CASE 10–2 Ian Manufacturing Company was organized five years ago and manufactures toys. Its most recent three years’ balance sheets and income statements are reproduced below:

IAN MANUFACTURING COMPANY Balance Sheets June 30, Year 5, Year 4, and Year 3 Year 5 Year 4 Year 3 Assets Cash .......................................................... $ 12,000 $ 15,000 $ 16,000 Accounts receivable, net............................ 183,000 80,000 60,000 Inventory.................................................... 142,000 97,000 52,000 Other current assets .................................. 5,000 6,000 4,000 Plant and equipment, net .......................... 160,000 110,000 70,000 Total assets ............................................... $502,000 $308,000 $202,000 Liabilities and Equity Accounts payable....................................... $147,800 $ 50,400 $ 22,000 Federal income tax payable ....................... 30,000 14,400 28,000 Long-term liabilities .................................. 120,000 73,000 22,400 Common stock, $5 par value ..................... 110,000 110,000 80,000 Retained earnings ..................................... 94,200 60,200 49,600 Total liabilities and equity ......................... $502,000 $308,000 $202,000 IAN MANUFACTURING COMPANY Condensed Income Statements For Years Ended June 30, Year 5, Year 4, Year 3 Year 5 Year 4 Year 3 Net sales ................................................ $1,684,000 $1,250,000 $1,050,000 Cost of goods sold.................................. (927,000) (810,000) (512,000)
Gross profit ............................................ 757,000 440,000 538,000 Marketing and administrative costs....... (670,000) (396,700) (467,760)
Operating income................................... 87,000 43,300 70,240 Interest cost ........................................... (12,000) (7,300) (2,240)
Income before income tax....................... 75,000 36,000 68,000 Income tax.............................................. (30,000) (14,400) (28,000)
Net income ............................................. $ 45,000 $ 21,600 $ 40,000 A reconciliation of retained earnings for years ended June 30, Year 4, and Year 5, follows:
IAN MANUFACTURING COMPANY Statement of Retained Earnings For Years Ended June 30, Year 5 and Year 4 Year 5 Year 4 Balance, beginning ............................... $ 60,200 $49,600 Add: Net income.................................... 45,000 21,600 Subtotal ................................................ 105,200 71,200 Deduct: Dividends paid......................... (11,000) (11,000)
Balance, ending .................................... $ 94,200 $60,200 Additional Information:
1. All sales are on account.
2. Long-term liabilities are owed to the company’s bank.
3. Terms of sale are net 30 days.
Required:

a. Compute the following measures for both Years 4 and 5:
(1) Working capital.
(2) Current ratio.
(3) Acid-test ratio.
(4) Accounts receivable turnover.
(5) Collection period of receivables.
(6) Inventory turnover.
(7) Days to sell inventory.
(8) Debt-to-equity ratio.
(9) Times interest earned.

b. Using Year 3 as the base year, compute an index-number trend series for:
(1) Sales.
(2) Cost of goods sold.
(3) Gross profit.
(4) Marketing and administrative costs.
(5) Net income.

c. Based on your analysis in

(a) and (b), prepare a one-page report yielding a recommendation on whether to grant a loan to Ian Manufacturing. Support your recommendation with relevant analysis.