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Productos Finas Case Solution

Solution Id Length Case Author Case Publisher
1089 1223 Words (3 Pages) David F. Hawkins Harvard Business School : 106037
This solution includes: A Word File A Word File and An Excel File An Excel File

Productos Finas is a Spanish operating and holding company whose president is concerned about implementing IFRS laws regarding consolidation. The consolidated statements for the group are prepared, and inter-company transfers are eliminated. Moreover, the comparison shows that the entire group is better off which is evident by the working capital and profitability ratios calculated. On the other hand, the activity ratios revealed that the working capital cycle is longer for the consolidated group as compared to Company P individually. Also, the effect of closing inventory regarding unrealized profit has been calculated, and the adjustment being made.

Following questions are answered in this case study solution

  1. Complete the worksheet and prepare:

  • A consolidated income statement,

  • A consolidated retained earnings statement  

  • A consolidated balance sheet.

  1. Compare the financial condition of company P on an unconsolidated basis with that presented by the consolidated statements. The chief accountant planned comparison included computation of

  • working capital

  • total assets

  • total capital

  • any other ratios he thought significant.

  1. Compare the profitability of company P on an unconsolidated basis with that shown by the consolidated statements.

  2. Illustrate the consolidation is adjusting accounting entries if €500 of company P’s €1500 sales to company S was still in company S’s year-end inventory.

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Case Analysis for Productos Finas

Compare the financial condition of company P on an unconsolidated basis with that presented by the consolidated statements. The chief accountant planned comparison included computation of

  • working capital,

  • total assets,

  • total capital and

  • any other ratios he thought significant.

The financial condition of the company on a consolidated basis gives an overview of the group as a whole. The ratios calculated in both forms of presentations help in a rational analysis of Company P as an individual company and as a parent company. Company P has current and quick ratios of 2.03 and 1.23 respectively while, on a consolidation basis, it has current and quick ratios of 2.53 and 1.67 respectively. The contrasting ratios show that on a consolidation basis, Company P has €0.50 more current assets available to pay its short-term liabilities than on a non-consolidation basis. Similarly, the quick ratio shows the strong position of Company P, when represented on a consolidation basis. However, it is noteworthy that the group on a whole and Company P, on the individual level, do not efficiently manage their receivables as around 42% of the total current assets are receivables.

Furthermore, the asset turnover ratio of 1.13 of the group is significantly higher, in comparison with the ratio of Company P’s, on the individual level, which is 0.88. The ratio shows that the group, on the whole, is better utilizing its assets to translate them into sales. Moreover, since Company S focuses on marketing Company P products, therefore, it is worthwhile to note that Company S has completed its job i.e. it has increased sales. Moreover, even though the companies do not acquire long-term debts, it is still important to look into the capital structure of both companies. Here, both companies do not contrast with each other significantly as Company P, individually, funds 23% of its assets through short-term debts whereas the group also funds 24% of its assets through short-term debts.

Similarly, the debt to equity ratio did not show any differences between Company P, individually, and the group. The debt-to-capital ratio of Company P is 0.29 whereas for the group it is 0.32. The slight difference between the two figures is due to the increase in accounts payable while consolidating with Company S.

The working capital cycle turnover (days) indicates how efficient a firm is in translating its less liquid assets into cash. The working capital cycle shows that Company P, on the individual level, can turn its input into cash flows within 60days whereas the group takes 66 days for doing the same.

Compare the profitability of company P on an unconsolidated basis with that shown by the consolidated statements.

The gross profit margin of Company P on a consolidated basis is 48%, a whole 8% more than its gross profit margin on the individual level, which is, 40%. The contrasting ratios show that the group on a consolidated basis can better turn its sales into profits than Company P on an unconsolidated basis. The reason is that Company P manufactures the products hence, the manufacturing cost increases the company’s costs of sales, whereas, Company S does the retail work that is to sell the goods manufactured to the third party. Therefore, in collaboration with Company S, Company P’s gross profit will increase.

Similarly, the net profit margin indicates the excessive expense borne by Company P on a consolidated basis. The net profit margin for Company P on the consolidated basis and unconsolidated basis is approximately the same –both margins nearing 10% – therefore Company P’s net profit margin doesn’t increase on a consolidated basis.

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