Financial Analysis of GNC Holdings: UCLA-NUS EMBA Program

This assignment delves into a comprehensive financial analysis of GNC Holdings, examining its financial statements for the years 2018 and 2017. The analysis involves calculating key financial metrics, such as bad debt expense, days sales outstanding, and inventory turnover, and evaluating their impact on the company's performance. The assignment covers various aspects, including the effects of write-offs, asset impairments, and restructuring charges on the balance sheet, income statement, and cash flow statement. Furthermore, it explores the impact of specific events like the Healthy Lifestyle Program, asset sales, and changes in depreciation methods. The student is required to assess the accuracy of management's estimates, analyze the impact of gift card liabilities, and understand the effects of stock repurchases on GNC's financial position, ultimately providing a detailed assessment of the company's financial health and performance.

Running head: GNC HOLDINGS
GNC HOLDINGS
Name of the student:
Name of the university:
Author Note:

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1. As we have done in class so many times, please provide an orderly “5-minute
summary” of the financial statements in the space provided below. (6 points)
Ans.
The chosen company for the assignment is the GNC holdings and financial statement
of the company has been analyzed accordingly. With the help of the various ratio, it is quite
possible to understand the overall financial position of the firm. This on the other hand will
allow the upper level management of the organization to take the respective decisions based
on the analysis of the company.

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(all $ are in thousands unless otherwise stated)
2. a. Considering the information
provided in the financial statements
and the notes, please determine the $
amount of the items shown on the
right for the year 2018 or as of
December 31, 2018, as appropriate.
(6 points)
b. Suppose that the amount that GNC
should have reported as a Bad Debt
Expense for 2018 was $4,019. By
what amount did GNC over- or
understate the items shown on the
right as a result of reporting the
incorrect Bad Debt Expense? (3 point)
Ans.
There is actually no effect in the bad debt
expenses of the company.
2. a. (i) Allowance for Doubtful
Accounts_$2563________________
(ii). Bad Debt Expense __$ 4019_____________
(iii). Accounts Receivable Written-off __$127317____________
(iv) Days Sales Outstanding__$_82249_____________
c. Circle the correct response Fill in the
amount
(i) EBIT overstated or understated by __overstated
by _$_367516 ______
(ii) Accounts Receivable as reported on the Balance Sheet
overstated or understated by overstated
by_$_667______
(iii) Cash Flow from Operating Activities
overstated or understated by _understated by
$ 124640_________
3. During 2018, GNC wrote off a
receivable in the amount of $100.
How did this write-off affect the
items shown at the right for that
year? (3 points)
Ans. The receivables of GNC have been
written off $100 and it will be treated by
adding $100 in the account receivables
of the company.
3.
Circle the correct response
(i) Accounts receivable, net decrease/increase/ no effect – The
net account receivables has increased.
(ii) Operating profit margin decrease/increase/ no effect – The
operating profit margin has increased in comparison to the previous
year.
(iii)Total receivables outstanding… decrease/increase/ no effect – The
total receivables outstanding of the company has increased in
comparison to the previous year.

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4. Has management been accurate in
estimating the amount of accounts that
will prove to be uncollectible over the
past three years? Provide evidence to
support your answer. (2 points)
4.
The management has been accurate in estimating the amount of
accounts which is quite uncollectable over the past three years. The
reasons behind that is the amount which is collected in terms of
receivables is based on the evaluation of the actual amount.

