Problem 24-3 Novak Corporation was formed 5 years ago through a public subscript

Question

Problem 24-3

Novak 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 Novak 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 $34,750 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $5,990 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Novak’s cash flow problems are due primarily to the company’s desire to finance a $299,300 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.

NOVAK CORPORATION
BALANCE SHEET
MARCH 31

2018

2017

NOVAK CORPORATION
INCOME STATEMENT
FOR THE FISCAL YEARS ENDED MARCH 31

2018

2017

(a) Compute the following items for Novak Corporation. (Round answer to 2 decimal places, e.g. 2.25 or 2.25%.)

2017   

2018

NOVAK CORPORATION
BALANCE SHEET
MARCH 31

Assets

2018

2017

Cash $18,270 $12,430 Notes receivable 148,780 130,950 Accounts receivable (net) 131,230 125,720 Inventories (at cost) 104,200 49,640 Plant & equipment (net of depreciation) 1,452,000 1,431,290     Total assets $1,854,480 $1,750,030 Liabilities and Owners’ Equity Accounts payable $78,690 $91,120 Notes payable 76,200 61,750 Accrued liabilities 5,420 19,930 Common stock (130,000 shares, $10 par) 1,307,580 1,296,530 Retained earningsa 386,590 280,700     Total liabilities and stockholders’ equity $1,854,480 $1,750,030 aCash dividends were paid at the rate of $1 per share in fiscal year 2017 and $2 per share in fiscal year 2018.

Explanation / Answer

1. Current Ratio = current assets / current liabilities

Current assets = cash + notes receivable + accounts receivable + inventories

Current liabilities = accounts payable + notes payable + accrued liabilities

Current Ratio 2017 = (12430+130950+125720+49640) / (91120+61750+19930) = 318740 / 172800 = 1.84:1

Current Ratio 2018 = (18270+148780+131230+104200) / (78690+76200+5420) = 402480/160310 = 2.51

2. Acid-test (quick) ratio = (current assets - inventories) / current liabilities

Acid-test (quick) ratio (2017)= (318740-49640)/172800 = 1.56:1

Acid-test (quick) ratio (2018) = (420480-104200)/160310 = 1.97:1

3. Inventory turnover = cost of goods sold / Average inventory

Average inventory = (beginning inventory +ending inventory) /2 = (49640+104200) /2 = 153840 / 2 = 76920

Inventory turnover = 1535270/76920 = 19.96 times

4. Return on assets = net income / Average assets

Return on assets (2017) = 308520/((1750030+1672570)/2) = 308520/1711300 = 18.03%

Return on assets (2018) = 371328/((1854480+1750030)/2)= 371328/1802255 = 20.60%

5. Percent changes

10.65%

(3010800-2721120)/2721120

7.89%

(1535270-1423060)/1423060

13.67%

(1475530-1298060)/1298060

20.36%

(371328-308520)/308520

Sales revenue

10.65%

(3010800-2721120)/2721120

Cost of goods sold

7.89%

(1535270-1423060)/1423060

Gross margin

13.67%

(1475530-1298060)/1298060

Net income after taxes

20.36%

(371328-308520)/308520

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