Nuware Case
Essay by JJ Liu • March 4, 2016 • Case Study • 918 Words (4 Pages) • 4,743 Views
1.) Restate Nuware’s 2013 earnings as if the company had used the same accounting methods and assumptions as R.P. Stuart. Your answer should focus on, but not necessarily be limited to, Nuware’s accounting for investments, receivables, inventory, and PP&E.
Nuware’s 2013 earnings is restated by using R.P. Stuart’s accounting methods and removing effect of one-time transaction.
INCOME STATEMENT | 2013 | ADJ | RESTATED | |
Net sales | 1,754,861 | 1,754,861 | ||
COGS | 1,001,892 | 5,600 | 1,007,492 | FIFO |
SG&A | 586,124 | 4,256 | 600,580 | RESERVE/AR |
10,200 | OTHER MARKETING | |||
Depreciation and amortization | 36,356 | 36,356 | ||
Interest and investment income | -9,382 | 6,700 | -2,682 | INVESTMENT |
Interest expense | 2,508 | 2,508 | ||
Income before tax | 137,363 | 26,756 | 110,607 | |
Income tax | 50,784 | 40,892 | ||
Net income | 86,580 | 69,715 | ||
Earnings per share | ||||
Basic | 0.86 | 0.69 | ||
Diluted | 0.82 | 0.66 | ||
Average shares outstanding | ||||
Basic | 100,883 | |||
Diluted | 105,823 |
For the inventory, we need to adjust Nuware’s inventory from LIFO to FIFO. As indicated in the footnote, Nuware’s inventory would be increased by 29.5 million in 2013 and 35.1 million in 2012 if using FIFO. Therefore, Nuware’s COGS would go up by 5.6 million under FIFO.
The percentage of reserves of accounts receivable for R.P. Stuart is 4.49% in 2013 while that for Nuware is 3.09%. Nuware set a relatively low level which may be considered as an aggressive accounting method. We apply the percentage of reserves of RP Stuart to Nuware in order to make Nuware’s risk of credit sales more comparable with R.P. Stuart.
Nuware deferred the advertising expenses, but GAAP requires costs should be realized as expenses as soon as it happened. So it should be added back.
Sales of available for sale securities resulted in net realized gains of $6.7 million should be removed from the retained earnings.
Both Nuware and R.P Stuart use straight line depreciation method. A longer depreciation period means a significantly lower deprecation deduction. However, there is not enough information to make adjustment on PP&E depreciation.
2.) Assess the financial performance of Nuware versus R.P. Stuart.
Nuware | R.P. Stuart | ||
2013 | 2013 RESTATED | 2013 | |
Net income | 86,580 | 69,715 | 25,361 |
EPS | 0.82 | 0.66 | 0.77 |
ROA | 7.3% | 5.5% | 3.8% |
ROE | 13.7% | 12.6% | 4.8% |
Sales growth | 2.7% | 2.7% | 7.9% |
Net profit margin | 4.93% | 3.97% | 4.47% |
Asset turnover | 1.40 | 1.38 | 0.74 |
Leverage(D/E) | 1.20 | 1.16 | 0.35 |
Current ratio | 1.59 | 1.61 | 3.53 |
Quick ratio | 1.12 | 1.55 | 2.53 |
Nuware’s original profitability ratio is higher than that of R.P.Stuart. ROE of Nuware is 8.9% higher than that of R.P.Stuart though the sales growth is much lower. Nuware uses assets more efficiently, resulting in higher asset turnover ratio. However, R.P. Stuart has a less leverage ratio than Nuware, which means that the risk embedded in R.P.Stuart is lower than Nuware. In terms of short-term liquidity risk, Nuware is also higher than R.P.Stuart because its current ratio and quick ratio are both lower than R.P. Stuart, respectively.
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