Modern Building Supply sells various building materials to retail outlets. The company has just

Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:

Modern Building Supply
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	90,000	$	200,000
Marketable securities		0		50,000
Accounts receivable, net		650,000		400,000
Inventory		1,300,000		800,000
Prepaid expenses		20,000		20,000
Total current assets		2,060,000		1,470,000
Plant and equipment, net		1,940,000		1,830,000
Total assets	$	4,000,000	$	3,300,000
Liabilities and Stockholders Equity
Liabilities:
Current liabilities	$	1,100,000	$	600,000
Bonds payable, 12%		750,000		750,000
Total liabilities		1,850,000		1,350,000
Stockholders equity:
Preferred stock, $50 par, 8%		200,000		200,000
Common stock, $10 par		500,000		500,000
Retained earnings		1,450,000		1,250,000
Total stockholders equity		2,150,000		1,950,000
Total liabilities and stockholders equity	$	4,000,000	$	3,300,000

Modern Building Supply
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	7,000,000	$	6,000,000
Cost of goods sold		5,400,000		4,800,000
Gross margin		1,600,000		1,200,000
Selling and administrative expenses		970,000		710,000
Net operating income		630,000		490,000
Interest expense		90,000		90,000
Net income before taxes		540,000		400,000
Income taxes (40%)		216,000		160,000
Net income		324,000		240,000
Dividends paid:
Preferred dividends		16,000		16,000
Common dividends		108,000		60,000
Total dividends paid		124,000		76,000
Net income retained		200,000		164,000
Retained earnings, beginning of year		1,250,000		1,086,000
Retained earnings, end of year	$	1,450,000	$	1,250,000

During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.

Assume that the following ratios are typical of companies in the building supply industry:

Current ratio	2.5
Acid-test ratio	1.2
Average collection period	18	days
Average sale period	50	days
Debt-to-equity ratio	0.75
Times interest earned	6.0
Return on total assets	10	%
Price-earnings ratio	9

Required:

1.	Linden State Bank is uncertain whether the loan should be made. To assist it in making a decision, you have been asked to compute the following amounts and ratios for both this year and last year:

a.	Working capital. (Omit the "$" sign in your response.)

	This year	Last year
Working capital	$	$

b.	Current ratio. (Round your answers to 2 decimal places.)

	This year	Last year
Current ratio

c.	Acid-test ratio. (Round your answers to 2 decimal places.)

	This year	Last year
Acid-test ratio

d.	Average collection period. (The accounts receivable at the beginning of last year totaled $350,000.) (Round your intermediate calculations and final answer to 1 decimal place. Use 365 days in a year.)

	This year	Last year
Average collection period	days	days

e.	Average sale period. (The inventory at the beginning of last year totaled $720,000.) (Round your intermediate calculations and final answer to 1 decimal place. Use 365 days in a year.)

	This year	Last year
Average sale period	days	days

f.	Debt-to-equity ratio. (Round your answers to 2 decimal places.)

	This year	Last year
Debt-to-equity ratio

g.	Times interest earned. (Round your answers to 1 decimal place.)

	This year	Last year
Times interest earned

2.	For both this year and last year:

a.	Present the balance sheet in common-size form. (Round your answers to 1 decimal place. Leave no cells blank - be certain to enter "0" wherever required. Omit the "%" sign in your response.)

Modern Building Supply
Common-Size Balance Sheets
	This Year	Last Year
Assets
Current assets:
Cash	%	%
Marketable securities
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Plant and equipment, net
Total assets	%	%
Liabilities and Stockholders' equity
Liabilities:
Current liabilities	%	%
Bonds payable, 12%
Total liabilities
Stockholders' equity:
Preferred stock, $50 par, 8%
Common stock, $10 par
Retained earnings
Total stockholders' equity
Total liabilities and equity	%	%

b.	Present the income statement in common-size form down through net income. (Input all amounts as positive values. Round your answers to 1 decimal place. Omit the "%" sign in your response.)

Modern Building Supply
Common-Size Income Statements
	This Year	Last Year
Sales	%	%
Cost of goods sold
Gross margin
Selling and administrative expenses
Net operating income
Interest expense
Net income before taxes
Income taxes
Net income	%	%

Explanation:

1.

		This Year		Last Year
a.	Current assets (a)	$	2,060,000	$	1,470,000
	Current liabilities (b)		1,100,000		600,000
	Working capital (a) - (b)	$	960,000	$	870,000
b.	Current assets (a)	$	2,060,000	$	1,470,000
	Current liabilities (b)	$	1,100,000	$	600,000
	Current ratio (a) ÷ (b)		1.87		2.45
c.	Quick assets (a)	$	740,000	$	650,000
	Current liabilities (b)	$	1,100,000	$	600,000
	Acid-test ratio (a) ÷ (b)		0.67		1.08
d.	Sales on account (a)	$	7,000,000	$	6,000,000
	Average receivables (b)	$	525,000	$	375,000
	Accounts receivable turnover (a) ÷ (b)		13.3		16.0
	Average collection period: 365 days ÷ accounts receivable turnover		27.4 days		22.8 days
e.	Cost of goods sold (a)	$	5,400,000	$	4,800,000
	Average inventory (b)	$	1,050,000	$	760,000
	Inventory turnover ratio (a) ÷ (b)		5.1		6.3
	Average sale period: 365 days ÷ inventory turnover		71.6 days		57.9 days
f.	Total liabilities (a)	$	1,850,000	$	1,350,000
	Stockholders' equity (b)	$	2,150,000	$	1,950,000
	Debt-to-equity ratio (a) ÷ (b)		0.86		0.69
g.	Net income before interest and taxes (a)	$	630,000	$	490,000
	Interest expense (b)	$	90,000	$	90,000
	Times interest earned (a) ÷ (b)		7.0		5.4