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Venice InLine, Incorporated, was founded by Russ Perez to produce a specialized in - line skate he had designed for doing aerial tricks. Up to
Venice InLine, Incorporated, was founded by Russ Perez to produce a specialized inline skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of highimpact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfinished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors. Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be any problem getting a loan to pay off his accounts payableproviding that on his most recent financial statements the current ratio was above the acidtest ratio was above and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements. Russ would like to apply for a $ sixmonth loan bearing an interest rate of per year. The unaudited financial reports of the company appear below: Venice InLine, Incorporated Comparative Balance Sheet As of December dollars in thousands This Year Last Year Assets Current assets: Cash $ $ Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment Total assets $ $ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ $ Accrued liabilities Total current liabilities Longterm liabilities Total liabilities Stockholders' equity: Common stock and additional paidin capital Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ $ Venice InLine, Incorporated Income Statement For the Year Ended December dollars in thousands This Year Sales all on account $ Cost of goods sold Gross margin Selling and administrative expenses: Selling expenses Administrative expenses Total selling and administrative expenses Net operating income Interest expense Net income before taxes Income taxes Net income $ Required: a Based on the above unaudited financial statement of the current year calculate the following. Current ratio Acidtest ratio Ratio of net operting income to loan interest b Based on the statement made by the loan officer, would the company qualify for the loan? Last year Russ purchased and installed new, more efficient equipment to replace an older plastic injection molding machine. Russ had originally planned to sell the old machine, but found that it is still needed whenever the plastic injection molding process is a bottleneck. When Russ discussed his cash flow problems with his brotherinlaw, he suggested to Russ that the old machine be sold or at least reclassified as inventory on the balance sheet because it could be readily sold. At present, the machine is carried in the Property and Equipment account and could be sold for its net book value of $ The bank does not require audited financial statements. a Calculate the following if the old machine is considered as inventory. b Based on the a answer would the company qualify for the loan? c Calculate the following if the old machine is sold off. d Based on the c answer would the company qualify for the loan?
Venice InLine, Incorporated, was founded by Russ Perez to produce a specialized inline skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of highimpact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfinished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors.
Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be any problem getting a loan to pay off his accounts payableproviding that on his most recent financial statements the current ratio was above the acidtest ratio was above and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements.
Russ would like to apply for a $ sixmonth loan bearing an interest rate of per year. The unaudited financial reports of the company appear below:
Venice InLine, Incorporated
Comparative Balance Sheet
As of December
dollars in thousands
This Year Last Year
Assets
Current assets:
Cash $ $
Accounts receivable, net
Inventory
Prepaid expenses
Total current assets
Property and equipment
Total assets $ $
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ $
Accrued liabilities
Total current liabilities
Longterm liabilities
Total liabilities
Stockholders' equity:
Common stock and additional paidin capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity $ $
Venice InLine, Incorporated
Income Statement
For the Year Ended December
dollars in thousands
This Year
Sales all on account $
Cost of goods sold
Gross margin
Selling and administrative expenses:
Selling expenses
Administrative expenses
Total selling and administrative expenses
Net operating income
Interest expense
Net income before taxes
Income taxes
Net income $
Required:
a Based on the above unaudited financial statement of the current year calculate the following.
Current ratio
Acidtest ratio
Ratio of net operting income to loan interest
b Based on the statement made by the loan officer, would the company qualify for the loan?
Last year Russ purchased and installed new, more efficient equipment to replace an older plastic injection molding machine. Russ had originally planned to sell the old machine, but found that it is still needed whenever the plastic injection molding process is a bottleneck. When Russ discussed his cash flow problems with his brotherinlaw, he suggested to Russ that the old machine be sold or at least reclassified as inventory on the balance sheet because it could be readily sold. At present, the machine is carried in the Property and Equipment account and could be sold for its net book value of $ The bank does not require audited financial statements.
a Calculate the following if the old machine is considered as inventory.
b Based on the a answer would the company qualify for the loan?
c Calculate the following if the old machine is sold off.
d Based on the c answer would the company qualify for the loan?
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