Refer to the data in Problem 13–9. Although Empire Labs Inc. has been profitable since it was organized several years ago, the company is beginning to experience some difficulty in paying its bills as they come due. Management has approached Security National Bank requesting a two-year, $500,000 loan to bolster the cash account.

Security National Bank has assigned you to evaluate the loan request. You have gathered the following data relating to firms in the pharmaceutical industry:

Current ratio...........................................................2.4 to 1
Acid-test (quick) ratio.............................................1.2 to 1
Average age of receivables...................................16 days
Inventory turnover in days...................................40 days
Times interest earned...........................................7 times
Debt-to-equity ratio.............................................0.70 to 1

The following additional information is available on Empire Labs Inc.:

a. All sales are on account.

b. At the beginning of last year, the accounts receivable balance was $600,000 and the inventory balance was $1,000,000.

Required:

1. Compute the following amounts and ratios for both last year and this year:

a. The working capital.

b. The current ratio.

c. The acid-test ratio.

d. The accounts receivable turnover in days.

e. The inventory turnover in days.

f. The times interest earned.

g. The debt-to-equity ratio.

2. Comment on the results of your analysis in part (1).

3. Would you recommend that the loan be approved? Explain.

In Problem 13–9

Transcribed Image Text:

EMPIRE LABS INC. Comparative Income Statement For the Years Ended December 31 This Year Last Year Sales $20,000,000 $15,000,000 Less: Cost of goods sold 13.000.000 9.000,000 Gross margin 7,000,000 6,000,000 Less: Operating expenses 5.260,000 4.560.000 Net operating income 1,740,000 1,440,000 Less: Interest expense 240,000 240.000