Crowley Building Supply sells various building materials to retail outlets. The

Question

Crowley Building Supply sells various building materials to retail outlets. The company has just approached Sycamore State Bank requesting a $300,000 loan to strengthen the Cash account 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 aggressively to acquire new customers. Sales terms are 2/10, n/30. All sales are on account.

Assume that the following ratios are typical of companies in the building supply industry:

Sycamore 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 amounts and ratios for both this year and last year:

Current ratio. (Round your answers to 2 decimal places.)

Acid-test ratio. (Round your answers to 2 decimal places

Average collection period. (The accounts receivable at the beginning of last year totaled $271,000.) (Round your intermediate calculations and final answers to 1 decimal place. Use 365 days in a year.)

Debt-to-equity ratio. (Round your answers to 2 decimal places.

Crowley Building Supply sells various building materials to retail outlets. The company has just approached Sycamore State Bank requesting a $300,000 loan to strengthen the Cash account and to pay certain pressing short-term obligations. The company’s financial statements for the most recent two years follow:

Explanation / Answer

Question 1). a). Solution :- Working capital = Total Current assets - Total Current Liabilities.

Question 1). b). Solution :- Current ratio = Total Current assets / Total Current Liabilities.

Question 1). c). Solution :- Acid-test ratio = Total liquid assets / Current liabilities.

(Total liquid assets = Total current assets - inventory - prepaid expenses)

Note :- Acid-test ratio is also known as Quick ratio / Liquid ratio.

Question 1). d). Solution :- Average collection period = 365 * (Average accounts receivable / Sales revenue)

Average accounts receivable (This year) = (492000 + 304000) / 2 = $ 398000.

Average accounts receivable (Last year) = (304000 + 271000) / 2 = $ 287500.

Question 1). Solution :- f). Debt-to-equity ratio = Total debt / Total equity.

Question 1). Solution :- g). Times interest earned ratio = Net operating income / Interest expense.

Notes :- i).  Times interest earned ratio is also known as Interest coverage ratio.

ii). Net operating income (NOI) is also referred to as Earnings before interest and taxes (EBIT).

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