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 $ 64,500 $ 149,500
Marketable securities 9,500 27,500
Accounts receivable, net 492,000 304,000
Inventory 956,880 596,690
Prepaid expenses 27,500 34,500
Total current assets 1,550,380 1,112,190
Plant and equipment, net 1,657,620 1,562,580
Total assets $ 3,208,000 $ 2,674,770
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities $ 822,000 $ 461,000
Bonds payable, 8% 624,500 624,500
Total liabilities 1,446,500 1,085,500
Stockholders' equity:
Preferred stock, $25 par, 7% 334,000 334,000
Common stock, $10 par 526,000 526,000
Retained earnings 901,500 729,270
Total stockholders' equity 1,761,500 1,589,270
Total liabilities and stockholders' Equity $ 3,208,000 $ 2,674,770
Crowley Building Supply
Comparative Income Statement and Reconciliation
This Year Last Year
Sales $ 5,053,000 $ 4,395,000
Cost of goods sold 3,892,600 3,456,600
Gross margin 1,160,400 938,400
Selling and administrative expenses 654,900 535,900
Net operating income 505,500 402,500
Interest expense 49,960 49,960
Net income before taxes 455,540 352,540
Income taxes (35%) 159,439 123,389
Net income 296,101 229,151
Dividends paid:
Preferred dividends 23,380 23,380
Common dividends 100,491 65,001
Total dividends paid 123,871 88,381
Net income retained 172,230 140,770
Retained earnings, beginning of year 729,270 588,500
Retained earnings, end of year $ 901,500 $ 729,270

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.
$
This year Last year
Working capital (1,657,620)
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 $271,000.)
(Round your intermediate calculations and 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 $524,000.) (Round your
intermediate calculations and 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 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.)
Crowley 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, 8% % %
Total liabilities % %
Stockholders' equity:
Preferred stock, $25 par, 7% % %
Common stock, $10 par % %
Retained earnings % %
Total stockholders' equity % %
Total liabilities and equity % %
0.0 0.0
0.0 0.0
0.0 0.0
0.0 0.0
0.0 0.0
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.)
Crowley 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 % %
0.0 0.0
0.0 0.0
0.0 0.0
0.0 0.0
Worksheet Learning Objective: 13-01
Prepare and interpret
financial statements in
comparative and commonsize
form.
Learning Objective: 13-03 Compute and interpret financial
ratios that managers use for asset management
purposes.
Difficulty: 1 Easy Learning Objective: 13-02
Compute and interpret
financial ratios that
managers use to assess
liquidity.
Learning Objective: 13-04 Compute and interpret financial
ratios that managers use for debt management purposes.

Answer 1

Solution:

1 a) Working capital = Total Current assets - Total Current Liabilities.

Year	Working capital
This year.	1550380 - 822000 = $ 728380.
Last year.	1112190 - 461000 = $ 651190.

1 b) Current ratio = Total Current assets / Total Current Liabilities.

Year	Current ratio
This year.	1550380 / 822000 = 1.89 : 1
Last year.	1112190 / 461000 =  2.41 : 1

1 c) Acid-test ratio = Total liquid assets / Current liabilities.

(Total liquid assets = Total current assets - inventory - prepaid expenses)

Year	Acid-test ratio
This year.	(1550380 - 956880 - 27500) / 822000 = 566000 / 822000 = 0.69 : 1
Last year.	(1112190 - 596690 - 34500) / 461000 = 481000 / 461000 = 1.04 : 1

Note :- Acid-test ratio is also known as Quick ratio / Liquid ratio.

1 d) Average collection period = 365 * (Average accounts receivable / Sales revenue)

Average accounts receivable (This year) = (492000 + 304000) / 2 = $ 398000.

Average accounts receivable (Last year) = (304000 + 271000) / 2 = $ 287500.

Year	Average collection period
This year	(365 * 398000 / 5053000) = 28.7 Days.
Last year	(365 * 287500 / 4395000) = 23.9 Days.

1 f) Debt-to-equity ratio = Total debt / Total equity.

Year	Debt-to-equity ratio
This year	1446500 / 1761500 = 0.82
Last year	1085500 / 1589270 = 0.63

1 g) Times interest earned ratio = Net operating income / Interest expense.

Year	Times interest earned ratio
This year	505500 / 49960 = 10.1 Times.
Last year	402500 / 49960 = 8.1 Times.

Notes :- i).  Times interest earned ratio is also known as Interest coverage ratio.

ii). Net operating income (NOI) is also referred to as Earnings before interest and taxes (EBIT).