60.1K

Verified Solution

Link Copied!

Problem 13-11A Common-Size Statements and Financial Ratios for Creditors [LO1, LO3, LO4]

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 companys financial statements for the most recent two years follow:

Modern Building Supply
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	50,000	$	133,000
Marketable securities		0		13,000
Accounts receivable, net		478,000		293,000
Inventory		937,000		590,000
Prepaid expenses		17,000		24,000
Total current assets		1,482,000		1,053,000
Plant and equipment, net		1,619,164		1,519,632
Total assets	$	3,101,164	$	2,572,632
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	803,000	$	442,000
Bonds payable, 11%		602,000		602,000
Total liabilities		1,405,000		1,044,000
Stockholders' equity:
Preferred stock, $25 par, 7%		307,500		307,500
Common stock, $10 par		510,000		510,000
Retained earnings		878,664		711,132
Total stockholders' equity		1,696,164		1,528,632
Total liabilities and stockholders' equity	$	3,101,164	$	2,572,632

Modern Building Supply
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,020,000	$	4,363,000
Cost of goods sold		3,870,000		3,437,000
Gross margin		1,150,000		926,000
Selling and administrative expenses		636,000		546,000
Net operating income		514,000		380,000
Interest expense		66,220		66,220
Net income before taxes		447,780		313,780
Income taxes (35%)		156,723		109,823
Net income		291,057		203,957
Dividends paid:
Preferred dividends		21,525		21,525
Common dividends		102,000		66,300
Total dividends paid		123,525		87,825
Net income retained		167,532		116,132
Retained earnings, beginning of year		711,132		595,000
Retained earnings, end of year	$	878,664	$	711,132

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.

	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 $245,000.)(Do not round intermediate calculations. Round your final answers 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 $501,000.) (Do not round intermediate calculations. Round your final answers 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. Due to rounding, figures may not fully reconcile down a column.)

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, 11%	%	%
Total liabilities	%	%
Stockholders' equity:
Preferred stock, $25 par, 7%	%	%
Common stock, $10 par	%	%
Retained earnings	%	%
Total stockholders' equity	%	%
Total liabilities and stockholders' 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. Due to rounding, figures may not fully reconcile down a column.)

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	%	%

Answer & Explanation Solved by verified expert

See Answer