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 | |||
