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Nuware Case

Essay by   •  March 4, 2016  •  Case Study  •  918 Words (4 Pages)  •  4,850 Views

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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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