Question - Ratio Computations and Additional Analysis
Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, Daniel Brown approached the Topeka National Bank, asking for a 24- month extension on two $ 35,000 notes, which are due on June 30, 2011, and September 30, 2011. Another note of $ 6,000 is due on March 31, 2012, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn's cash flow problems are due primarily to the company's desire to finance a $ 300,000 plant expansion over the next 2 fiscal years through internally generated funds.
The commercial loan officer of Topeka National Bank requested financial reports for the last 2 fiscal years.
BRADBURN CORPORATION STATEMENT OF FINANCIAL POSITION MARCH 31
Assets 2011 2010
Cash $ 18,200 $ 12,500
Notes receivable 148,000 132,000
Accounts receivable (net) 131,800 125,500
Inventories (at cost) 105,000 50,000
Plant & equipment (net of depreciation) 1,449,000 1,420,500
Total assets $ 1,852,000 $ 1,740,500
Liabilities and Owners' Equity Accounts payable $ 79,000 $ 91,000
Notes payable 76,000 61,500
Accrued liabilities 9,000 6,000
Common stock (130,000 shares, $ 10 par) 1,300,000 1,300,000
Retained earnings 388,000 282,000
Total liabilities and owners' equity $ 1,852,000 $ 1,740,500
*Cash dividends were paid at the rate of $ 1 per share in fiscal year 2010 and $ 2 per share in fiscal year 2011.
BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31
2011 2010
Sales $ 3,000,000 $ 2,700,000
Cost of goods sold 1,530,000 1,425,000
Gross margin $ 1,470,000 $ 1,275,000
Operating expenses 860,000 780,000
Income before income taxes $ 610,000 $ 495,000
Income taxes (40%) 244,000 198,000
Net income $ 366,000 $ 297,000
*Depreciation charges on the plant and equipment of $ 100,000 and $ 102,500 for fiscal years ended March 31, 2010 and 2011, respectively, are included in cost of goods sold.
Instructions -
(a) Compute the following items for Bradburn Corporation.
(1) Current ratio for fiscal years 2010 and 2011.
(2) Acid- test (quick) ratio for fiscal years 2010 and 2011.
(3) Inventory turnover for fiscal year 2011.
(4) Return on assets for fiscal years 2010 and 2011. (Assume total assets were $ 1,688,500 at 3/ 31/ 09.)
(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2010 to 2011.
(b) Identify and explain what other financial reports and/ or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown's request for a time extension on Bradburn's notes.
(c) Assume that the percentage changes experienced in fiscal year 2011 as compared with fiscal year 2010 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn's desire to finance the plant expansion from internally generated funds realistic? Discuss.
(d) Should Topeka National Bank grant the extension on Bradburn's notes considering Daniel Brown's statement about financing the plant expansion through internally generated funds? Discuss.