P11-5 L. Konrath Company is considering extending credit to D. Hawk Company L. Konrath Company estimated that sales to D. Hawk Company would amount to $2 million each year. L Konrath Company, a wholesaler, sells throughout the Midwest, D. Hawk Company, a retail chain operation, has a member of stores in the Midwest. L. Konrath Company has had a gross profit of approximately 60% in recent years and expects to have a similar gross profit on the D. Hawk Company. The D. Hawk Company order is approximately 15% of L. Konrad Company's present sales. Data from recent statements of D. Hawk Company follow 2009 2010 2011 Assets Current asset Cash 526 51.3 51.6 Government securities (cs) 04 Accounts and notes receivable() NO 85 Prepaid 05 Total current asse 143 143 13.5 Property, plant, and equipment(s) 59 Total $18.3 $19.2 $19.4 Liabilities and Equities Current labies $6.9 $85 $93 Long-term debt, 6% 3.0 20 10 Total lubilities 99 105 10.3 Shareholders' equity 3.9 92 9.1 Total liabilities and equities $158 $19.7 $19.4 2009 2010 2011 Nesale $24.2 $24.5 $24.9 Cost of goods sold 162 172 150 Gross margin 73 73 69 Selling and administrative expenses 66 68 73 Earnings (loss) before taxes Income taxes Net income Required Calculate the following for D. Hawk Company for 2011: 1. Rate of return on total assets 2. Acid-estratio 3. Return on sales 07 05 (0.4) 0.3 0.2 (0.2) 504 503 $(02) 4. Current ratio 5. lavery turnover b. As part of the analysis to determine whether L. Konrath Company should extend code to D. Hawk Company, assume the ratios were calculated from D. Hawk Company statements. For each ratio, indicate whether it is a favorable, an unfavorable, or a neutral statistic in the decision to grant D. Hawk Company credit. Briefly explain your choice in each cane. Ratio Rate of return on total assets 2009 2011 Return on sale Acid-teratio Creatio Inventory t Equity relationships Current liabilities Long-tonn liabilities Shareholders' equity Asset hip Current assets Property, plant, and equipment 2010 1.12% (87% 1.73 136 1.19 2.39 1.92 167 4.41 4.32 432 36.0% 43.0% 48.0% 16.0 105 50 450 46.5 47.0 100% 1000 100.2% 77.0% 72.5% 69.5% 23.0 27.5 30.5 100.05 100.0% c. Would you grant credit to D. Hawk Company? Support your answer with facts given in the problem d. What additional information, if any, would you want before making a final decision