Mountain Aerosport was founded by Jurgen Prinz to produce a ski he had designed for doing aerial tricks. Up to this point, Jurgen has financed the company with his own savings and with cash generated by his business. However, Jurgen now faces a cash crisis. In the year just ended, an acute shortage of a vital tungsten steel alloy arose just as the company was beginning production for the Christmas season. Jurgen had been assured by his suppliers that the steel would be delivered in time to make Christmas shipments, but the suppliers had been unable to fully deliver on this promise. As a consequence, Mountain Aerosport had large stocks of unfinished skis at the end of the year and had been unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Jurgen does not have enough cash to pay his creditors.

Well before the accounts payable were due, Jurgen visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Jurgen that there should not be any problem getting a loan to pay off his accounts payableproviding that on his most recent financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Jurgen promised to return later with a copy of his financial statements.

Jurgen would like to apply for a $90 thousand six-month loan bearing an interest rate of 10% per year. The unaudited financial reports of the company appear below.

Mountain Aerosport Comparative Balance Sheet As of December 31, This Year and Last Year (in thousands of dollars)
	This Year		Last Year
Assets
Current assets:
Cash	$	85.8	$	235.0
Accounts receivable, net		90.0		100.0
Inventory		265.0		165.0
Prepaid expenses		25.0		63.0
Total current assets		465.8		563.0
Property and equipment		410.0		275.0
Total assets	$	875.8	$	838.0
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable	$	241.0	$	180.0
Accrued payables		20.0		60.0
Total current liabilities		261.0		240.0
Long-term liabilities		.0		.0
Total liabilities		261.0		240.0
Stockholder's equity:
Common stock and additional paid-in-capital		150.0		150.0
Retained earnings		464.8		448.0
Total stockholder's equity		614.8		598.0
Total liabilities and stockholder's equity	$	875.8	$	838.0

Mountain Aerosport Income Statement For the Year Ended December 31, This Year (in thousands of dollars)
	This Year
Sales (all on account)	$	680.0
Cost of goods sold		401.0
Gross margin		279.0
Selling and administrative expenses:
Selling expenses		113.0
Administrative expenses		142.0
Total selling and administrative expenses		255.0
Net operating income		24.0
Interest expense		.0
Net income before taxes		24.0
Income taxes (30%)		7.2
Net income	$	16.8

Required:

1a.	Based on the above unaudited financial statements calculate the following Based on the above unaudited financial statement of the current year calculate the following. (Round your answers to 2 decimal places.)

Current ratio
Acid-test ratio
Number of times of the net operating income to the interest on the proposed loan

1b.

Based on the statement made by the loan officer, would the company qualify for the loan?

	Yes
	No

2.

Last year Jurgen purchased and installed new, more efficient equipment to replace an older heat-treating furnace. Jurgen had originally planned to sell the old equipment, but found that it is still needed whenever the heat-treating process is a bottleneck. When Jurgen discussed his cash flow problems with his brother-in-law, he suggested to Jurgen that the old equipment be sold or at least reclassified as inventory on the balance sheet because it could be readily sold. At present, the equipment is carried in the Property and Equipment account and could be sold for its net book value of $85,000. The bank does not require audited financial statements.

a.	Calculate the following if the old machine is considered as inventory. (Round your answers to 2 decimal places.)

Current ratio
Acid-test ratio

b.

Based on the 2a above would the company qualify for the loan?

	Yes
	No

c.	Calculate the following if the old machine is sold off. (Round your answers to 2 decimal places.)

Current ratio
Acid-test ratio

d.

Based on the 2c above would the company qualify for the loan?

	Yes
	No