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, 2009 and September 30, 2009. Another note of $7,000 is due on December 31, 2009, 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:

WARFORD CORPORATION   Statement of Financial Position   March 31, 2008 and 2009
Â	2008	2009
Assets:	Â	Â
Cash	$12,500	$16,400
Notes   receivable	104,000	112,000
Accounts   receivable (net)	68,500	81,600
Inventories   (at cost)	50,000	80,000
Plant   and equipment (net of depreciation)	646,000	680,000
Total   assets	$881,000	$970,000
Liabilities   and Owners’ Equity:	Â	Â
Accounts   payable	$72,000	$69,000
Notes   payable	54,500	67,000
Accrued   liabilities	6,000	9,000
Common   stock (60,000 shares, $10 par)	600,000	600,000
Retained   earnings*	148,500	225,000
Total   liabilities and owners’ equity	$881,000	$970,000

 

WARFORD CORPORATION   Income Statement   For the Fiscal Years Ended March 31, 2008 and 2009
Â	2008	2009
Sales	$2,700,000	$3,000,000
Cost of   goods sold*	1,720,000	1,902,500
Gross   profit	980,000	1,097,500
Operating   expenses	780,000	845,000
Net   income before taxes	200,000	252,500
Income   taxes (40%)	80,000	101,000
Income   after taxes	$120,000	$151,500

Required

a. Calculate the following items for Warford Corporation:

1. Current ratio for fiscal years 2008 and 2009

2. Acid-test (quick) ratio for fiscal years 2008 and 2009

3. Inventory turnover for fiscal year 2009

4. Return on assets for fiscal years 2008 and 2009

5. Percentage change in sales, cost of goods sold, gross profit, and net income after taxes from fiscal year 2008 to 2009

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 2009, as compared with fiscal year 2008, 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.