Plus Receipts 69 30 22
2. Accounts Receivable Collections 2,260 1,877 2,039
3. Other Income (Expense) (3) (5) 2
4. Net Other Case Receipts* 0 0 3
5. TOTAL RECEIPTS 2,257 1,872 2,044

CS 9 – 7

ACME PAINT COMPANY HISTORICAL FINANCIAL RATIOS

ID 1:
ID 2:

Company

Company

Fiscal Year-end: June 30
Company Company

Date: X6-Sept. X5 Year X2 Year X3 Year X4 Year X5

LIQUIDITY & SOLVENCY RATIOS
1. Current Ratio (x)

2.03

1.60

1.51

1.42

2. Quick Ratio (x) 0.86 0.58 0.58 9.43
3. Working Capital ($) 382.00 228.00 207.00 173.00
4. Working Capital (% Sales) 15.91 10.35 10.87 8.65

SAFETY RATIOS
5. Debt/Worth (x)

1.37

1.36

1.36

1.48

6. Debt/Worth (w/Sub.debt)(x) 1.37 1.36 1.36 1.48
7. Break-even Sales ($) 2,360.00 2,143.00 1,870.00 1,996.00
8. Actual Sales/Break-even Sales (x) 1.02 1.03 1.02 1.00
9. Z Factor (#) 4.43 3.39 3.17 2.80

GROWTH RATIOS
10. Sales (Annual %)

NA

-8.33

-13.64

5.26

11. Pretax Income (Annual %) NA 66.67 -80.00 50.00
12. Sust. Growth-same D/W (%) 1.21 2.03 0.40 0.60
13. Sust. Growth-new D/W 2.20 37.01 39.43 36.15 30.22
14. Sust. Growth-No New Debt (%) 0.84 1.44 0.29 0.41

PROFITABILITY RATIOS
15. Gross Margin (%)

25.00

22.73

23.68

25.00

16. Operating Expense (%) 23.29 20.59 21.63 23.15
17. Operating Profit Margin (%) 1.71 2.14 2.05 1.85
18. Pretax Profit Margin (%) 0.25 0.45 0.11 0.15
19. Net Profit Margin (%) 0.20 0.36 0.08 0.12

BALANCE SHEET MANAGEMENT RATIOS
20. Sales to Assets (x)

2.57

2.32

2.00

1.99

21. Assets to Sales (%) 38.89 43.02 50.08 50.17
22. Sales to Net Fixed Assets (x) 13.36 6.52 5.59 4.76
23. Return on Assets (Pretax %) 0.64 1.06 0.21 0.30
24. Return on Equity (Pretax %) 1.53 2.49 0.50 0.74
25. A/R Collection Period (Days) 0.00 0.00 0.00 0.00
26. Inventory Turnover (Days) 0.00 0.00 0.00 0.00
27. A/P Payment Period (Days) 0.00 0.00 0.00 0.00

FINANCING RATIOS
28. Net Profit Bank to Sales (%)

3.21

4.55

6.32

6.64

29. Interest Coverage (x) 1.19 1.29 1.06 1.08
30. Principal & Interest Coverage (x) NA 1.29 1.06 1.08
31. Net Profit to A/R (%) 75.00 30.79 52.58 56.21 75.96
32. Inv. Reliance (%) 60.00 0.00 0.00 0.00 0.00
33. Credit Based on Inv. and A/R 443.00 376.00 376.00 370.00
34. Credit Avail. (Deficit) ($) 366.00 276.00 258.00 238.00
35. LTD to Net Fixed Assets (%) 93.71 48.62 42.42 44.75
36. LTD with Sub. Debt/Net Fixed Assets (%) 93.71 48.62 42.42 44.75