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.

          

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 $271,000.) (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 $524,000.) (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

1.
		This Year	Last Year
(a)	Working Capital	728380	651190	Current assets - current liabilities
(b)	Current Ratio	1.9	2.4	Current Assets / Current Liabilities
(c)	Acid-test ratio	0.7	1.1	Quick Assets / Curent Liabilities
(d)	Average Collection period - days	28.7	23.9	365 / Accounts receivable turnover Ratio
(e)	Average Sales Period	56.1	46.5	365 / Inventory turnover ratio
(f)	Debt-to-equity ratio	0.8	0.7	Total Liabilities / Stockholders' equity
(g)	Times interest earned	10.12	8.06	Income before interest / Interest expense
	Quick assets
	Current Assets	1550380	1112190
	Inventory assets	956880	596690
	Quick assets	593500	515500
	Accounts Receivable Turnover Ratio
	Beginning Accounts receivables	304000	271000
	Ending Accounts Receivables	492000	304000
	Average Accounts Receivable (A)	398000	287500
	Sales                                                 (B)	5053000	4395000
	Accounts Receivable Turnover Ratio (B/A)	12.7	15.3
	Inventory Turnover Ratio
	Beginning Inventory	596690	524000
	Ending Inventory	956880	596690
	Average Inventory                     (A)	776785	560345
	Sales                                                 (B)	5053000	4395000
	Inventory Turnover Ratio       (B/A)	6.5	7.8

Crowley Building Supply
Comparative Balance Sheets
	This Year		Last Year
	Value	%	Value	%
Assets
Current Assets
Cash	64500	2.0%	149500	5.6%
Marketable Securities	9500	0.3%	27500	1.0%
Accounts Receivable, net	492000	15.3%	304000	11.4%
Inventory	956880	29.8%	596690	22.3%
Prepaid Expenses	27500	0.9%	34500	1.3%
Total Current Assets	1550380	48.3%	1112190	41.6%
Plant and Equipment, net	1657620	51.7%	1562580	58.4%
Total Assets	3208000	100.0%	2674770	100.0%
Liabilities and Stockholders' Equity
Liabilities:
Current Liabilities	822000	25.6%	461000	17.2%
Bonds Paybale, 8%	624500	19.5%	624500	23.3%
Total Liabilities	1446500	45.1%	1085500	40.6%
Stockholders' Equity
Preferred Stock, $25 par , 7%	334000	10.4%	334000	12.5%
Common Stock, $10 par	526000	16.4%	526000	19.7%
Retained Earnings	901500	28.1%	729270	27.3%
Total Stockholders' Equity	1761500	54.9%	1589270	59.4%
Total Liabilities and Stockholders' Equity	3208000	100.0%	2674770	100.0%
Crowley Building Supply
Comparative Income Statements
	This Year		Last Year
	Value	%	Value	%
Sales	5053000	100.0%	4395000	100.0%
Cost of Goods Sold	3892600	77.0%	3456600	78.6%
Gross Margin	1160400	23.0%	938400	21.4%
Selling and administrative expenses	654900	13.0%	535900	12.2%
Net opearating income	505500	10.0%	402500	9.2%
Interest expense	49960	1.0%	49960	1.1%
Net income before taxes	455540	9.0%	352540	8.0%
Income Taxes	159439	3.2%	123389	2.8%
Net income	296101	5.9%	229151	5.2%