Question

Crowley Building Supply sells various building materials to retail outlets. The company has just approached Sycamore State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:

Crowley Building Supply
Comparative Balance Sheets
	This Year		Last Year
Assets
Current assets:
Cash	$	58,000	$	143,000
Marketable securities		3,000		21,000
Accounts receivable, net		479,000		291,000
Inventory		950,120		590,060
Prepaid expenses		21,000		28,000
Total current assets		1,511,120		1,073,060
Plant and equipment, net		1,644,620		1,549,580
Total assets	$	3,155,740	$	2,622,640
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	809,000	$	448,000
Bonds payable, 8%		618,000		618,000
Total liabilities		1,427,000		1,066,000
Stockholders' equity:
Preferred stock, $25 par, 7%		321,000		321,000
Common stock, $10 par		513,000		513,000
Retained earnings		894,740		722,640
Total stockholders' equity		1,728,740		1,556,640
Total liabilities and stockholders' Equity	$	3,155,740	$	2,622,640

Crowley Building Supply
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,027,000	$	4,369,000
Cost of goods sold		3,874,400		3,438,400
Gross margin		1,152,600		930,600
Selling and administrative expenses		653,600		534,600
Net operating income		499,000		396,000
Interest expense		49,440		49,440
Net income before taxes		449,560		346,560
Income taxes (35%)		157,346		121,296
Net income		292,214		225,264
Dividends paid:
Preferred dividends		22,470		22,470
Common dividends		97,644		62,154
Total dividends paid		120,114		84,624
Net income retained		172,100		140,640
Retained earnings, beginning of year		722,640		582,000
Retained earnings, end of year	$	894,740	$	722,640

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.	Sycamore 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.

          

b.	Current ratio. (Round your answers to 2 decimal places.)

          

c.	Acid-test ratio. (Round your answers to 2 decimal places.)

           

d.	Average collection period. (The accounts receivable at the beginning of last year totaled $258,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

           

e.	Average sale period. (The inventory at the beginning of last year totaled $511,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

         

f.	Debt-to-equity ratio. (Round your answers to 2 decimal places.)

           

g.	Times interest earned. (Round your answers to 1 decimal place.)

           

2.	For both this year and last year:

a.	Present the balance sheet in common-size form. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3. Due to rounding, figures may not fully reconcile down a column.)

        

b.	Present the income statement in common-size form down through net income. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3. Due to rounding, figures may not fully reconcile down a column.)

        

Answer 1

Solution 1:

(a) Working Capital= Total current assets – Total Current liabilities

	This Year	Last Year
Working Capital	= $ 1,511,120- $ 809,000	= $ 1,073,060 -$ 448,000
	=$ 702,120	=$ 625,060

(b)Current Ratio = Total current assets / Total Current liabilities

	This Year	Last Year
Current Ratio	= $ 1,511,120 / $ 809,000	= $ 1,073,060 / $ 448,000
	=1.87	=2.39

(c)Acid test ratio= (Total current assets – Inventory –Prepaid expenses) / Total Current liabilities

	This Year	Last Year
Acid test ratio	=( $ 1,511,120- $ 950,120 - $ 21,000) / $ 809,000	=( $ 1,073,060 - $ 590,060 - $ 28,000 ) / $ 448,000
	= $ 540,000 / $ 809,000	= $ 455,000 / $ 448,000
	= 0.67	= 1.02

(d)Average collection period= 365 / Receivable Turnover ratio*

* Receivable Turnover ratio = Sales / Average Accounts Receivable

	This Year	Last Year
Average collection period	= 365 / 13.1	= 365 / 15.9
	=27.8	=22.9
* Receivable Turnover ratio	= $ 5,027,000 / [ ($ 291,000 + $ 479,000) / 2]	= $ 4,369,000/ [ ($ 291,000 + $ $258,000) / 2]
	= $ 5,027,000 / $ 385,000	=$ 4,369,000/ $ 274,500
	=13.1	=15.9

(e)Average Sale period= 365 / Inventory Turnover ratio*

* Inventory Turnover ratio = Cost of goods sold / Average Inventory

	This Year	Last Year
Average Sale period	= 365 / 5.0	= 365 / 4.7
	=73	=77.6
* Inventory Turnover ratio	= $ 3,874,400/ [ ($590,060+ $ 950,120) / 2]	= $ 3,438,400/ [ ($950,120+ $ $511,000) / 2]
	= $ 3,874,400/ $ 770,090	= $ 3,438,400 /   $ 730,560
	=5.0	=4.7

(f)Debt equity ratio= Total liabilities /Total stockholders' equity

	This Year	Last Year
Debt equity ratio	= $ 1,427,000 / $ 1,728,740	= $ 1,066,000 / $ 1,556,640
	=0.82	=0.68

(g)Times interest earned = Income before interest and taxes / Interest expense

	This Year	Last Year
Times interest earned	= $ 499,000 / $ 49,440	= $ 396,000 / $ 49,440
	=10.1	=8.0

As per answering guidelines, I am submitting answer to first question (all parts). For rest of the answers, post question separately.