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5. a. On average, how many days did it
take for GNC to sell its inventory? (2
points)
b. In calculating the inventory turnover
ratio, why would it be potentially
misleading to use the inventory level
at the end of the year rather than the
average inventory level? (2 points)
5. a. The inventory turnover in days taken by the GNC to sell its
inventory is about 107.4 for the financial year 2018.
b.
As per the evaluation of the inventory turnover ratio of the firm it
can be said that based on the average inventory level, the inventory
turnover ratio has increased from 2017 to 2018 where the days is
from 85.6 to 107.445. There is actually no misleading in the
inventory level due to the fact that the inventory turnover ratio of
GNC has improved.
6. a. A footnote reveals that during
2018, GNC wrote-off $2,500 of
inventory. What accounts would have
been affected when GNC recorded the
write-off? (2 points)
b. How would the items shown on the
right be affected by this write-off in
fiscal 2018? (3 points)
6. a.
The inventory of the company has been written off $2500 which will be
charged to the inventory account. It will be written off to the inventory
account of GNC.
b. Circle the correct response
(i) EBIT decrease / increase / no effect – The
EBIT of GNC has increased by 639% in comparison to the previous
year 2017.
(ii) Inventory Turnover (in days) decrease / increase / no effect – The
inventory turnover ratio of the company has increased by 20% in
comparison to the previous year 2017.
(iii) Gross margin ratio decrease / increase / no effect – The
gross margin ratio of GNC has decreased by 1% in comparison to the
previous year 2017.
7. a. GNC developed a new Healthy
Lifestyle Program in 2017. The costs
were capitalized as Deferred Charges.
The program was rolled out to the public
in June 2018. In early 2018, GNC
finalized the program, spending
$23,000.
What was the amount of Deferred
Charges that were removed from the
Balance Sheet in 2018? (2 points)
b. In January 2019, it was determined
that the Healthy Lifestyle Program was
not a success. Management decided to
discontinue the program. How would this
7. a.
GNC finalized the programs which actually includes the spending of
$ 23000 and the amount of the deferred charges in the early 2018
was $ 8100 due to the reason that the program was rolled out
accordingly.
The amount of $ 8100 has been removed from the deferred charges
from the year 2007.
b. Circle the correct response
(i) Deferred Charges decrease / increase / no effect –
The deferred charges has decreased by 9% in comparison to the
previous year, which is 2017.
(ii) Cost of Goods Sold decrease / increase / no effect –
The cost of good sold of GNC has decreased by 5% in comparison to

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decision affect the items shown on the
right? (3 points)
Ans. As the upper level management of
the company takes the decision, it is
based on the various evaluation
techniques. This will definitely benefit
the management as healthy lifestyle
program was not a great success. The
program in that case is discontinued as it
was not benefit the aspects of the
business.
the previous year 2017.
(iii) Cash Flow from Operations decrease / increase / no effect –
The cash flow from the operating activity has decreased by 130% in
comparison to the previous year 2017.

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8. a. In 2018, GNC recorded an asset
impairment charge of $38,236. Note 3
mentions “Property and equipment” of
$9,521. What procedure did
management use to determine that the
property and equipment was impaired?
(2 points)
b. How did the recording of the
impairment for the property and
equipment affect the items on the right?
(3 points)
Ans.
The recording of the impairment of
property will definitely create effect on
the long lived asset impairment charges
based on the intangible assets
(Schaltegger and Burritt, 2017).
8. a.
The procedure which is followed in that case are the equipment and
property of $ 9521 followed as per the IAS 36 which is applied in
this case.
b. Circle the correct response
(i) PPE, net increased / decreased / no effect -
(ii) Total liabilities / total assets increased / decreased / no effect –
The ratio in that case has significantly reduced by 11% compared to
the year 2017.
(iii) Cash flow from investing increased / decreased / no effect
Activities – The cash flow from investing activity of GNC has
also reduced by 44%.
9. In the following year, 2019, GNC
managed to sell some of its low
performing assets for $15.0 million cash.
At the time of the sale, the assets, which
originally cost $25 million, had $8
million of accumulated depreciation.
What is the impact of this sale on each
of the financial statements?
Provide account names and dollar
amounts. (5 points)
9. (1) Income Statement
The effect of the loss on sale of asset is $2 which is treated in the
debit side of the income statement.
(2) Balance Sheet
In balance sheet, the treatment will be provided where the
accumulated depreciation is charged in the balance sheet of the
company.
(3) Cash Flow Statement
The cash flow statement the effect will be charged in the cash flow
from investing activity of the firm.

