Comparison with Industry Averages Heartland Inc. is a medium-size company that has been in business for 20 years. The industry has become very competitive in the last few years, and Heartland has decided that it must grow if it is going to survive. It has approached the bank for a sizable fi veyear loan, and the bank has requested Heartland’s most recent fi nancial statements as part of the loan package.

The industry in which Heartland operates consists of approximately 20 companies relatively equal in size. The trade association to which all of the competitors belong publishes an annual survey of the industry, including industry averages for selected ratios for the competitors. All companies voluntarily submit their statements to the association for this purpose.

Heartland’s controller is aware that the bank has access to this survey and is very concerned about how the company fared this past year compared with the rest of the industry. The ratios included in the publication and the averages for the past year are as follows:

Ratio Industry Average Current ratio 1.23 Acid-test (quick) ratio 0.75 Accounts receivable turnover 33 times Inventory turnover 29 times Debt-to-equity ratio 0.53 Times interest earned 8.65 times Return on sales 6.57%

Asset turnover 1.95 times Return on assets 12.81%

Return on common stockholders’ equity 17.67%

The fi nancial statements to be submitted to the bank in connection with the loan follow.

Heartland Inc.

Statement of Income and Retained Earnings For the Year Ended December 31, 2010

(thousands omitted)

Sales revenue $ 542,750 Cost of goods sold (435,650)

Gross profi t $ 107,100 Selling, general, and administrative expenses $ (65,780)

Loss on sales of securities (220)

Income before interest and taxes $ 41,100 Interest expense (9,275)

Income before taxes $ 31,825 Income tax expense (12,730)

Net income $ 19,095 Retained earnings, January 1, 2010 58,485

$ 77,580 Dividends paid on common stock (12,000)

Retained earnings, December 31, 2010 $ 65,580.

Heartland Inc.
Comparative Statements of Financial Position (thousands omitted)
December 31, 2010 December 31, 2009 Assets Current assets:
Cash $ 1,135 $ 750 Marketable securities 1,250 2,250 Accounts receivable, net of allowances 15,650 12,380 Inventories 12,680 15,870 Prepaid items 385 420 Total current assets $ 31,100 $ 31,670 Long-term investments $ 425 $ 425 Property, plant, and equipment:
Land $ 32,000 $ 32,000 Buildings and equipment, net of accumulated depreciation 216,000 206,000 Total property, plant, and equipment $248,000 $238,000 Total assets $279,525 $270,095 Liabilities and Stockholders’ Equity Current liabilities:
Short-term notes $ 8,750 $ 12,750 Accounts payable 20,090 14,380 Salaries and wages payable 1,975 2,430 Income taxes payable 3,130 2,050 Total current liabilities $ 33,945 $ 31,610 Long-term bonds payable $ 80,000 $ 80,000 Stockholders’ equity:
Common stock, no par $100,000 $ 100,000 Retained earnings 65,580 58,485 Total stockholders’ equity $165,580 $158,485 Total liabilities and stockholders’ equity $279,525 $270,095 Required 1. Prepare a columnar report for the controller of Heartland Inc. comparing the industry averages for the ratios published by the trade association with the comparable ratios for Heartland. For Heartland, compute the ratios as of December 31, 2010, or for the year ending December 31, 2010, whichever is appropriate.
2. Briefl y evaluate Heartland’s ratios relative to the industry averages.
3. Do you think that the bank will approve the loan? Explain your answer.AppendixLO1