Davidson Yachts is a small company founded by two businesspeople who are friends and avid sailors. At present, they are interested in expanding the business and have asked you to review its financial statements.

Davidson Yachts sells approximately 210 to 260 sailboats each year, ranging from 14-foot dinghies to 20-foot sailboats. Their sales prices range from $3,200 to more than $11,200. The company has a limited inventory of boats consisting primarily of one or two boats from each of the four manufacturers that supply Davidson. The company also sells a variety of supplies and parts and performs different types of service. Most sales are on credit.

The company operates from a large building that has offices, storage, and sales space for some of the smaller sailboats. The larger sailboats are kept in a fenced area adjacent to the main building, and an ample parking area is nearby. This year, Davidson purchased a boat lift to haul boats. The lift has brought in revenues for boat repairs, hull painting, and related services, as well as the boat hauls.

The balance sheet and income statement for Davidson Yachts for 2014-2019 follow. The increase in net fixed assets in the recent 2 years is due to improvements in the building, paving of the parking area, and the purchase of the lift.

0891080! 9000!: COEPLI! Comparative Balance lbeet Dace-her 31 2014 2015 2016 2017 2018 2019 Cash $ 24,460 $ 23,166 $ 19,935 $ 29,626 $ 44,092 $ 32,464 Accounts receivable 100,665 104,154 114,343 127,223 105,588 145,209 Allowance for bad debts (9,904) (10,586) (9,424) (11,066) (7,002) (13,706) Inventory 36,209 50,104 63,232 69,444 60,194 90,094 other current assets 13,094 14,214 10,464 12,566 20,123 24,223 Total current assets $164,524 $189,052 $ 190,550 5 226,993 $ 222,915 $ 286,284 Property and equipment 263,395 283,200 300,500 369,765 406,469 499,826 Accumulated depreciation (67,184) (94,642) (124,092) (159,299) (108,427) (220,507) Total assets $360,735 $377,610 5 375,030 5 437.459 5 440,957 5 557,603 Accounts payable 3 83,035 3 79,447 $ 64,706 $ 57,016 $ 41,309 $ 51,864 Taxes payable 12,030 12,103 12,900 15,203 4,930 17,332 Short-term loans 61,076 58,180 38,783 42,293 50,794 78,162 Accrued payroll payable 6,427 5,790 4,049 5,424 5,974 6,479 Total current liabilities $164,160 $155,600 $ 121,390 $ 120,816 $ 103,095 $ 153,837 Longterm debt 159,373 173,588 180,690 216,197 230,671 263,458 Equity 37,194 48,422 72,950 100,446 107,191 140,308 Total liabilities and equity $360,735 $377,618 $ 375,838 $ 437,459 $ 440,957 $ 557,603 , navrnsoe recs-10 0mm Comparative Statement 0! Income and Operating Cash Flow [or the Years lnded December 31 2014 2015 2016 2017 2010 2019 Sales $773,500 $730,070 $703,400 $935,470 770,610 954,057 Returns and allowances 39,579 36,045 41,534 47,190 34,007 40,500 Cost of sales 477,508 444,898 461,615 549,378 457,269 534,197 Gross margin $256,493 $249,135 $200,331 $330,902 $279,254 $372,000 Depreciation expense 5 29,195 $ 27,570 $ 29,570 $ 35,327 $ 29,240 $ 40,200 Interest expense 10,717 19,677 21,110 21,595 25,009 29,113 Salaries and wages 02,043 73,704 77,966 95,004 93,023 101,567 Accounting and legal 9,904 10,586 9,443 11,954 13,228 11,500 Administration expense 79,706 75,354 00,013 96,509 00,115 97,561 other expense 12,750 19,047 15,883 23,023 19,054 22,782 Total expense $232,395 $226,026 $234,793 $204,372 $267,677 $302,723 net income $ 24,090 5 23,109 $ 45,530 5 54,530 $ 11,577 5 69,357 Cash flow from operations (adjustments to net income) Depreciation $ 27,570 $ 29,570 $ 35,327 $ 29,240 $ 40,200 Decrease (increase) in receivables (2,807) (11,351) (10,438) 17,651 (33,797) Decrease (increase) in inventory (21,095) (5,120) (6,212) 9,250 (37,900) Decrease (increase) in other current assets (1,120) 3,750 (2,102) (7,557) (4,100) Increase (decrease) in current liabilities (0,560) (34,210) (502) 17 721 50,742 9 16,305 3 20,169 5 70,523 5 42,440 5 04,502 ' The company obtains its debt nancing from two sources: (1) a small savings and loan for its short-term funds and (2) a larger commercial bank, also for short-term loans, but principally for long-term nancing. The terms of the loan agreement with the bank include a restriction that Davldson's current ratio must remain higher than 1.5