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 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 |
$ |
57,000 |
$ |
136,000 |
| Marketable securities |
|
0 |
|
10,000 |
| Accounts receivable, net |
|
462,000 |
|
297,000 |
| Inventory |
|
943,000 |
|
587,000 |
| Prepaid expenses |
|
16,000 |
|
23,000 |
| |
|
|
|
|
| Total current assets |
|
1,478,000 |
|
1,053,000 |
| Plant and equipment, net |
|
1,589,330 |
|
1,503,590 |
| |
|
|
|
|
| Total assets |
$ |
3,067,330 |
$ |
2,556,590 |
| |
|
|
|
|
| Liabilities and Stockholders' Equity |
|
|
|
|
| Liabilities: |
|
|
|
|
| Current liabilities |
$ |
801,000 |
$ |
436,000 |
| Bonds payable, 11% |
|
605,000 |
|
605,000 |
| |
|
|
|
|
| Total liabilities |
|
1,406,000 |
|
1,041,000 |
| |
|
|
|
|
| Stockholders' equity: |
|
|
|
|
| Preferred stock, $25 par, 8% |
|
322,500 |
|
322,500 |
| Common stock, $10 par |
|
507,000 |
|
507,000 |
| Retained earnings |
|
831,830 |
|
686,090 |
| |
|
|
|
|
| Total stockholders' equity |
|
1,661,330 |
|
1,515,590 |
| |
|
|
|
|
| Total liabilities and stockholders' equity |
$ |
3,067,330 |
$ |
2,556,590 |
| |
|
|
|
|
|
| Modern Building Supply |
| Comparative Income Statement and Reconciliation |
|
This Year |
Last Year |
| Sales |
$ |
5,020,000 |
$ |
4,354,000 |
| Cost of goods sold |
|
3,863,000 |
|
3,443,000 |
| |
|
|
|
|
| Gross margin |
|
1,157,000 |
|
911,000 |
| Selling and administrative expenses |
|
644,000 |
|
538,000 |
| |
|
|
|
|
| Net operating income |
|
513,000 |
|
373,000 |
| Interest expense |
|
66,550 |
|
66,550 |
| |
|
|
|
|
| Net income before taxes |
|
446,450 |
|
306,450 |
| Income taxes (40%) |
|
178,580 |
|
122,580 |
| |
|
|
|
|
| Net income |
|
267,870 |
|
183,870 |
| |
|
|
|
|
| Dividends paid: |
|
|
|
|
| Preferred dividends |
|
25,800 |
|
25,800 |
| Common dividends |
|
96,330 |
|
70,980 |
| |
|
|
|
|
| Total dividends paid |
|
122,130 |
|
96,780 |
| |
|
|
|
|
| Net income retained |
|
145,740 |
|
87,090 |
| Retained earnings, beginning of year |
|
686,090 |
|
599,000 |
| |
|
|
|
|
| Retained earnings, end of year |
$ |
831,830 |
$ |
686,090 |
| |
|
|
|
|
|
|
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 |
|
|
| 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:
|
|
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 $241,000.)(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 $509,000.) (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, 8% |
% |
% |
| 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 |
% |
% |
| |
|
|