(Financial statement analysis)The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm's sales were $600,100 for the year just ended, and its total assets exceeded $500,000. The company was started by Mr. Jarmon just 10 years ago and has been profitable every year since its inception. The chief financial officer for the firm, Brent Vehlim, has decided to seek a line of credit from the firm's bank totaling $80,000. In the past, the company has relied on its suppliers to finance a large part of its needs for inventory. However, in recent months tight money conditions have led the firm's suppliers to offer sizable cash discounts to speed up payments for purchases. Mr. Vehlim wants to use the line of credit to supplant a large portion of the firm's payables during the summer, which is the firm's peak seasonal sales period. The firm's two most recent balance sheets were presented to the bank in support of its loan request. In addition, the firm's income statement for the year just ended was provided. These statements are found in the following tables:

T. P. Jarmon Company Balance Sheets
	2012	2013
Cash	$14,900	$13,900
Marketable securities	5,990	6,190
Accounts receivable	42,000	33,000
Inventory	51,000	83,900
Prepaid rent	1,210	1,090
Total current assets	$115,100	$138,080
Net plant and equipment	285,900	270,000
Total assets	$401,000	$408,080
	2012	2013
Accounts payable	$47,900	$56,900
Notes payable	15,000	12,900
Accruals	6,000	4,990
Total current liabilities	$68,900	$74,790
Long-term debt	159,900	150,100
Common stockholders' equity	172,200	183,190
Total liabilities and owners' equity	$401,000	$408,080

T. P. Jarmon Company
Income Statement for 2013
Sales (all credit)		$600,100
Less: Cost of goods sold		(460,100)
Gross profit		$140,000
Less: Operating and interest expenses
General and administrative	$(30,100)
Interest	(10,100)
Depreciation	(30,000)
Total		$(70,200)
Earnings before taxes		$69,800
Less: Taxes		(27,000)
Net income available to common stockholders		$42,800
Less: Cash dividends		(31,800)
Change in retained earnings		$11,000

.

Jan Fama, associate credit analyst for the Merchants National Bank of Midland, Michigan, was assigned the task of analyzing Jarmon's loan request.

a.Calculate the following financial ratios for 2013:

Current ratio

1.80

Acid-test ratio

0.90

Debt ratio

50.0%

Times interest earned

10.00

Average collection period

20.0

Inventory turnover (based on cost of goods sold)

7.00

Return on equity

12.0%

Operating return on assets

16.8%

Operating profit margin

14.0%

Total asset turnover

1.20

Fixed asset turnover

1.80

T. P. Jarmon's current ratio is (Round to two decimal places.)

b.Which of the ratios calculated in part (a) do you think should be most crucial in determining whether the bank should extend the line of credit?

c. Use the information provided by the financial ratios and industry-norm ratios to decide if you would support making the loan. Discuss the basis for your recommendation.