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PROJECTINFINA004

(FINANCIAL STATEMENT ANALYSIS)

RAJAS, MICHAEL BERT G.BSA / E44 / TTHS 6-7pm

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K-L Fashions, Inc. Financial Statements

Income StatementFor the year ended January 31:

(Dollars in thousands) 2005 2004 2003 2002Net Sales $6,039,750 $5,452,010 $4,558,060 $3,362,910Cost of Goods 3,573,070 3,135,730 2,616,710 1,903,480Gross Profit 2,466,680 2,316,280 1,941,350 1,459,430

Selling, General and AdministrativeExpenses (including depreciation)

2,221,540 1,849,100 1,434,860 1,076,990

Income from Operations 245,140 467,180 506,490 382,440Other Income (expenses):

Interest and other income 14,470 19,510 27,250 14,410Interest Expense (10,180) (13,990) (12,320) (13,570)

Income Before Income Taxes 249,430 472,700 521,420 383,280

Income Tax Provision 102,000 181,990 198,600 162,080

Net Income $147,430 $290,710 $322,820 $221,200

(As a Percentage of Sales)Net Sales 100.0% 100.0% 100.0% 100.0%Cost of Goods 59.2 57.5 57.4 56.6Gross Profit 40.8 42.5 42.6 43.4

Selling, General and AdministrativeExpenses (including depreciation)

36.8 33.9 31.5 32.0

Income from Operations 4.0 8.6 11.1 11.4Other Income (expenses):Interest and other income .3 .4 .6 .4

Interest Expense (.2) (.3) (.3) (.4)

Income Before Income Taxes 4.1 8.7 11.4 11.4

Income Tax Provision 1.7 3.4 4.3 4.8

Net Income 2.4% 5.3% 7.1% 6.6%

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K-L Fashions, Inc. Financial Statements

Balance SheetJanuary 31:

(Dollars in thousands) 2005 2004 2003 2002 AssetsCurrent Assets:Cash and Cash Equivalents $272,640 $82,540 $321,390 $281,750Receivables 12,090 3,480 7,550 2,740Inventory 738,630 857,090 668,200 464,440Prepaid Expenses 54,880 54,030 39,670 33,630Total Current Assets 1,078,240 997,140 1,036,810 782,560

Property, Plant & Equipment (at cost):Land and Buildings 531,270 383,350 312,670 151,140

Fixtures and equipment 476,460 411,230 251,920 219,740Leasehold improvements 16,460 15,120 12,340 9,080Construction in progress ---- 46,370 32,800 6,740Less Accumulated Depreciation (248,430) (183,890) (135,020) (99,470)Property, Plant & Equipment, net 775,760 672,180 474,710 287,230

Total Assets $1,854,000 $1,669,320 $1,511,520 $1,069,790

Liabilities and Stockholders Equity Current Liabilities: Accounts Payable $377,970 $244,150 $259,040 $212,223 Advance Payment on Orders 4,460 2,030 3,500 4,530Income Taxes Payable 70,800 53,020 103,970 53,940Other Current Obligations 154,510 139,950 148,790 117,900Total Current Liabilities 607,740 439,150 515,300 388,600

Long-Term Debt 78,000 84,130 76,740 86,670

Stockholders Equity: Common Stock; 20.1M, 20.1M &20.0MShares, respectively, at par 2,010 2,010 2,000 2,000

Additional Capital, net 311,360 307,810 293,080 223,080Retained Earnings 983,810 875,160 624,400 341,666Less Treasury Stock, at cost (128,920) (38,940) ---- ----Total Stockholders Equity 1,168,260 1,146,040 919,480 566,740

Total Liabilities and Equity $1,854,000 $1,669,320 $1,511,520 $1,069,790

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How quickly does the prospective credit customer pay its bills ?

- Suppose that, on balance, we find the companys short-term solvency to be acceptable. Beforeagreeing to supply the company on a credit basis (or establishing credit terms for the company), weshould try to determine how quickly the company normally pays its bills. The Average Age ofPayables [(Average Payable Net Purchases) x 365] helps answer this question. That is, havingdetermined that a company has the capacity to pay its short-term obligations as they come due(through the current or quick ratios), it is also important to evaluate its payment practice. In a mannsimilar to calculating the average collection period for accounts receivable, one can compute theaverage age of a companys payable, which is the average number of days it takes topay itsinvoices. The age of the potential customers payable will give a reasonable estimate of how soon a

creditor can expect to be paid. This is particularly important for the small business that has just landa major customer.

A large corporation is likely to use very effective (from its own standpoint) cash managementprocedures to ensure prompt payment from its customers while delaying payment to its suppliers aslong as possible. Unless the small business is a critical suppler of its large corporate customer, thatcorporation may not accelerate its payment cycle to meet the suppliers cash flow needs. Thats whyis critically important for the decision-making process of the small-business owner/manager to be abto estimate the potentialcustomers payment cycle.

To calculate the average age of payables for K-L Fashions, we need to estimate purchases becausethey are not reported directly in the statements. Cost of goods sold (which is on the income statemeequals beginning inventory, plus net purchases, minus ending inventory. Therefore, purchases equathe cost of goods sold ($3,573,070) minus beginning inventory $857,090) plus ending inventory($738,630), or about $3,454,610. Using this calculation, we can calculate that the average age of K-Fashions payables is [($311,060 $3,454,610) x 365] = 32.9 days. If K-L Fashions were a potentialcustomer, we should not expect it to pay our invoices much sooner than 33 days.