Problem 24-3 (Essay)

Bradburn Corporation was formed 5 years ago through 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, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its 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 financial reports for the last 2 fiscal years.

BRADBURN CORPORATION

BALANCE SHEET

MARCH 31

Assets2018

2017

Cash$18,200$12,500Notes receivable148,000132,000Accounts receivable (net)131,800125,500Inventories (at cost)105,00050,000Plant & equipment (net of depreciation)1,449,0001,420,500Total assets$1,852,000$1,740,500Liabilities and Owners' EquityAccounts payable$79,000$91,000Notes payable76,00061,500Accrued liabilities9,0006,000Common stock (130,000 shares, $10 par)1,300,0001,300,000Retained earnings^a388,000282,000Total liabilities and stockholders' equity$1,852,000$1,740,500^aCash dividends were paid at the rate of $1 per share in fiscal year 2017 and $2 per share in fiscal year 2018.

BRADBURN CORPORATION

INCOME STATEMENT

FOR THE FISCAL YEARS ENDED MARCH 31

2018

2017

Sales revenue$3,000,000$2,700,000Cost of goods sold^a1,530,0001,425,000Gross margin1,470,0001,275,000Operating expenses860,000780,000Income before income taxes610,000495,000Income taxes (40%)244,000198,000Net income$366,000$297,000^aDepreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March 31, 2017 and 2018, respectively, are included in cost of goods sold.

Identify and explain what other financial reports and/or financial analyses 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.?

Assume that the percentage changes experienced in fiscal year 2018 as compared with fiscal year 2017 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.?

Should Topeka National Bank grant the extension on Bradburn's notes considering Daniel Brown's statement about financing the plant expansion through internally generated funds? Discuss.?