Essay on Accounting Microline Case

1425 Words Sep 1st, 2012 6 Pages
Memorandum
To: Sharon Sonneborn
From:
Date: 9/9/2012
Re: Potential Acquisition of Garmin Ltd. And Subsidiaries Garmin Ltd is under consideration for acquisition by Mega Industries. As a result, an assessment of Microline’s financial condition and assessment is necessary to evaluate the company as a suitable candidate. Our team has prepared a memo stating Microline’s earning power potential , solvency position, and to which extent the companies financial statements reflect the true financial position and performance. We have also included an analysis regarding each of the six questions that you requested.
Microline’s profits increased significantly from 2010 to 2011 with the net income of 2011 being over 3 times the
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Their debt to equity ratio also showed an increase from .98 in 2010 to 1.16 in 2011. This increase is concerning, where for every dollar of shareholders equity, the companies owes $1.16 to creditors, resulting in a higher risk of the company being able to generate enough cash to pay its debt.
From 2010 to 2011 the inventory turnover decreased from 6 to 5.04 with an increase in sales inventory from 61 to 72 days. This could be cause for concern leading to inefficiency in controlling their inventory levels. In 2010 the company had an inventory write down of $750 dollars. There is no mention of the cause of this write down in the footnotes, however, this could be the result of either the companies inability to manage their inventory levels or obsolete products.

1) At the end of each year executive compensation is based on a bonus which is equivalent to 25% of the dollar amount where the corporation’s net income exceeds 10% of its shareholders equity. In 2011 Microlines net income exceeded its shareholders equity by $875 resulting in a payout to the executives of $218.75. There is evidence that management’s bonus caused it to enter into transactions at year end that may not have been in the shareholders best interest. The increase from net income was caused primarily by other gains which increased by

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