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Analyze financial statements email owner suggestions & ratio

See attached files.

Albert Owen owns and operates Owen Sales which opened its doors on January 1, 2007. Owen Sales has a line of credit with the bank (Note: the line of credit allows Owen Sales' bank account to go into a negative balance, called an overdraft, during slow business periods; the bank charges interest on any overdraft amounts). In order to maintain the line of credit, the bank requires that Owen Sales has a current ratio of at least 1.1. The owner is really frustrated because although his sales are increasing, he felt that he shouldn't make any withdrawals and hasn't done so since opening the business. Albert Owen has come to you, a recent CGA grad, to help him sort this out. You review the financial statements and find the following:

Owen Sales
Income Statement
Year Ended December 31

2008 2007
Sales $1,800 $1,400
Cost of goods sold 1,200 940
Operating & other expenses
400 310
Net income $200 $150

Owen Sales
Balance Sheet
December 31
2008 2007
Cash $28 $120
Accounts receivable 160 100
Merchandise inventory 360 240
Capital assets (net) 700 800
Total assets $1,248 $1,260

2008 2007
Accounts and accrued payables $100 $112
Notes payable, due 2009 300 500
Albert Owen, capital 848 648
Total liabilities and owner's equity $1,248 $1,260

Other information:

?sales occur evenly throughout the year
?accounts payable relate to the purchase of inventory
?the capital assets include a warehouse for inventory that remains consistently half empty throughout the year
?the capital assets are two years old and have an estimated remaining life of 10 years
?the note payable due in 2009 was incurred to acquire the capital assets; the principal paid in 2008 was the principal due in that year
?Owen Sales has used the bank overdraft only once during the past year to pay for an inventory purchase
You advise Albert that it will take the information he has provided and present him with a report within the next two business days.

Required:

Review the financial statements and provide the owner with an information email that includes some suggestions that might help him address his business concerns. As part of your email, include all appropriate supporting calculations. Use the industry average ratios on textbook page 1017 to assess the financial condition of the company. The written email should supporting calculations presented in appendices and/or exhibits to the email.

Attachments

Solution Preview

DATE: October 12, 2009
TO: Albert Owen
FROM: [NAME]
SUBJECT: Review of Owen Sales' Finances

Shown in Exhibit 1 are pertinent financial ratios for Owen Sales. Based on these ratios, Owen is in compliance with the bank's current ratio requirement of 1.1 as the company has current ratios of 1.37 and 4.11 for 2008 and 2007, respectively.

Now, as to the issue on the inability of the business to support periodic cash or capital withdrawal by the owner, the following are the factors contributing to this inability. I have also outlined recommendations on how these factors can be lessened or controlled such that in the near future the business' cash ...

Solution Summary

The solution analyzes financial statements email owner suggestions.

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