Financial Management of financial statements - Essay Example

Micro Chip Computer Corporation's net sales target for 2005 is $9,168 which is 10% higher than what is generated in 2004. This sales budget seems reasonable based on the impressive growth posted by the company in 2004. The sales target of $9,168 is lower than the five year average of $9,330. If the company will continue to recovery from the two-year slump, 10% even seems to be a very conservative target. It should be noted that the pre-2002 net sales reached almost $12,000. It is not impossible that the company can generate this income again.

Question 1.Use the Percentage Sales Method and a 20% increase in sales to forecast Micro Chip's Consolidated Statement of Operations for the period September 26, 2004 through September 25, 2005. Assume a 15% tax rate and restructuring costs of 2% of the new sales figure. Micro Chip Computer Corporation forecasts that its sales will increase by 20% from the current level. This will result to $10,000.80 gross revenue in the following period. Since the percentage sales method is used to compute the other components of the financial statement, it is assumed that the company will incur the same expenses in proportion to sales.

For example, cost of sales was previously 65.49% of total sales. In the computation for the following year, it was also assumed that the company is going to spend 65.49% of its income in cost of sales. It can be seen that using the percentage sales method lead to some unreasonable assumptions. For one, this method assumes that expenses are directly related to the level of sales. This might seem appropriate for a merchandising firm as the cost of goods sold often bloats with sales revenue. However, it doesn't take into account the possible changes in costs.

Also, it should be noted that some of the company's costs does not often vary with sales. Fixed cost like selling, general, and administrative expenses are often fixed regardless of sales level. Part B ABC Fitness Activity ratios indicate how well a company manages to turn its resources into cash, revenue or profit. In the case of ABC Fitness, three significant ratios are computed to measure its relative efficiency. The following table shows the average collection period, inventory turnover, and total assets turnover of the business organization.

ABC Fitness has an average collection period of 10 days. Its inventory turnover is 10.23 while assets produced 1.79 times revenue. Average Collection Period = Current Accounts Receivables/Average Daily Sales, where Average Daily Sales = Annual Sales/360 days = $2, 004, 016 / 360 days = $5, 560/days Average Collection Period =$55, 514 / $5,560/days =9.98 or 10 days Inventory Turnover = Cost of Goods Sold / Average Inventory = $1, 446, 733 / $141, 350 = 10.

23 Total Asset Turnover = Sales / Total Assets = $2, 00