Part 1:
Family Dollar Stores, Inc. is the company that will be portrayed in this project. It is becoming one of the fastest growing discount stores chains in the United States. Family Dollar has stores ranging all over the U.S., with new stores being put up daily. Family Dollar shows the years 2003 and 2002 in each of the primary comparative financial statements. The annual report was audited in Charlotte, North Carolina 28202 by PricewaterhouseCoopers LLP. The independent audit “includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. The auditors state that, “A number of facts could cause actual results to differ materially from those expressed in any forward-looking statements, whether written or oral, made by or on behalf of the Company. Such factors include, but are not limited to, competitive factors and pricing pressures, general economic conditions, the impact of acts of war or terrorism, etc.” However, the auditors believe that their statements are accurate and very much inline with the companies audit.
The details about changes in the amount of retained earnings can be found in the Consolidated Balance Sheets. It can also be found in the Consolidated Statements of Shareholders’ Equity of the annual report. In 2003 retained earnings were $1,315,600 and in 2002 they showed $1,118,015.
The annual report shows the companies annual net cash flow for three consecutive years in operating activities, investing activities, and financing activities. The financial statement showed both positive and negative flow for the activities during the years 2003, 2002, and 2001.
For operating activities the graph shows a positive increase from 2001 to 2002 and a decrease from 2002 to 2003. For investing activities there has been a positive increase of cash flow for all three years. Financing activities show a decrease of cash from 2001 to 2002 and a positive increase going into 2003. The cash balance for the three years showed an increase from $21,753 in 2001 to $220265 in 2002. However, there was a slight decrease in 2003 showing a balance of $206,731.
Over the past three years Family dollar has shown an increase in net sales from the years 2001 to 2003. The net sales for 2001 were $3,665,362 and for 2002 net sales increased to $4,162,652 and a slightly smaller increase in 2003, net sales were $4,750,171.
Family Dollar had a balance of $1,208,474 in the forth quarter year ending December 31, 2003. The company showed that 4th quarter net sales were $1,058,272 in 2002 relative to the 4th quarter net sales in 2003 of $1,208,474. Family Dollar has a percent change of 14% when comparing 4th quarter net sales from 2003 and 2002.
* Percent Change = (2003/2002)
* Percent Change = ($1208474/$1058272) = 14%
When looking at the pattern of quarterly sales, the easiest way to visually show it is to perform the trend percentage on each quarter for 2003.
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1st Quarter |
2nd Quarter |
3rd Quarter |
4th Quarter |
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100% |
113% |
106% |
109% |
When looking at the trend percentage graph, it’s easy to see that there was a increase in net sales from the 1st quarter to the 2nd quarter. There was a slight decrease going into the 3rd quarter and another slight increase going into the 4th quarter.
In the annual report, the Family Dollar management did an analysis of the company’s financial conditions. Management reported that net sales had increased 14% in 2003 compared to 2002 and they had also increased net sales by 13.6% in 2002 compared to 2001. Management also reported sales in existing stores increased 3.8% in 2003 and 5.8% in 2002, compared with prior years. They felt the increase was due to customers’ response to the company’s everyday low pricing and shift in merchandise mix toward more basic merchandise. Selling, general and administrative expenses increased 15.2% in 2003 compared with 2002, and increased 13.6 in 2002 compared with 2001. Management states that these expenses were due to additional costs arising from the continued growth in the number of stores in operation and the addition of a seventh distribution center. Family Dollar reported an addition of 411 new stores in 2003, and increase in cash dividends declared per share of Common Stock of 13.7%.
Management believes that there are numerous primary indicators of the company’s financial strength. Family Dollar’s financial strength permits them to make substantial investments in the company’s future. They believe that their increase in the number of stores was a strong attribute to making them one of the fastest growing discount store chains in the U.S. In the challenging retail sales environment, management believes that their apparel departments have done an outstanding job of raising quality standards while at the same time hitting the low-end price points their customers need. They have also pushed the same focus on the quality of their home departments by selling not only goods with higher quality, but they are better coordinated and more consistent with fashions seen in higher end retailers. These changes along with better
meeting their customers’ needs have contributed to the sales gains in 2003. In 2003, Family Dollar has also introduced the theory of the “Store of the Future.” The point of the “Store for the Future” is to improve the shopping experience for their customers while making processes easier for their associates.
Family Dollar operates a chain of neighborhood retail discount stores in 43 states in the Northeast, Southeast, Midwest, and Southwest. They do not sell goods not Operate any stores outside of the United States. However, with the company’s fast growth, the operation of stores outside of the United States could increase the sales and growth of Family Dollar in the future.
Part 2:
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a.
