Comparison with Industry Averages Midwest 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 Midwest has decided that it must grow if it is going to survive. It has approached the bank for a sizable fi ve-year loan, and the bank has requested Midwest’s most recent fi nancial statements as part of the loan package.

The industry in which Midwest 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.

Midwest’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 1.20 Acid-test (quick) ratio 0.50 Inventory turnover 35 times Debt-to-equity ratio 0.50 Times interest earned 25 times Return on sales 3%

Asset turnover 3.5 times Return on common stockholders’ equity 20%.

The fi nancial statements to be submitted to the bank in connection with the loan follow.
Midwest Inc.
Statement of Income and Retained Earnings For the Year Ended December 31, 2010 (thousands omitted)
Sales revenue $ 420,500 Cost of goods sold (300,000)
Gross profi t $ 120,500 Selling, general, and administrative expenses (85,000)
Income before interest and taxes $ 35,500 Interest expense (8,600)
Income before taxes $ 26,900 Income tax expense (12,000)
Net income $ 14,900 Retained earnings, January 1, 2010 12,400 $ 27,300 Dividends paid on common stock (11,200)
Retained earnings, December 31, 2010 $ 16,100 Midwest Inc.
Comparative Statements of Financial Position (thousands omitted)
December 31, 2010 December 31, 2009 Assets Current assets:
Cash $ 1,790 $ 2,600 Marketable securities 1,200 1,700 Accounts receivable, net of allowances 400 600 Inventories 8,700 7,400 Prepaid items 350 400 Total current assets $ 12,440 $ 12,700 Long-term investments $ 560 $ 400 Property, plant, and equipment:
Land $ 12,000 $ 12,000 Buildings and equipment, net of accumulated depreciation 87,000 82,900 Total property, plant, and equipment $ 99,000 $ 94,900 Total assets $112,000 $108,000 Liabilities and Stockholders’ Equity Current liabilities:
Short-term notes $ 800 $ 600 Accounts payable 6,040 6,775 Salaries and wages payable 1,500 1,200 Income taxes payable 1,560 1,025 Total current liabilities $ 9,900 $ 9,600 Long-term bonds payable $ 36,000 $ 36,000 Stockholders’ equity:
Common stock, no par $ 50,000 $ 50,000 Retained earnings 16,100 12,400 Total stockholders’ equity $ 66,100 $ 62,400 Total liabilities and stockholders’ equity $112,000 $108,000.

Required 1. Prepare a columnar report for the controller of Midwest Inc. comparing the industry averages for the ratios published by the trade association with the comparable ratios for Midwest. For Midwest, compute the ratios as of December 31, 2010, or for the year ending December 31, 2010, whichever is appropriate.
2. Briefl y evaluate Midwest’s ratios relative to the industry averages.
3. Do you think that the bank will approve the loan? Explain your answer.AppendixLO1