(Ratio Computations and Additional Analysis) Sandburg Corporation was formed 5 years ago 12) through a public subscription of common stock. Robert Frost, who owns 15% of the common stock, was one of the organizers of Sandburg and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, Robert Frost approached the Spokane National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2007, and September 30, 2007. Another note of $6,000 is due on March 31, 2008, but he expects no difficulty in paying this note on its due date. Frost explained that Sandburg’s cash flow problems are due primarily to the company’s desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds.

The Commercial Loan Officer of Spokane National Bank requested financial reports for the last 2 fiscal years. These reports are reproduced on page 1337.

Instructions

(a) Compute the following items for Sandburg Corporation.
(1) Current ratio for fiscal years 2006 and 2007.
(2) Acid-test (quick) ratio for fiscal years 2006 and 2007.
(3) Inventory turnover for fiscal year 2007.
(4) Return on assets for fiscal years 2006 and 2007. (Assume total assets were $1,688,500 at 3/31/05.)
(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2006 to 2007.

(b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Spokane National Bank in evaluating Robert Frost’s request for a time extension on Sandburg’s notes.

(c) Assume that the percentage changes experienced in fiscal year 2007 as compared with fiscal year 2006 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Sandburg’s desire to finance the plant expansion from internally generated funds realistic? Discuss.

(d) Should Spokane National Bank grant the extension on Sandburg’s notes considering Robert Frost’s statement about financing the plant expansion through internally generated funds?
Discuss.

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SANDBURG CORPORATION STATEMENT OF FINANCIAL POSITION AS OF MARCH 31 Assets 2007 2006 Cash $ 18,200 $ 12,500 Notes receivable 148,000 132,000 Accounts receivable (net) 131,800 Inventories (at cost) 95,000 125,500 50,000 Plant & equipment (net of depreciation) 1,449,000 1,420,500 Total assets $1,842,000 $1,740,500 Liabilities and Owners' Equity Accounts payable $ 69,000 $ 91,000 Notes payable Accrued liabilities Common stock (130,000 shares, $10 par) Retained earnings Total liabilities and owners' equity 61,500 6,000 1,300,000 282,000 $1,740,500 "Cash dividends were paid at the rate of $1 per share in fiscal year 2006 and $2 per share 76,000 9,000 1,300,000 388,000 $1,842,000 in fiscal year 2007.