Reference no: EM13334898

Financial Statement Preparation

"The numbers" (or, the "language of business", as Warren Buffett has said) is usually a great place to start in analyzing an enterprise and making prudent business decisions. So ... as background for the Group Project Situational Analysis and Report you will be preparing, you are required to create a properly classified Balance Sheet, Income Statement, Cash Flows Statement, and Ratio Analysis Statement from information provided to you.

The information you need is in the file under "Project". The file includes a Data worksheet with a complete listing of accounts and balances in alphabetical order for EcoSystems Industries and worksheet templates for a Balance Sheet, Income Statement, Cash Flows Statement, and Ratios. The templates have been prepared for the Balance Sheet and Income Statement such that you need only copy/paste from the Data worksheet into the appropriate position on those financial statements and then determine the appropriate sub-total and total amounts. Templates have also been prepared for the Cash Flows Statement and for Ratio Analysis but the nature of those items do not as easily lend themselves to simple "copy/paste" functionality. For the Cash Flows and Ratios worksheets, and for that matter also for the Balance Sheet and Income Statement if you prefer, feel free to either manually enter your answers and supporting computations into Excel or print the template worksheets and write your answers/supporting computations on the printed paper. Do whatever is easiest for you. Attach additional sheets if necessary.  The formulae for five of the six Ratios requested are identified on a supplemental "Ratios" file. The only ratio not included is the Gross Profit ratio, which is computed as Gross Profit divided by Net Sales.

Project - Situational Analysis and Report

You are the CFO (Chief Financial Officer) for SciTech Industries, a company which designs, manufactures, and sells research instrumentation worldwide. SciTech sells direct to the customer in the United States, but utilizes aDistributor network to sell instruments internationally. The research instruments are expensive (up to $75,000 each) and, therefore, purchase decisions by the end user are not taken lightly. Distributors are independent companies who buy from you (SciTech) at a discounted sales price and then sell to their customers at whatever price they choose. With occasional assistance (financial and otherwise) and advice from you, Distributorsperform their own marketing and sales efforts, and also perform equipment installation, repairs, training, and other service functions for your equipmentwhich they have sold in their territory. It is a very costly and time-consuming process for youto first identify appropriate Distributors and then to maintain that ongoing relationship. Distributors, as independent entities, also sell other companies' products. To your knowledge, none of yourDistributorssell any of yourcompetitors' products.

Your sales terms to Distributors are 2/20, n/60. In the process of monitoring payment activity for all Distributors you have noticed that your Distributor in Italy, EcoSystems Industries, over the past six months has not only neglected to take advantage of your discount payment terms, but has progressively fallen further behind in payments for the full invoice price, to the point where payments are now typically 10 days past the 60-day due date.

EcoSystems is a family owned and operated Company with 30 employees, and has been your Italian Distributor for 15 years. EcoSystems has been a cooperative "business partner", and you have generally been pleased with their performance in selling and servicing your products in their territoryover the years. Feedback you receive on occasion from their customers is usually positive, and you receive very few complaints. EcoSystems payment terms offered to its customers are net/45 days (i.e. no early payment discount is offered), and you (SciTech) representapproximately 40% of EcoSystems annual Sales. You have expressed your concern to EcoSystems about the trend in payment history of their account with you. At your request, EcoSystems has provided financial information (represented by the financial statements you have already prepared), and Ecosystems is very willing to answer any questions you might have.

Required:

In a double-spaced, 2to 3page narrative report (i.e. not including any exhibits you wish to attach), address the questions below and any other considerations which come to mind. As additional information, EcoSystemsratios for prior years are shown in the following table:

	2013	2012	2011
Current Ratio	??	2.6 to 1	2.8 to 1
Accounts Rec. Turnover	??	39 days	33 days
Inventory Turnover	??	55 days	52 days
Gross Profit on Sales	??	44.2%	44.6%
Profit Margin on Sales	??	3.2%	5.3%
Rate of Return on Assets	??	9.9%	10.3%

Your score will be based on your situational analysis, and on the wording/grammar, "flow", and generalcommunication aspects of your report. Provide your thoughts and the decisionyou might be leaning toward lacking any additional information and answers to your questions, but there is no right or wrong answer to this .

• What are your thoughts as to the financial stability of EcoSystems? What positive aspects of the financial statements and ratios strike you and what "red flags" of concern have drawn your attention? If you had the opportunity to dialogue and interact with the owners of EcoSystems, what questionswould you have concerning their operation? What aspects of your financial analysis are in need of answers and/or further explanation?
• SciTech reviews, modifies as appropriate, and renewsDistributor agreements annually. The Ecosystems agreement is up for renewal in three months, so you have the opportunity to terminate this Distributor relationship andlocate another Italian Distributor, or sellyour instruments (and service and support) direct from your offices in the U.S., or not sell into Italy at all. What factors, financial and also non-financial, are worthy of consideration in deciding the best future course of action?

Attachment:- EcoSystem.xlsx