Case study – Financial Management and Analysis GsBrow is a publishing company. By the nature of the textbook market, heavy sales are made in the…

Case study – Financial Management and Analysis

GsBrow is a publishing company. By the nature of the textbook market, heavy sales are

made in the fourth quarter of each year for full semester sales. Most sales occur in

September, and again in February for the second semester. In this industry, the actual

printing and binding of a book have fixed cost that make printing many copies more

efficient.

Since publishing companies cannot reproduce books on demand, GsBrow’s policy is to

contract with the printing company to print a fixed number of copies, depending on

expected sales over at least one year and sometimes based on sales over several years.

If the books sell better than expected, the publisher company will order a second or

third printing. The printing company requires to place the publisher order as much as

four months before the books will actually be needed, and reorders will be placed as

much as two months ahead of actual sales. In 2015, the many books were decline in

popularity, and GsBrow got stuck with a large inventory of obsolete books.

GsBrow balance sheet shows the following balances in 2015:

Cash $342,500

Marketable securities 78,000

Receivables 210,000

Inventory 375,000

Lon-term investments 162,000

The company maintained almost the same amounts of sales for the last three years

which about $3,718,500, where the total current assets were less 25% in 2014 and 54%

in 2013 respectively.

A part of liability side on January 1, 2015 balance sheet of GsBrow is as follows:

Accounts Payable 262,000

Loan (10 years – 4.4%) 1,650,000

The inventory activities for the first quarter of 2015 were as follows:

Purchases Sales Balance

Beginning inventory $112,000

January 22 – cash $401,000 513,000

February 5 – on account $ 63,000

February 25 – cash 183,000

March 30 – cash 19,000

on account 21,000

As you are a financial analyst-consultant:

1. Study the financial policies of GsBrow and demonstrate to which alternative

policies regarding the size of current asset holdings they are implementing.

2. Explain for the Board of Directors how the curves of current assets and

investment holdings have worked during the last three years and why.

3. How you describe the current assets financing policy of GsBrow and if you want

to change this policy, to which extend you can go?

4. Again, explain for the directors using an illustration the company’s financing

policy.

Keep in mind that the long-term loan is subject to evaluation by the bank each two

years.