[Solved] Common-Size Statements and Financial Ratios for Creditors

PROBLEM 1511[LO1, LO3, LO4]
Modern Building Supply sells various building materials to retail outlets. The company has just approached 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 SupplyComparative Balance SheetThis Year / Last YearAssetsCurrent assets: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 90,000/ $ 200,000Marketable securities . . . . . . . . . . . . . . . . 0/ 50,000Accounts receivable, net . . . . . . . . . . . . . . 650,000/ 400,000Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300,000/ 800,000Prepaid expenses . . . . . . . . . . . . . . . . . . . 20,000/ 20,000Total current assets . . . . . . . . . . . . . . . . . . . 2,060,000/ 1,470,000Plant and equipment, net . . . . . . . . . . . . . . . 1,940,000 /1,830,000Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $4,000,000/ $3,300,000Liabilities and Stockholders EquityLiabilities:Current liabilities . . . . . . . . . . . . . . . . . . . . $1,100,000/ $ 600,000Bonds payable, 12% . . . . . . . . . . . . . . . . . 750,000 /750,000Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 1,850,000/ 1,350,000Stockholders equity:Preferred stock, $50 par, 8% . . . . . . . . . . . 200,000 /200,000Common stock, $10 par . . . . . . . . . . . . . . 500,000 /500,000Retained earnings . . . . . . . . . . . . . . . . . . . 1,450,000 /1,250,000Total stockholders equity . . . . . . . . . . . . . . . 2,150,000/ 1,950,000Total liabilities and stockholders equity . . . . $4,000,000 /$3,300,000Modern Building SupplyComparative Income Statement and ReconciliationThis Year Last YearSales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,000,000/ $6,000,000Cost of goods sold . . . . . . . . . . . . . . . . . . . . 5,400,000/ 4,800,000Gross margin . . . . . . . . . . . . . . . . . . . . . . . . 1,600,000 /1,200,000Selling and administrative expenses . . . . . . 970,000 /710,000Net operating income . . . . . . . . . . . . . . . . . . 630,000/ 490,000Interest expense . . . . . . . . . . . . . . . . . . . . . . 90,000/ 90,000Net income before taxes . . . . . . . . . . . . . . . . 540,000/ 400,000Income taxes (40%) . . . . . . . . . . . . . . . . . . . 216,000/ 160,000Net income . . . . . . . . . . . . . . . . . . . . . . . . . . 324,000/ 240,000Dividends paid:Preferred dividends . . . . . . . . . . . . . . . . . . 16,000 /16,000Common dividends . . . . . . . . . . . . . . . . . . 108,000/ 60,000Total dividends paid . . . . . . . . . . . . . . . . . . . 124,000/ 76,000Net income retained . . . . . . . . . . . . . . . . . . . 200,000 /164,000Retained earnings, beginning of year . . . . . . 1,250,000/ 1,086,000Retained earnings, end of year . . . . . . . . . . $1,450,000 /$1,250,000
Problems706 Chapter 15
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, and 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 . . . . . . . . . . . . . . . . 1.2Average collection period . . . . . . . 18 daysAverage sale period . . . . . . . . . . . 50 days . . . . . . . . . . . . 0.75Times interest earned . . . . . . . . . . 6.0Return on total assets . . . . . . . . . 10%Price-earnings ratio . . . . . . . . . . . 9Required:
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.b. Current ratio.c. Acid-test ratio.d. Average collection period. (The accounts receivable at the beginning of last year totaled $350,000.)e. Average sale period. (The inventory at the beginning of last year totaled $720,000.)f. Debt-to-equity ratio.g. Times interest earned.2. For both this year and last year (carry computations to one decimal place):a. Present the balance sheet in common-size form.b. Present the income statement in the common-size form down through net income.3. From your analysis in (1) and (2) above, what problems or strengths do you see for ModernBuilding Supply? Make a recommendation as to whether the loan should be approved.

Your project for this unit is to write personal narrative that is based on the many creative ideas found in using new media. Write multi-paragraph composition on one of the writing prompts