Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden Bank requesting a $300,000 loan to strengthen the cash account and to pay certain pressing short-term obligations. The companys financial statements for the most recent two years are shown below.

MODERN BUILDING SUPPLY
Comparative Balance Sheet
	This Year		Last Year
Assets
Current assets:
Cash	$	70,000	$	220,000
Temporary investments		0		50,000
Accounts receivable, net		670,000		420,000
Inventory		1,210,000		710,000
Prepaid expenses		20,000		20,000
Total current assets		1,970,000		1,420,000
Plant and equipment, net		1,750,000		1,610,000
Total assets	$	3,720,000	$	3,030,000
Liabilities and Shareholders Equity
Liabilities:
Current liabilities	$	1,004,000	$	500,000
Bonds payable, 12%		750,000		750,000
Total liabilities		1,754,000		1,250,000
Shareholders' equity:
Preferred shares, 4,000, $4 no par		200,000		200,000
Common shares, 50,000		500,000		500,000
Retained earnings		1,266,000		1,080,000
Total shareholders' equity		1,966,000		1,780,000
Total liabilities and shareholders' equity	$	3,720,000	$	3,030,000

MODERN BUILDING SUPPLY
Comparative Income Statement and Reconciliation of Retained Earnings
	This Year		Last Year
Sales	$	5,000,000	$	4,000,000
Cost of goods sold		3,400,000		3,000,000
Gross margin		1,600,000		1,000,000
Selling and administrative expenses		990,000		730,000
Operating income		610,000		270,000
Interest expense		90,000		90,000
Net income before taxes		520,000		180,000
Income taxes (40%)		208,000		72,000
Net income		312,000		108,000
Dividends paid:
Preferred dividends		16,000		16,000
Common dividends		110,000		62,000
Total dividends paid		126,000		78,000
Net income retained		186,000		30,000
Retained earnings, beginning of year		1,080,000		1,050,000
Retained earnings, end of year	$	1,266,000	$	1,080,000

During the past year, the company has expanded the number of lines that it carries in order to stimulate sales and increase profits. It has also moved aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.

Assume that the following ratios are typical of companies in the building supply industry:

Current ratio	2.9
Acid-test ratio	1.50
Average collection period	32	days
Average sale period	74	days
Debt-to-equity ratio	0.76
Times interest earned ratio	4.0
Return on total assets	10	%
Priceearnings ratio	9

Required:

1. Management at Linden Bank is uncertain whether the loan should be made. To assist in making the decision, you have been asked to compute the following amounts and ratios for both this year and last year:

a. Working capital.

b. Current ratio. (Round your answers to 2 decimal places.)

c. Acid-test ratio. (Round your answers to 2 decimal places.)

d. Average collection period. (The accounts receivable at the beginning of last year totalled $370,000.) (Round your intermediate calculations and final answer to 1 decimal place. Use 365 days in a year.)

e. Average sale period. (The inventory at the beginning of last year totalled $630,000.) (Round your intermediate calculations and final answer to 1 decimal place. Use 365 days in a year.)

f. Debt-to-equity ratio. (Round your answers to 2 decimal places.)

g. Times interest earned ratio. (Round your answers to 1 decimal place.)

2. For both this year and last year:

a. Present the balance sheet in common-size format. (Round your answers to 1 decimal place.)

b. Present the income statement in common-size format down through net income. (Round your answers to 1 decimal place.)

Required: 1. Management at Linden Bank is uncertain whether the loan should be made. To assist in making the decision, you have been asked to compute the following amounts and ratios for both this year and last year: a. Working capital. This Year Last Year Working capital b. Current ratio. (Round your answers to 2 decimal places.) This Year Last Year Current ratio c. Acid-test ratio. (Round your answers to 2 decimal places.) This Year Last Year Acid-test ratio d. Average collection period. (The accounts receivable at the beginning of last year totalled $370,000.) (Round your intermediate calculations and final answer to 1 decimal place. Use 365 days in a year.) This Year days Last Year days Average collection period e. Average sale period. (The inventory at the beginning of last year totalled $630,000.) (Round your intermediate calculations and final answer to 1 decimal place. Use 365 days in a year.) This year Last year days Average sale period days f. Debt-to-equity ratio. (Round your answers to 2 decimal places.) This Year Last Year Debt-to-equity ratio g. Times interest earned ratio. (Round your answers to 1 decimal place.) This Year Last Year Times interest earned ratio 2. For both this year and last year: a. Present the balance sheet in common-size format. (Round your answers to 1 decimal place.) MODERN BUILDING SUPPLY Common-Size Balance Sheet This Year Last Year Assets Current assets: Cash Temporary investments Accounts receivable, net Current assets: % % Cash Temporary investments Accounts receivable, net Inventory Prepaid expenses Total current assets % % Plant and equipment, net Total assets Liabilities and Shareholders' Equity Liabilities: Current liabilities % % Bonds payable, 12% Total liabilities Shareholders' equity: Preferred shares, 4,000, $4 no par Common shares, 50,000 Retained earnings Total shareholders' equity Total liabilities and shareholders' equity % % b. Present the income statement in common-size format down through net income. (Roundy answers to 1 decimal place.) MODERN BUILDING SUPPLY Common-Size Income Statement This Year Last Year Sales % % Cost of goods sold Gross margin Selling and administrative expenses Operating income Interest expense Net income before taxes Income taxes Net income % 1% |