BNL Stores
Description
The case requires students to conduct a financial analysis of BNL Stores, a retail business. Case materials include a multi-year balance sheet, an income statement and statement of cash flows data. Students will prepare and interpret selected ratios, and prepare a basic statement of cash flows. The case entails use of financial statement analysis, balance sheets and income statements to provide a complete picture of an organization’s financial health. Data for the case are disguised and are drawn from the published financial statements of a major retailer that went bankrupt. The collapse of companies in similar circumstances influenced the Financial Accounting Standards Board’s moves to require a statement of cash flows and was historically significant.
Detailed case information could be found at Harvard Business School Cases: https://hbsp.harvard.edu/import/699232.
Learning objective
The case allows students to calculate a series of financial ratios and perform basic financial statement analysis. It also introduces the statement of cash flows and engages students in preparing simple cash flow statements. These exercises then demonstrate shortcomings in ratio analysis through showing that good financial statement ratios can conceal deteriorating liquidity. The limited warning of bankruptcy in this case is a caution to students in reading and interpreting financial statements. The case is suitable for use at the early stage of an MBA or undergraduate core course in accounting.
Required questions
1) Calculate the following 11 ratios for each year from 2018 to 2020. Do you notice any trends? What insight do these trends provide into the operations of BNL?
Profitability ratios: Gross profit margin, net profit margin, ROE, ROA;
Turnover ratios: Days receivables, inventory turnover, total asset turnover;
Liquidity ratios: current ratio, quick ratio;
Solvency ratios: Debt to equity ratio, debt to capitalization ratio
Note: For any ratios involving the average of an asset account, use the ending balance of that account instead of the average balance for simplicity. For example, in the calculation of ROA, the end balance of total assets should be used as the denominator instead of average total assets. That is,
ROA = [Net Income + interest expense * (1-tax rate)]/ ending total assets
Inventory turnover = cost of goods sold / ending inventory
Furthermore, debt to capitalization ratio is defined as follows:
debt to capitalization = long-term liabilities / (long-term liabilities + share capital)
2) Following the format in Exhibit 3, prepare statements of cash flows for BNL for each year from 2018 to 2020.
3) What do the cash flow statements show? What does this mean for the future viability of the firms? How helpful is this analysis in understanding the company’s stock price performance?
Format of the case analysis report
The case analysis should respond specifically to the case questions in a clear and concise manner. In general, the report should be no longer than four pages of text (12 font size, 1.5 lines spaced, one-inch margins) plus four pages of appendix including tables and figures if necessary.
The text should describe and explain the key information presented in the statements, as if you are presenting the case to a group of audience who are trying to understand the financial conditions of this company better.
You should submit your case report to the blackboard using the link associated with each case. Only one copy of the report is needed for each group. Please coordinate with your group members so that the same report will not be submitted by more than one member in your group.
