Problem 13-13B Common-Size Statements and Financial Ratios for Creditors [LO13-1, LO13-2, LO13-3, LO13-4]

Crowley Building Supply sells various building materials to retail outlets. The company has just approached Sycamore State 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 follow:

Crowley Building Supply
Comparative Balance Sheets
	This Year		Last Year
Assets
Current assets:
Cash	$	55,500	$	140,500
Marketable securities		500		18,500
Accounts receivable, net		474,000		286,000
Inventory		947,520		587,510
Prepaid expenses		18,500		25,500
Total current assets		1,496,020		1,058,010
Plant and equipment, net		1,639,620		1,544,580
Total assets	$	3,135,640	$	2,602,590
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities	$	804,000	$	443,000
Bonds payable, 8%		615,500		615,500
Total liabilities		1,419,500		1,058,500
Stockholders' equity:
Preferred stock, $25 par, 7%		316,000		316,000
Common stock, $10 par		508,000		508,000
Retained earnings		892,140		720,090
Total stockholders' equity		1,716,140		1,544,090
Total liabilities and stockholders' Equity	$	3,135,640	$	2,602,590

Crowley Building Supply
Comparative Income Statement and Reconciliation
	This Year		Last Year
Sales	$	5,017,000	$	4,359,000
Cost of goods sold		3,867,400		3,431,400
Gross margin		1,149,600		927,600
Selling and administrative expenses		653,100		534,100
Net operating income		496,500		393,500
Interest expense		49,240		49,240
Net income before taxes		447,260		344,260
Income taxes (35%)		156,541		120,491
Net income		290,719		223,769
Dividends paid:
Preferred dividends		22,120		22,120
Common dividends		96,549		61,059
Total dividends paid		118,669		83,179
Net income retained		172,050		140,590
Retained earnings, beginning of year		720,090		579,500
Retained earnings, end of year	$	892,140	$	720,090

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	2.5
Acid-test ratio	1.2
Average collection period	18	days
Average sale period	50	days
Debt-to-equity ratio	0.75
Times interest earned	6.0
Return on total assets	10	%
Price-earnings ratio	9

Required:

1.	Sycamore State Bank is uncertain whether the loan should be made. To assist it in making a 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 totaled $253,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

e.	Average sale period. (The inventory at the beginning of last year totaled $506,000.) (Round your intermediate calculations and final answers 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. (Round your answers to 1 decimal place.)

2.	For both this year and last year:

a.

Present the balance sheet in common-size form. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3. Due to rounding, figures may not fully reconcile down a column.)

Crowley Building Supply
Common-Size Balance Sheets
	This Year		Last Year
Assets
Current assets:
Cash		%		%
Marketable securities		%		%
Accounts receivable, net		%		%
Inventory		%		%
Prepaid expenses		%		%
Total current assets		%		%
Plant and equipment, net		%		%
Total assets		%		%
Liabilities and Stockholders' equity
Liabilities:
Current liabilities		%		%
Bonds payable, 8%		%		%
Total liabilities		%		%
Stockholders' equity:
Preferred stock, $25 par, 7%		%		%
Common stock, $10 par		%		%
Retained earnings		%		%
Total stockholders' equity		%		%
Total liabilities and equity		%		%

b.	Present the income statement in common-size form down through net income. (Round your percentage answers to 1 decimal place i.e., 0.123 is considered as 12.3. Due to rounding, figures may not fully reconcile down a column.)

Crowley Building Supply
Common-Size Income Statements
	This Year		Last Year
Sales		%		%
Cost of goods sold		%		%
Gross margin		%		%
Selling and administrative expenses		%		%
Net operating income		%		%
Interest expense		%		%
Net income before taxes		%		%
Income taxes		%		%
Net income		%		%