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10. As shown on the Income Statement in
2018, GNC had a restructuring charge
related to its international operations.
Among the things it did were:
 Lay-off employees which required
$2,400 in severance payments,
 Write-off $3,500 of store fixtures,
 Close 15 stores which triggered lease
cancellation fees.
Show the changes in the Balance Sheet
on the right, filling in the amount for the
Lease Cancellation fees, the Change in
Total Assets and the Change in Total
Liabilities and Equity. Make sure that the
Balance Sheet balances! (5 points)
10.
__________________Balance Sheet____________________
Δ Total Assets = 8087_____ Δ Total Liab. & Equity =
___-162328____

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(These dollar values are not in
thousands.)
11. a. On the first day of 2016, GNC
bought new mirrors that it placed around
its 400 stores in California to make its
customers look thinner and tanner. The
cost per store was $2,250. The mirrors
are being depreciated on a straight-line
basis with a residual value of $125 per
store over a 5-year life. In 2018, what
was GNC’s total depreciation expense
related to these mirrors? (2 points)
b. As a result of an internal study, in
2019 the estimated residual value of
each stores’ mirrors was increased to
$225 and the estimated life of the
mirrors was revised from a total of 5
years to a total of 9 years. What is the
total depreciation expense on the mirrors
for 2019 based on these changes in the
estimated life and residual value? (3
points)
c. How would the change in (b) impact
the items shown on the right relative to
what they would have been had the
change not been made? (3 points)
11.
a. the total Depreciation expense related to these mirrors is= (2250-
125)/5=425
b. the total depreciation expense on the mirrors for 2019 based on
these changes un the estimated life and residual value is= (2250-
225)/8=253.125
c. Circle the correct response
(i) Operating Income higher / lower / no effect
(ii) Cash flow from Operating Activities higher / lower / no effect
(iii) PPE on the Balance Sheet higher / lower / no effect
12. a. Within other current liabilities,
GNC reports a “Gift card liability.” The
balance of this account was $5,500 as of
December 31, 2018 and $6,700 as of
December 31, 2017. During 2018, a total
amount of $4,000 of gift cards were used.
What was the dollar amount of gift cards
purchased during 2018? (3 points)
b. How much revenue did GNC report in
2018 as a result of customers using the
gift cards? (2 points)
c. Given the information in (a) and (b),
during 2018, how much did the gift cards
contribute to Cash from Operating
Activities? (2 points)
12. a. the dollar amount of gift cards purchasing during 2018 is
( 5500+4000-6700)=2800.
b. 2,353,523 revenue GNC report in 2018 as a result of customers
using the gift cards (Renz and Herman, 2016).
c. the gift cards contribute to cash from operating activities is 95,868

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13. a. On average, how much did GNC
pay to repurchase a share of its stock?
(2 points)
b. How would the repurchase transaction
in (a) affect the items shown on the
right? (3 points)
13. a. on average 0.001 par value pay to repurchase a share of its
stock.
b. Circle the correct response
(i) Retained Earnings increase / decrease / no effect
(ii) Total liabilities/Total equity increase / decrease / no effect
(iii) Common stock increase / decrease / no effect
14.. An analyst recently commented on
the deterioration of GNC’s gross profit
margin since 2016. She argued that if the
2016 margin had been maintained in
2018, operating income for that year
would have been over $40.0 million
higher. Is she right? Explain. (3 points)
14. No, it will be lower than 40 million. In 2016 gross profit is
886591. We less all the operating expenses in 20l8 with the
gross profit of 2016. Then finally we deducted the 2018
operating income.
(886591-620885+513-38236-784)=227199
(227119-112353)=114846
15. a. According to the Cash Flow
Statement, GNC’s cash Capital
Expenditures were $18,981 in 2018.
Assuming that this amount was spent
only on Property and Equipment and that
there were no other expenditures, what
was the original cost of Property and
Equipment that was sold during 2018?
(3 points)
b. Note 4 mentions that the depreciation
expense is included as part of Cost of
Sales and SG&A expense on the
Consolidate Statements of Operations.
Why would a portion of this be reflected
in Cost of Sales? (2 points)
15. a. the original cost of property and equipment is (18981-
9521) = 9460 that was sold during 2018 (Otley, 2016).
b. The depreciation expenses is included in cost of sales because
of sale of an assets is effected due to sale of the property.

