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IntegrativeCase2TrackSoftware,Inc.
Sevenyearsago,after15yearsinpublicaccounting,StanleyBooker,CPA,resignedhispositionasmanagerofcostsystemsforDavis,Cohen,and
OBrienPublicAccountantsandstartedTrackSoftware,Inc.Inthe2yearsprecedinghisdeparturefromDavis,Cohen,andOBrien,Stanleyhadspent
nightsandweekendsdevelopingasophisticatedcostaccountingsoftwareprogramthatbecameTracksinitialproductoffering.Asthefirmgrew,Stanley
plannedtodevelopandexpandthesoftwareproductofferings,allofwhichwouldberelatedtostreamliningtheaccountingprocessesofmediumtolarge
sizedmanufacturers.
AlthoughTrackexperiencedlossesduringitsfirst2yearsofoperation2009and2010itsprofithasincreasedsteadilyfrom2011tothepresent(2015).
Thefirmsprofithistory,includingdividendpaymentsandcontributionstoretainedearnings,issummarizedinTable1.
Stanleystartedthefirmwitha$100,000investment:hissavingsof$50,000asequityanda$50,000longtermloanfromthebank.Hehadhopedto
maintainhisinitial100percentownershipinthecorporation,butafterexperiencinga$50,000lossduringthefirstyearofoperation(2009),hesold60
percentofthestocktoagroupofinvestorstoobtainneededfunds.Sincethen,nootherstocktransactionshavetakenplace.Althoughheownsonly40
percentofthefirm,Stanleyactivelymanagesallaspectsofitsactivitiestheotherstockholdersarenotactiveinmanagementofthefirm.Thefirms
stockwasvaluedat$4.50persharein2014andat$5.28persharein2015.
TABLE1
TrackSoftware,Inc.,
Profit,Dividends,andRetainedEarnings,20092015
Netprofits
Dividends
Contributionto
after
taxes
paid
retainedearnings
Year
(1)
(2)
[(1)(2)]=(3)
2009
($50,000)
$0
($50,000)
2010
(20,000)
(20,000)
2011
15,000
15,000
2012
35,000
35,000
2013
40,000
1,000
39,000
2014
43,000
3,000
40,000
2015
48,000
5,000
43,000
Stanleyhasjustpreparedthefirms2015incomestatement,balancesheet,andstatementofretainedearnings,showninTables2,3,and4,alongwith
the2014balancesheet.Inaddition,hehascompiledthe2014ratiovaluesandindustryaverageratiovaluesfor2015,whichareapplicabletoboth2014and
2015andaresummarizedinTable5.Heisquitepleasedtohaveachievedrecordearningsof$48,000in2015,butheisconcernedaboutthefirmscash
flows.Specifically,heisfindingitmoreandmoredifficulttopaythefirmsbillsinatimelymannerandgeneratecashflowstoinvestors,bothcreditors
andowners.Togaininsightintothesecashflowproblems,Stanleyisplanningtodeterminethefirms2015operatingcashflow(OCF)andfreecashflow
(FCF).
Stanleyisfurtherfrustratedbythefirmsinabilitytoaffordtohireasoftwaredevelopertocompletedevelopmentofacostestimationpackagethatis
believedtohaveblockbustersalespotential.Stanleybegandevelopmentofthispackage2yearsago,butthefirmsgrowingcomplexityhasforced
himtodevotemoreofhistimetoadministrativeduties,therebyhaltingthedevelopmentofthisproduct.
Stanleysreluctancetofillthispositionstemsfromhisconcernthattheadded$80,000peryearinsalaryandbenefitsforthepositionwouldcertainlylower
thefirmsearningspershare(EPS)overthenextcoupleofyears.Althoughtheprojectssuccessisinnowayguaranteed,Stanleybelievesthatifthe
moneywerespenttohirethesoftwaredeveloper,thefirmssalesandearningswouldsignificantlyriseoncethe2to3yeardevelopment,production,and
marketingprocesswascompleted.
Withalltheseconcernsinmind,StanleysetouttoreviewthevariousdatatodevelopstrategiesthatwouldhelpensureabrightfutureforTrackSoftware.
Stanleybelievedthataspartofthisprocess,athoroughratioanalysisofthefirms2015resultswouldprovideimportantadditionalinsights.
TABLE2
TrackSoftware,Inc.,IncomeStatement($000)
fortheYearEndedDecember31,2015
Salesrevenue
$1,550
Less:Costofgoods
sold
$1,030
Grossprofits
$520
Less:Operatingexpenses
Sellingexpense
$150
Generalandadministrativeexpenses
270
Depreciationexpense
11
Totaloperatingexpense
431
Operatingprofits(EBIT)
$89
Less:Interestexpense
29
Netprofitsbeforetaxes
$60
Less:Taxes(20%)
12
Netprofitsaftertaxes
$48
TABLE3
TrackSoftware,Inc.,BalanceSheet($000)
December31
Assets
2015
2014
Cash
$12
$31
Marketablesecurities
66
82
Accountsreceivable
152
104
Inventories
191
145
Totalcurrentassets
$421
$362
Grossfixedassets
$195
$180
Less:Accumulateddepreciation
63
52
Netfixedassets
$132
$128
Totalassets
$553
$490
Accountspayable
$136
$126
Notespayable
200
190
Accruals
27
25
Totalcurrentliabilities
$363
$341
Longtermdebt
$38
$40
Liabilitiesandstockholdersequity
Longtermdebt
$38
$40
Totalliabilities
$401
$381
at$0.40parvalue)
$20
$20
Paidincapitalinexcessofpar
30
30
Retainedearnings
102
59
Totalstockholdersequity
$152
$109
Totalliabilitiesandstockholdersequity
$553
$490
Commonstock(50,000sharesoutstanding
TABLE4
BOOKS
STUDY
TUTORS
INTERNSHIPS
COLLEGES
PLAY
TrackSoftware,Inc.,
StatementofRetainedEarnings($000)
fortheYearEndedDecember31,2015
Retainedearningsbalance(January1,2015)
$59
Plus:Netprofitsaftertaxes(for2015)
48
Less:Cashdividendsoncommonstock(paidduring2015)
Retainedearningsbalance(December31,2015)
$102
TABLE5
Industrial
Actual
Average
Ratio
2014
2015
Currentratio
1.06
1.82
Quickratio
0.63
1.1
Inventoryturnover
10.4
12.45
Averagecollectionperiod(days)
29.6
20.2
Totalassetturnover
2.66
3.92
Debtratio
0.78
0.55
Timesinterestearnedratio
5.6
Grossprofitmargin
32.1%
42.3%
Operatingprofitmargin
5.5%
12.4%
Netprofitmargin
3.0%
4.0%
Returnontotalassets(ROA)
8.0%
15.6%
Returnoncommonequity(ROE)
36.4%
34.7%
Price/earnings(P/E)ratio
5.2
7.1
Market/book(M/B)ratio
2.1
2.2
TODO
a.(1)OnwhatfinancialgoaldoesStanleyseemtobefocusing?
Isitthecorrectgoal?Whyorwhynot?
(2)Couldapotentialagencyproblemexistinthisfirm?
Explain.
b.Calculatethefirmsearningspershare(EPS)foreachyear,
recognizingthatthenumberofsharesofcommonstockoutstanding
hasremainedunchangedsincethefirmsinception.
CommentontheEPSperformanceinviewofyourresponseinparta.
c.UsethefinancialdatapresentedtodetermineTracksoperatingcashflow(OCF)
andfreecashflow(FCF)in2015.
EvaluateyourfindingsinlightofTrackscurrentcashflowdifficulties.
Answer
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