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1. Current
Ratio |
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30-Aug-03 |
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31-Aug-02 |
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$1,156,492/$595,331=
1.9 |
$1,055,859/$530,780=
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2. Quick
Ratio |
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30-Aug-03 |
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31-Aug-02 |
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$206,731/$595,331=
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$220,265/$530,780=
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3. Amount of working
capital |
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30-Aug-03 |
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31-Aug-02 |
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$1,156,492-$595,331=
$561,161 |
$1,055,859-$530,780=
$525,079 | |||||
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4. Percentage change
in working capital from the prior year. | ||||||
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$561,161/$525,079= 7%
increase |
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5. Percentage change
in cash and cash equivalents from the prior
year. | ||||||
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$206,731/$220,265= 6%
decrease |
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Liquidity is involved in the whole aspect of a business. It is the ability of a company to pay their operating debts as they become due throughout the year. In the case of Family Dollar, we looked at the current ratio, quick ratio, amount of working capital, percentage change in working capital from the prior year, and percentage change in cash and cash equivalents from the prior year. By analyzing these functions it has allowed us to determine how liquid Family Dollar is.
Based on our analysis of Family Dollar, we have concluded that the company’s liquidity appears to have slightly decreased during the most recent fiscal year. Looking at Family Dollar’s current ratio it has decreased from 2 in 2002 to 1.9 in 2003. This means that the company’s current assets are 1.9 times as large as its current liabilities. Although in 2002 the company’s current assets were two times as large as its liabilities, which is normally a good credit risk, the lower current ratio in 2003 should have a minimal effect on Family Dollar’s liquidity.
The liquidity of a company is very important to a creditor in determining a company’s credit risk. Current assets and current liabilities are very useful in determining the short-term liquidity of a company. Family Dollar currently has a working capital of $561,161, which is the excess of current assets over current liabilities. The current amount of working capital is slightly larger than the previous year, and very similar with other competitor’s working capitals. In addition, they show a current ratio of 1.9, which is average among other small retailers. Compared to 2002, they have kept a very constant current ratio, leading us to believe that Family Dollar has kept a very consistent liquidity position. Though Family Dollar’s quick ratio is substantially low at .3 this does not affect their short-term liquidity because they have a short operating cycle and their inventory turns into cash quickly.
Other then Family Dollar’s ability to pay for its purchases, we have no reason to believe that they would have any trouble paying off their short-term debts within reason. Family Dollar’s liquidity consistency and level of working capital leads us to believe that they will have minimal problems in paying for their purchases.
Family Dollar is a financially sound company with a consistent liquidity position. Our company has assigned a “B” credit rating for Family Dollar. Our decision was based on Family Dollars current liquidity position as well as their current ratio and working capital. This information compared with past years and their competition gives us reason to believe Family Dollar has good debt-paying ability. This rating has been given because of Family Dollar’s consistent liquidity position. In addition, they have a current ratio, which is about average compared to that of their competition. With a working capital of $561,161, they have potential excess sources of cash remaining after their short-term debts are paid. This amount is very similar when compared with their competitors, leading us to believe that Family Dollar is a financially sound company. In addition, Family Dollar has had a very consistent current ratio and working capital, giving us more evidence that Family Dollar can indeed pay off its short-term debts. With this information we have concluded that Family Dollar has good debt paying ability. We have no reason to believe that Family Dollar would have any major difficulties paying off their short-term credit purchases.
Part 3:
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1 |
$ 4,750,171.00 |
/ |
$
4,162,652.00 |
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14.10% |
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(Net sales 2003)
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(Net sales 2002)
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2 |
$
247,475.00 |
/ |
$
216,929.00 |
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14.10% |
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(Net Income 2003) |
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(Net income
2002) |
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3 |
$
1,604,383.00 |
/ |
$
4,750,170.00 |
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33.70% |
gross
profit rate |
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(2003 Gross Margin) |
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(Net sales 2003) |
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$ 1,395,919.00 |
/ |
$ 4,162,652.00 |
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33.50% |
gross profit
rate |
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(2002 Gross Margin) |
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(Net sales 2002) |
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4 |
$ 247,475.00 |
/ |
$ 4,750,171.00 |
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5.20% |
net income of net sales |
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(Net Income 2003) |
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(Net sales 2003) |
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$ 216,929.00 |
/ |
$ 4,162,652.00 |
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5.20% |
net
income of net sales |
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5 |
$ 389,725.00 |
/ |
$ 1,870,157.00 |
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20.83% |
return on avg total
asset |
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(Operating Income 2003) |
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(avg. total assets) |
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(Total assets 2003)1,985,695
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1,754,619 assets 02
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/ |
2 = |
$
1,870,157.00 |
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$ 341,621.00 |
/ |
$ 1,577,182.00 |
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21.66% |
return on avg total
asset |
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(Operating Income 2002) |
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(avg. total assets) |
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(Total assets 2002 $1,754,619
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$1,399,745 assets 2001 |
/ |
2 = |
$
1,577,182.00 |
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6 |
$ 247,475.00 |
/ |
$ 1,232,958.50 |
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20.07% |
return on avg. total
equity |
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(Net Income 2003) |
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(avg.
stockholder equity) |
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(SE 2003 $1,310,969 |
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$1,154,948 SE 2002 |
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2 = |
$
1,232,958.50 |
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$ 216,929.00 |
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$ 1,056,981.50 |
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20.52% |
return on avg. total
equity |
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(Net Income 2002) |
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(avg. stockholder equity) |
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(SE 2002 $1,154,948 |
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$ 959,015 SE 2001 |
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2 = |
$
1,056,981.50 |
Profits are the heart of a business entity. No business can survive and accomplish
its goals unless it is profitable.
