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Category > Management Posted 04 Nov 2017 My Price 10.00

Modern Building Supply

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 companyAc€?cs financial statements for the most recent two years follow:

Modern Building Supply
Comparative Balance Sheet
    This Year   Last Year
  Assets         
  Current assets:         
    Cash $ 52,000 $ 138,000     
    Marketable securities   0   19,000     
    Accounts receivable, net   471,000   292,000     
    Inventory   931,000   586,000     
    Prepaid expenses   16,000   24,000     
          
  Total current assets   1,470,000   1,059,000     
  Plant and equipment, net   1,689,060   1,569,550     
          
  Total assets $ 3,159,060 $ 2,628,550     
          
  Liabilities and Stockholders' Equity         
  Liabilities:         
    Current liabilities $ 818,000 $ 433,000     
    Bonds payable, 10%   612,000   612,000     
          
  Total liabilities   1,430,000   1,045,000     
          
  Stockholders' equity:         
    Preferred stock, $25 par, 7%   395,000   395,000     
    Common stock, $10 par   504,000   504,000     
    Retained earnings   830,060   684,550     
          
  Total stockholders' equity   1,729,060   1,583,550     
          
  Total liabilities and stockholders' equity $ 3,159,060 $ 2,628,550     
          
 
Modern Building Supply
Comparative Income Statement and Reconciliation
    This Year   Last Year
  Sales $ 5,018,000 $ 4,369,000    
  Cost of goods sold   3,864,000   3,445,000    
          
  Gross margin   1,154,000   924,000    
  Selling and administrative expenses   653,000   540,000    
          
  Net operating income   501,000   384,000    
  Interest expense   61,200   61,200    
          
  Net income before taxes   439,800   322,800    
  Income taxes (40%)   175,920   129,120    
          
  Net income   263,880   193,680    
          
  Dividends paid:         
    Preferred dividends   27,650   27,650    
    Common dividends   90,720   60,480    
          
  Total dividends paid   118,370   88,130    
          
  Net income retained   145,510   105,550    
  Retained earnings, beginning of year   684,550   579,000    
          
  Retained earnings, end of year $ 830,060 $ 684,550    
          
 

     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 $257,000.)(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, 10%   %     %  
      
  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 % %
  

 

Answers

Maurice Tutor
(5)
Status NEW Posted 04 Nov 2017 05:11 PM My Price 10.00

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