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PROBLEM 16-11 Common-Size statements and Financial Ratios for Creditors [LO1, LO3, LO4] Modern Building Supply sells various building materials to retail outlets. The company has
PROBLEM 16-11 Common-Size statements and Financial Ratios for Creditors [LO1, LO3, LO4] Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden State Bank requesting a $300,000 loan to strengthen the Cash aceount and to pay certain pressing short-term obligations. The company's financial statements for the most recent two years follow: 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 ageressively to acquire new customers. Sales terms are 2/10,n/30. An sales are on account. Assume that the following ratios are typical of companies in the building supply industry: Required: 1. Linden 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 amoumts and ratios for both this year and last yeara. Working capital a. Corrent ratio. c. Acid-test ratio. d. Average collection period. (The accounts receivable at the beginung of last year totaled $350,000. e. Average sale period. (The imventory at the beginning of last year totaled 5720.000 .) f. Debt-to-equity ratio is. Times interest eamed. 2. For both this yeur and last year (carry computations to one decimal place): a. Present the balance sheet in comumon-size form a b. Present the income statement in common-sire form down through net inconse. 3. From your analysis in (1) and (2) above, What problems or strengrth do you see for Modern Building Supply? Make a recommendation as to whether the loan should be approved
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