(Ratio Computations and Additional Analysis) Carl Sandburg Corporation was formed 5 years ago 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, 2004, and September 30, 2004. Another note of $6,000 is due on December 31, 2005, 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 below.

Instructions

(a) Compute the following items for Carl Sandburg Corporation.
(1) Current ratio for fiscal years 2003 and 2004.
(2) Acid-test (quick) ratio for fiscal years 2003 and 2004.
(3) Inventory turnover for fiscal year 2004.
(4) Return on assets for fiscal years 2003 and 2004. (Assume total assets were $1,688,500 at 3/31/02.)
(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2003 to 2004.

(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 2004 as compared with fiscal year 2003 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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CARL SANDBURG CORPORATION STATEMENT OF FINANCIAL POSITION MARCH 31 Assets Cash 2004 $ 18,200 Notes receivable 148,000 Accounts receivable (net) 131,800 2003 $ 12,500 132,000 125,500 Inventories (at cost) 95,000 50,000 Plant & equipment (net of depreciation) 1,449,000 1,420,500 Total assets $1,842,000 $1,740,500