RadioShack Corporation Financial Analysis - Research Paper Example

The cost of inventory on hand which is the same as closing inventory for the year ending on December 31, 2010 amounts to $723,700,000. Similarly, the cost of sales which is the cost of the products sold amounts to $2,462,100,000 according to the income statement for the year ending December 31, 2010.
Consequently, to compute the cost of the inventory purchased during that trading year, the following formula has been employed.
Cost of inventory at hand + cost of inventory purchased – beginning inventory = purchases of inventory (Albrecht, Stice, & Stice, 2011). Beginning inventory for the year 2010 has been assumed equal to the cost of inventory on 31 December 2009.
Thus, inventory purchases in 2010 = $724+ $2,462- $670, = $2,516
Question 2
From the three computed components of inventory in the corporation, the inventory component that is mainly directly related to the cash flow movement is the purchases. This is because, when the firm purchases the inventory on a cash or banking basis, the cash and cash equivalent in the cash flow statement for the trading period is lowered (Harrison & Horngren, 2008). Indeed, RadioShack Corporation acquires its electronic inventories through the banking transfer instead of the account purchasing process. Thus, whenever the organization acquires additional inventories, the cash flow statement is amended to reflect the actual cash and cash equivalent the firm possesses.
Question 3
If the inventory purchases are responsible for the account payable provision in the balance sheet of RadioShack Corporation, then, to compute the cash payment that was made in 2010, the account payable for 2009 and 2010 as well as the inventory purchases made in 2010 2ill be used to estimate the cash payments made during the year. Accordingly, the following formula will be applied.
[2010 Cash payment = account payable in 2009 + purchases of 2010 - account payable in 2010]
This formula has been derived because the account payable at the end of 2010 will be made up of the account payable amount the firm was holding at the beginning of the year plus the inventory purchases it accumulated during that year as shown in the formula below (Warren, Reeve, & Duchac, 2012).
[Account payable in 2009 + purchases of 2010 = account payable in 2010]
Thus, the deficit balance is the cash amount the firm has paid to lower the account payable amount it would be holding at the end of the year if it fails to make any cash payment.
Thus, 2010 Cash payment = $263 + $2,516 - $272 = $2507
Question 4
In accounting for the inventories the corporation has, the accounting policy the entity applies is the FIFO costing method. This involves allocating the cost of the inventory based on the market value of the finished goods (Crosson & Needles, 2011). Thus, the market value costs of transporting inventories to the various distribution centers, distribution expenses, and merchandise acquisition are applied in computing the value of the inventory. In addition, when determining the net realizable value of the inventory is less than the recorded cost, the firm allows a provision to lower the inventory amount.
Question 5
[Gross profit percentage ratio = (gross profit/ net sales) * 100]
{Inventory turnover ratio = [(cost of goods sold)/ (beginning inventory + ending inventory)/2]}
2009 Gross profit percentage ratio = (1962.5/ 4276) * 100 = 46%
2010 Gross profit percentage ratio = (2010.6/ 4472.7) * 100 = 45%
The gross profit percentage ratio is used to analyze the strength of a firm in maintaining its operating profit margin by reducing it per unit prices of the goods it sells (Besley & Brigham, 2008). From the two percentages computed for the years 2009 and 2010, the length to which RadioShack can reduce the per unit prices of the electronic goods it sells, the strength deteriorated from 2009 to 2010. This is because in 2009 the firm could reduce its selling price per unit of the products it sells by 46% without incurring operation losses while in 2010 it could only reduce by 45%. Even though the margin is very small, it reflects that the operational profitability of the firm may continue deteriorating if the management does not check the operation expenses. Indeed, the performance of the entity over the last two years in the stock market compared to the market has been slowing as shown in the graph below. This could be contributed by the falling gross profit percentage ratio as indicated above. Further, the gross profit percentage ratio of the corporation from the recent financial statement of 2011 and 2012 depict the same trend.
2011 Gross profit percentage ratio = (1810800/ 4378000) * 100 = 41%
2012 Gross profit percentage ratio = (1561800/ 4257800) * 100 = 37%

Source (Yahoo-Finance.com, 2013).
Inventory Turnover Ratio
2009 Inventory turnover ratio = [(2313.5)/ (636.3 + 670.6)/2] = [(2313.5)/ 653.45] = 3.5 times
2010 Inventory turnover ratio = [(2462.1)/ (670.6 + 723.7)/ 2] = [(2462.1)/ 697.15] = 3.5 times Read More