Question

Problem 24-3

Metlock 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 Metlock and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $34,960 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,030 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Metlock’s cash flow problems are due primarily to the company’s desire to finance a $299,210 plant expansion over the next 2 fiscal years through internally generated funds.

The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years.

METLOCK CORPORATION BALANCE SHEET MARCH 31
Assets		2018		2017
Cash		$18,280		$12,630
Notes receivable		147,800		132,850
Accounts receivable (net)		131,830		124,830
Inventories (at cost)		103,960		50,250
Plant & equipment (net of depreciation)		1,441,730		1,408,680
Total assets		$1,843,600		$1,729,240
Liabilities and Owners’ Equity
Accounts payable		$78,440		$91,050
Notes payable		75,590		62,110
Accrued liabilities		12,090		6,630
Common stock (130,000 shares, $10 par)		1,312,780		1,304,780
Retained earningsa		364,700		264,670
Total liabilities and stockholders’ equity		$1,843,600		$1,729,240
aCash dividends were paid at the rate of $1 per share in fiscal year 2017 and $2 per share in fiscal year 2018.

METLOCK CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31
		2018		2017
Sales revenue		$3,014,860		$2,692,590
Cost of goods solda		1,543,140		1,437,230
Gross margin		1,471,720		1,255,360
Operating expenses		861,510		774,820
Income before income taxes		610,210		480,540
Income taxes (40%)		244,084		192,216
Net income		$366,126		$288,324
aDepreciation charges on the plant and equipment of $100,890 and $103,120 for fiscal years ended March 31, 2017 and 2018, respectively, are included in cost of goods sold.

(a) Compute the following items for Metlock Corporation. (Round answer to 2 decimal places, e.g. 2.25 or 2.25%.)

(1)		Current ratio for fiscal years 2017 and 2018.
(2)		Acid-test (quick) ratio for fiscal years 2017 and 2018.
(3)		Inventory turnover for fiscal year 2018.
(4)		Return on assets for fiscal years 2017 and 2018. (Assume total assets were $1,677,350 at 3/31/16.)
(5)		Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2017 to 2018.

Answer 1

1	Current ratio = Current assets / current liabilities	2018	2017
	Current assets	401870	320560
	Current Liabilities	78440	91050
	Current ratio	5.12	3.52
2	Acid test ratio = Acid test assets / current liabilities
	Acid test assets = current assets - prepaid expense - merchandise inventory
	Quick assets	297910	270310
	Current liabilities	78440	91050
	Acid test ratio	3.80	2.97
3	Inventory turnover = Cost of goods sold / Average inventory
	Cost of goods sold	1543140
	Beginning inventory	50250
	Ending inventory	103960
	Average inventory	77105
	Average inventory = (Beginning + Ending )/2
	Inventory turnover	20.01	Times
	Days sale in inventory = 365 / inventory turnover
	Days sales in inventory	18	Days
4
	Return on assets = net income / Average total assets
	Net income	366126	288324
	Beginning total assets	1729240	1677350
	Ending total assets	1843600	1729240
	Average total assets	1786420	1703295
	Return on assets	20.5%	16.9%
5		2018	2017	Change	% change
	Sales revenue	3014860	2692590	322270	11.97%
	Cost of goods sold	1543140	1437230	105910	7.37%
	Gross margin	1471720	1255360	216360	17.23%
	Net income	366126	288324	77802	26.98%