P24-3 (Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago

~otlgh a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was

one of the organizers of Bradburn and is its current president. The company has been successful, but it currently

is experiencing a shortage of funds. On June 10,2014, Daniel Brown approached the Topeka National

Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2015, and September 30,

2015. Another note of $6,000 is due on March 31, 2016, but he expects no difficulty in paying this note on its

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1538 Chapter 24 Full Disclosure in Financial Reporting

due date. Brown explained that Bradburn's cash flow problems are due primarily to the company's desire to

finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds.

The commercial loan officer of Topeka National Bank requested the following financia l reports for the

last 2 fiscal years.

BRADBURN CORPORATION

BALANCE SHEET

MARCH 31

Assets 2015 2014

Cash $ 18,200 $ 12,500

Notes recei vable 148,000 132,000

Accounts receivable (net) 131,800 125,500

Inventories (at cost) 105,000 50,000

Plant & equipment (net of depreciation) 1,449,000 1,420,500

Total assets $1,852,000 -- $1,740,500 --

Liabilities and Stockholders' Equity

Accounts payable $ 79,000 $ 91,000

Notes payable 76,000 61,500

Accrued liabilities 9,000 6,000

Common stock (130,000 shares, $10 par) 1,300,000 1,300,000

Retained earningsa 388,000 282,000

Total liabilities and stockholders' equity $1,852,000 $1,740,500

"Cash dividends were paid at the rate of $1 per share in fiscal year 2014 and $2 per

share in fiscal year 2015.

BRADBURN CORPORATION

INCOME STATEMENT

FOR THE FISCAL YEARS ENDED MARCH 31

2015 2014 -- Sales revenue $3,000,000 $2,700,000

Cost of goods solda 1,530,000 1,425,000

Gross margin 1,470,000 1,275,000

Operating expenses 860,000 780,000

Income before income taxes 610,000 495,000

Income taxes (40%) 244,000 198,000

Net income $ 366,000 $ 297,000

"Depreciation charges on the plant and equipment of $100,000 and $102,500

for fiscal years ended March 31, 2014 and 2015, respectively, are included in

cost of goods sold.

Instructions

(a) Compute the follOWing items for Bradburn Corporation.

(1) Current ratio for fiscal years 2014 and 2015.

(2) Acid-test (quick) ratio for fiscal years 2014 and 2015.

(3) Inventory turnover for fiscal year 2015.

(4) Return on assets for fiscal years 2014 and 2015. (Assume total assets were $1,688,500 at 3/31 /13.)

(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from

fiscal year 2014 to 2015.

(b) Identify and explain what other financial reports and/ or financial ana lyses might be helpful to the

commercial loan officer of Topeka National Bank in evaluating Daniel Brown's request for a time

extension on Bradburn's notes.

(c) Assume that the percentage changes experienced in fiscal year 2015 as compared with fiscal year

2014 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn's desire

to finance the plant expansion from internally generated funds realistic? Discuss.

(d) Should Topeka National Bank grant the extension on Bradburn's notes considering Daniel Brown