In the case of Family Dollar we have assessed the profitability of the
business entity, with interested in their net sales, net earnings, gross profit
rate, return on assets and return on equity. These functions will not only help in
determining if Family dollar is profitable but also help in evaluating if the
business is stable.
Family Dollars profitability is of interest to equity investors and
management. Investors and managers
are interested in the trend of net sales from year to year. Family Dollar has had a 14.1% change in
net sales from 2002 to 2003. This
increase means more products sold which intern will mean larger profit
gains. Investors must be weary when
annualizing this percentage change, they must make sure to take into account
inflation. Family Dollar has a
large enough percentage increase that inflation is not the only factor that had
been the reason for the increase.
Another measure of profitability is in the business gross profit rate,
which expresses its gross profit as a percentage of net sales. Family Dollar had raised their rate .2%
from 2002 to 2003. The 2003 rate is
now at 33.7% and is about average in the industry.
Investors consider net income as one of the most
significant figures in the income statement. The net increase or decrease in net
income is a direct result from all profit-directed activities. In 2003 Family Dollar had increased
their net income by 14.1% from 2002.
The increase meant $30,546 dollar gain in net income. Many equity investors also value net
income to be the most important measure, which represents the overall increase
or decrease in owner’s equity. In
many cases net income is computed as a percentage of net sales. In the case of Family Dollar there was
no increase or decrease in net income as a percentage of net sales they remained
consistent at 5.2% in years ending August 30, 2003 and August 31, 2002. The normal ratio of net income to net
sales varies greatly by industries but is usually between 5 to 15 %. Family Dollar looks to be on the
average in comparison to other small retail grocers.
The last two components in evaluating if Family Dollar
has been profitable or not; is their return on assets and their return on
equity. The return on assets ratio
is used to evaluate weather management has earned a reasonable return with the
assets under its control. In the
year ending August 30, 2003 Family Dollar has lost .83% return on assets to
remain at 20.83%. This loss is
evidence that management have found it difficult to remain efficient in their
use of all assets in their control.
Not only has return on assets dropped but return on equity had decreased
in 2003 as well. Return on equity
in 2002 was at 20.52% and dropped in 2003 to 20.07%. Family Dollar still remains at an
average level but decreases will not be tolerated long, investors will not
tolerate management’s downturn in return on investment.
In conclusion Family Dollar seems to be on a stable
track relative to its growth and profitability. The net income of 5.2% of sales revenue
is one of the most influential factors that indicate their success. In comparison with other grocers Family
Dollar is about on the average. Although, if management cannot revamp its losses
on return on equity and assets then the stability and profitability of the
business will surly decline.
Evaluations:
Brian Alexander
I worked on part one of this project. To complete part one; it was required to find all of the information from the annual report. This project helped me to start understanding what information consisted in the annual report along understanding how find out where the information is within the report. Along with these skills the project helped to better my team working skills which I will very much need in the near future. I believe that this is an important project because it helps give insight on how to analysis a company on such aspects of liquidity and profitability.
Nolan Lombardi
In our compressive group project of Family Dollar I was responsible for part three the profitability section. I helped in determining what company to choose for the project and completed the analysis of our company’s profitability. First and foremost this project helped develop team work skills. It aided in improvement in my communication skills, productivity and team focus. The projects also helped give me a better understanding about what a company’s financial statement looked like. I gained a better understanding about annual reports, liquidity and profitability of a business. Over-all I liked this project much better then 210’s project it help to see the information in a different prospective.
Deanna Ginther
This project was very beneficial. Although it was a time consuming project it was interesting to learn the aspects of Family Dollar and actually look at and analyze there annual report. Dan and I were responsible for part 2 of the project since we felt it was the most difficult part of the project. After doing part 2 of the project I would definitely agree with that too. Our group worked together well and we all finished our parts in a timely matter.
Dan Peitz
This project was a great learning experience. It made me understand the purpose of all the formulas I have learned in class. I enjoyed analyzing Family Dollar and applying information that I have learned in Accounting 211. Our group split up the project into sections. I was responsible for the completion of part two. This section gave me more insight into what liquidity means to a creditor. I used my computations of current ratio, quick ratio, amount of working capital, percentage change in working capital, and percentage change in cash and cash equivalents to analyze Family Dollar’s liquidity. Overall this project was a great learning experience that allowed me to apply my acquired accounting knowledge in a real life application.