Refer to the financial data for the

Bao Corporation in Problem 14-13.You have just been hired as a loan officer at the Sussex Bank.Your

supervisor has given you a file containing a request from Bao Corporation for a $30,000 five-year

loan.Use the financial statements for the Bao Corporation to answer the questions that follow.

Lui Chun, who just a year ago was appointed president of Bao Corporation, informs you that

although the company has had some problems in the past, it is turning things around, as evidenced

by the 17 percent increase in sales and the improved earnings results between last year and this year.

Ms.Chun feels that,with her leadership and the improved technology (which will come from the equipment

that the $30,000 will allow the company to purchase),profits will be even stronger in the future.

Wanting to succeed in your first assignment, you decide to gather all the necessary information

for a complete analysis.You determine that the following ratios are typical for the industry

in which Bao Corporation operates:

Current ratio 2.6 to 1

Acid-test (quick) ratio 1.2 to 1

Accounts receivable turnover 8.5 times

Inventory turnover 6.2 times

Return on assets 12.1%

Debt-to-equity ratio 0.68 to 1

Times interest earned 6.8

Required

Compute each of the above ratios for Bao Corporation.

Summarize the results of these ratios.

Based on this analysis,would you recommend that the loan be approved?

Bao Corporation

Comparative Balance Sheets

December 31, 2015, and 2014

2015 2014

Assets

Current assets:

Cash $ 1,900 $ 1,300

Accounts receivable net 9,100 7,300

Inventory 11,300 9,100

Prepaid expenses 560 250

Total current assets 22,860 17,950

Property and equipment:

Land 86,000 86,000

Buildings and equipment, net 48,600 52,000

Total property and equipment 134,600 138,000

Total assets $157,460 $155,950

Liabilities and Stockholders Equity

Current liabilities:

Accounts payable $ 17,600 $ 21,000

Accrued expenses 1,620 4,430

Notes payable, short term 540 220

Total current liabilities 19,760 25,650

Long-term liabilities:

Bonds payable 5,300 5,300

Notes payable 34,400 35,000

Total liabilities 59,460 65,950

Stockholders equity:

Common stock 11,000 11,000

Additional paid-in capital 19,000 19,000

Total paid-in capital 30,000 30,000

Retained earnings 68,000 60,000

Total stockholders equity 98,000 90,000

Total liabilities and stockholders equity $157,460 $155,950

Bao Corporation

Comparative Income Statement

For the Year Ended December 31, 2015, and 2014

2015 2014

Sales $130,000 $111,000

Cost of goods sold 67,000 61,000

Gross margin 63,000 50,000

Operating expenses:

Selling expenses 24,500 20,000

Administrative expenses 17,500 14,600

Total operating expenses 42,000 34,600

Income from operations 21,000 15,400

Interest expense 5,600 4,700

Income before taxes 15,400 10,700

Less income taxes 6,160 4,280

Net income $ 9,240 $6,420