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16. a. What is GNC’s asset turnover ratio
for 2018? (2 points)
b. Comparing GNC’s ratio with the
industry average of 2.20, what do you
conclude? (2 points)
16. a. asset turnover ratio= net sales/ avg. total assets
= 2353523/(1527850+1519763)/2
=1.54
b. it is concluded that industry averages ratios is higher
comparing to GNC’s asset turnover ratio.

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17. Statements in a. - f. below pertain to Cash flows from operating activities for 2018. (The line items are
bolded on the Cash Flow Statement.) Determine whether the statements below are true or false by circling
the correct response. Provide an explanation for your answer. (All $ amounts in thousands.) (12 points)
a. Depreciation and amortization
produced cash of $47,105 for
operating activities (Malmi 2016).
a. True / False
TRUE—the cash flow statement of the company during the year
presenting the following details.
b. Long-lived asset impairments
indicates that $38,236 was
expensed and accrued as a
liability on the Balance Sheet.
b. True / False
FALSE—such balance is reflecting in the cash flows statements
operating expenses, not in liability side as expenses.
c. Stock-based compensation of
$6,808 was paid to employees in
2018.
c. True / False
TRUE- such balance is reflecting in the cash flows statements
operating expenses.
d. Accounts payable of $3,351
indicates that this amount passed
through the Income Statement and
was paid out in cash.
e. True / False
FALSE- the accounts payable amount is different that passed in
income statement.

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18. a. How much cash did GNC
collect from its customers in 2018?
(2 points)
b. How much cash did GNC pay to its
suppliers in 2018? (2 points)
c. Why is it important to know the
information in (a) and (b)?
18. a. companies’ income statement and financial statement is not
disclosing any information relating to any collection from the
customer during 2018 (Quattrone 2016).
b. companies income statement and financial statement is not
disclosing any information relating to any supplier from the
customer during 2018 (Maas, Schaltegger and Crutzen, 2016).
c. companies income statement and financial statement is not
disclosing any information relating to any supplier and collection
from the customer during 2018.

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19. Considering all of the information provided about GNC, what are the 4 main items of
advice that you would give management? Explain. (8 points)
 The company needs to maintain its financial statements and income statement properly;
the data are not properly disclosed in the accounting report. For example the collection
for the debtors and amount payable to creditors are not present in such statement.
 The company need to maintain some effecting strategy relating to the financial growth
of the company.
 Company needs to increase the amount of revenues through increasing its operating
activities (Bromwich and Scapens, 2016).
 Company needs to disclose its depreciated amortization property in the financial
statement.

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References
Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years on.
Management Accounting Research, 31, pp.1-9.
Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability
assessment, management accounting, control, and reporting. Journal of Cleaner Production,
136, pp.237-248.
Malmi, T., 2016. Managerialist studies in management accounting: 1990–2014. Management
Accounting Research, 31, pp.31-44.
Otley, D. (2016). The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, 45-62.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it wiser?.
Management Accounting Research, 31, pp.118-122.
Renz, D.O. and Herman, R.D. eds., 2016. The Jossey-Bass handbook of nonprofit leadership
and management. John Wiley & Sons.
Schaltegger, S. and Burritt, R., 2017. Contemporary environmental accounting: issues,
concepts and practice. Routledge.
Weetman, P., 2019. Financial and management accounting. Pearson UK.