Case 6

LHU Company had sales data of 2019 and 2020 as the followings: (tax rate 34％)
2019 2020
Sales $ 4,203 $ 4,053
Depreciation 525 550
EBIT 705 723
Interest Paid 480 502
Dividends 30 47
Current Assets 1,072 853
Cash 210 215
Notes Receivable 175 140
Inventory 507 328
Short-term Debt 125 165
Short-term Investment 80 60
Net Fixed Assets 6,085 6,777
Tangible Assets 4,835 5,277
Land 1,700 1,550
Equipment 1,050 1,942
Building 2,085 1,785
Trade Mark 250 250
Goodwill 500 500
Patent 500 750
Current Liabilities 1,922 1,725
Account Payable 207 298
Interest Payable 500 260
Owners’ Equity 3,248 3,397
Common Stock 1,000 1,050

Find：
1. 2019 and 2020 Balance Sheet and 2020 Income Statement
2. 2020 statement of Cash Flows
3. Financial ratios 2019 and 2020:
a. Current ratio, Quick ratio and Cash ratio
b. Inventory turnover and Account Receivables turnover
c. Day’s sales in inventory and Days’ sales in receivables
d. Total debt ratio, Long-term debt ratio and Long-term capital ratio
e. Times interest earned ratio, Cash coverage ratio and Degree of financial leverage
f. ROA, ROE and the Du Pont Identity
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LHU Company, Balance Sheet
2019, 2020
Assets Liabilities & Owner’s Equity
2019 2020 2019 2020
Current Assets: $1,072 $853 Current Liabilities: $1,922 $1,725
- Cash $210 $215 - Account Payable $207 $268
- Account Receivable $100 $110 - Interest Payable $500 $260
- Note Receivable $175 $140 - Notes Payable $1,090 $1,032
- Inventory $507 $328 - Short-term Debt $125 $165
- Short-term Investment $80 $60
Net fixed Assets: $6,085 $6,777 Owner’s Equity: $3,248 $3,397
*Tangible Assets $4,835 $5,277 - Common Stock T $1,000 $1,050
- Land $1,700 $1,550 - Retained Earnings $2,248 $2,347
- Equipment $1,050 $1,942 Long-term Debt $1,987 $3,397
- Building $2,085 $1,785
*Intangible Assets: $1,250 $1,500
- Trade mark $250 $250
- Good will $500 $500
- Patent $500 $750
Total Assets $7,157 $7,630 Total L&OE $7,157 $7,630

LHU Company, Income Statement

2020
2020
Sales $4,053
Cost of goods sold $2,780
Depreciation $550
EBIT $723
Interest Paid $502
Pretax Income $221
Taxes $75
Net Income $146
Dividends $47
Addition to retained earnings $99
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LHU Company, Change
2020
Assets 2019 2020 change
Current assets
Cash $210 $215 +5
Note R $175 $140 -35
AR $100 $110 +10
Inventory $507 $328 -179
Short-term Inv $80 $60 -20
Total $1,072 $853 -219
Fixed Assets
Net plant & equipment $6,085 $6,777 +692
*Tangible Assets $4,835 $5,277 +442
Land $1,700 $1,550 -150
Equipment $1,050 $1,942 +892
Building $2,085 $1,785 -300
*Intangible Assets $1,250 $1,500 +250
Trade Mark $250 $250 +0
Good will $500 $500 +0
Patent $500 $750 +250
Total assets $7,157 $7,630 +473

Liabilities and owners’ equity

Current liabilities
AP $ 207 $ 298 +91
Notes P $1,090 $1,002 -88
Interest Payable $500 $260 -240
Short-term Debt $125 $165 +40

Total $1,922 $1,725 -197

Long-term debt $1,987 $2,508 +521
Owners’ equity
CS and Paid-in surplus $1,000 $1,050 +50
RE $2,248 $2,347 +99
Total $3,248 $3,347 +99
Total L &OE $7,157 $7,630 +473
 LHU Corporation, Statement Cash Flows
2020
Cash, beginning of year $210
1. Operating activity
a. Net income $146
plus
b. Depreciation $550
c. Increase in accounts payable $91
d. Decrease in inventory $179
e. Decrease in ST investment $20
f. Decrease in Notes P $35
Less
g. Decrease in accounts receivable $10
Net cash from operating activity $1,011 (146+550+91+179+20+35-10)

