Warford Corporation was formed five years ago through a public subscription of common stock. Lucinda Street, who owns 15% of the common stock, was one of the organizers of Warford and is its current president. The company has been successful but currently is experiencing a shortage of funds. On June 10, Street approached Bell National Bank, asking for a 24-month extension on two $30,000 notes, which are due on June 30, 2011 and September 30, 2011.
Another note of $7,000 is due on December 31, 2011, but Street expects no difficulty in paying this note on its due date. Street explained that Warford's cash flow problems are due primarily to the company's desire to finance a $300,000 plant expansion over the next two fiscal years through internally generated funds.
The commercial loan officer of Bell National Bank requested financial reports for the last two fiscal years. These reports follow:
Required
a. Calculate the following items for Warford 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
5. Percentage change in sales, cost of goods sold, gross profit, 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 Bell National Bank in evaluating Street's request for a time extension on Warford's notes.
c. Assume that the percentage changes experienced in fiscal year 2011, as compared with fiscal year 2010, for sales, cost of goods sold, gross profit, and net income after taxes, will be repeated in each of the next two years. Is Warford's desire to finance the plant expansion from internally generated funds realistic? Explain.
d. Should Bell National Bank grant the extension on Warford's notes, considering Street's statement about financing the plant expansion through internally generated funds? Explain.