2. Investment activity
a. Fixed asset acquisitions $(992) (5,277-4,835+550 depreciation)
b. Patent $(250)
Net cash from investment activity $(1,242)

3. Financing activity
a. Decrease in notes payable $(88)
b. Dividends paid $(47)
c. Decrease in Interest Payable $(240)
d. Increase in long-term debt $521
e. Increase in short-term debt $40
f. Increase in common stock $50
Net cash from financing activity $236

Net increase in cash $5 (1,011-1,242+236)

Cash, end of year $215

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a.
Current ratio= Current assets ∗100 %
current liabilities

2019: = 1,072 ∗100 % = 55.78%

1,922

2020: = 853 ∗100 % = 49.45%

1,725

Quick ratio= Current assets−inventory ∗100 %

current liabilities

2019: = 1,072−507 ∗100 % = 29.4%

1,922

2020: = 853−328 ∗100 % = 30.43%

1 ,725

Cash Ratio: Cash

∗100 %
current liabilities

2019: = 210 ∗100 % = 10.93%

1,922

2020: = 215 ∗100 % = 12.46%

1, 725

b.

Inventory Turnover: Cost of goods sold

Inventory
Cost of goods sold in 2019= Sales – Depreciation – EBIT
= 4,203 – 525 – 705 = $2,973
2019: = 2 ,97 3 = 16.99
175

2020: = 2,780 = 8.46

328

Receivables Turnover: Sales

Accounts receivable

2019: = 4,203 = 42.03

100

2020: = 4 ,05 3 = 36.85

110
 c.
Days’ Sales in Inventory: 365 days
inventory turnover

2019: = 365 days = 21.48

16.99

2020: = 365 days = 43.14

8 . 46

Days’ Sales in Receivables: 365 days

receivables turnover

2019: = 365 days = 8.68

42.03

2020: = 365 days = 9.91

36.85

d.
Total Debt Ratio: Total assets−Total equity ∗100 %
Total assets

2019: = 7,157−3,248 ∗100 % = 54.62%

7 ,517

2020: = 7 , 630−3 , 397 ∗100 % = 55.48%

7 ,630

Long-term debt ratio: Long−term Debt

∗100 %
total long−term financing (long−term debt+total equity )

2019: = 1,987
∗100 % = 37.96%
1,987+3,248

2020: = 2,508
∗100 % = 42.47%
2,508+3,397

Long-term Capital Ratio=

total long−term financing (long−term debt+total equity )
assets ¿∗100 %
total ¿

2019: = 1,987+3,248 ∗100 % = 86.03%

6,085

2020: = 2,508+3,397 ∗100 % = 87.13%

6,777
 e.
Times Interest Earned Ratio: EBIT
interest paid

2019: = 705 = 1.47

480

2020: = 7 23 = 1.44
502

Cash Coverage Ratio: ¿ EBIT + Depreciation ( non−cash expense )

Interest Paid

2019: = 705+525 = 2.56

480

2020: = 723+550 = 2.53

502

Degree of Financial Leverage (DFL)¿ EBIT

EBIT−interest paid

2019: = 705 = 3.13

705−480

2020: = 723 = 3.27

723−502

f.
ROA: Net Income ∗100 %
Total assets
Net Income in 2019= Pretax Income – Tax = (EBIT – Interest Paid) – (Pretax Income x 34%)
= (705 – 480) – ((705-480) x 34%)
= 148.5
2019: = 148.5 ∗100 % = 2.07%
7,157

2020: = 146 ∗100 % = 1.91%

7,630

ROE: Net Income ∗100 %

Total equity

2019: = 148.5 ∗100 % = 4.57

3,248
 2020: = 146 ∗100 % = 4.3%
3,397

2019: = 148.5 × 4,203 × 7,157

4,203 7,157 3,248
= 3.53% * 58.73% * 2.2
= 2.07% * 2.2
= 4.55%
2020: = 14 6 × 4 ,05 3 × 7 ,630
4 ,053 7 , 630 3 ,397
= 3.6% * 53.12% * 2.25
= 1.91% * 2.25
= 4.3%