Question

You can just give bullets I do not need the answer in sheets. I will type out full page.

P3. Financial Statement Analysis Modern Building Supply, Inc. Building supply INDUSTRY ratios follow: Current Ratio 2.5 to 1 Quick Ratio 1.2 to 1 Average Age of Receivables 30 days Inventory turnover in days 50 days Debt to Equity Ratio 0.75 to 1 Times Interest Earned 5.0 times Return on Total Assets 10% Price-earnings ratio 9 Return on Sales (profit margin) 4% The company, MBS, has just approached State Bank requesting a $300,000 short-term loan for working capital purposes. Would you make the loan? Use the information provided above to help make your decision. Keep your explanation to one page or less, analysis on same or second page. You are not limited to the above ratios. Modern Building Supply sells various building materials to retail outlets. Listed below are its financial statements for the past two years. Modern Building Supply Comparative Balance Sheets (amounts in 000's) This Year Last Year Assets Current Assets: Cash $ 90 $ 200 Short-term Investments 50 Accounts Receivable 6501 500 Inventory 1,160 900 Prepaid Expenses 301 20 Total Current Assets 1,9301 1,670 Plant and Equipment, Net 2.0001 1,830 Total Assets $ 3,930$ 3,500 Liabilities and S/E Liabilities: Accounts Payable 660 520 Wages Payable 701 50 Other Payables 2301 130 Current Liabilities $ 960 $ 700 Notes Payable 750 750 (12% annual interest) Total Liabilities 1,7101 1,450 Stockholders' Equity Common Stock 7001 700 Retained Earnings 1,5201 1,350 Total Equity 2,220 2,050 Total Liab. And Equity $ 3,930$ 3,500 Comparative Income Statements This Year Last Year Sales $ 7,000 $ 6,000 Less Cost of Goods Sold 5,530 4,800 Gross Profit 1,4701 1,200 Less Operating Expenses 930 710 Operating Income 5401 4900 Less Interest Expense 901 90 Income Before Taxes 4501 400 Income Tax Expense (40%) $ 180 $ 160 Net Income After Taxes $ 270 S 240 (you do NOT need to include this sheet with the solution sheets you turn in to me)

Answer 1

This year Last year a) Current assets ratio Current assets Current liabilities $1,930 $960 2.0 $1,670 $700 2.4 Current ratio is above 2 but below industry standard The current ratio has also reduced from last year to current year b) Quick ratio Quick assets Current liabilities $740 0.8 $750 $700 1.1 $960 Quick assets exclude inventory and prepaid expenses Quick ratio is below requirement of 1 Days c) Average age of receivables 365 days Receivables turnover 365 12.17 30 Average age of receivables is as per industry standard Receivables turnover Sales Average receivables (Opening +Closing)/2 $7,000 $575 12.17 Days d) Inventory turnover in days 365 days Inventory turnover 365 5.37 68 Average age of inventory is above industry standard. The firm is carrying more inventory than industry standard Inventory turnover Cost of goods sold Average inventory (Opening +Closing)/2 $5,530 $1,0301 5.37 e) Debt to Equity Total Debt Total Equity $1,7101 $2,2201 0.77 $1,450 $2,050 0.71 Debt Equity ratio has increased. It is above industry standard. Higher debt ratio increases the risk of the firm f) Times interest earned Operating profit Interest expense $540 $901 6.0 $490 $90 5.4 Interest coverage has improved and is above industry standard of 5.0 g) Return on total asset Operating profit Total Assets $540 $3,930 13.7% $490 $3,500 14.0% Return on assets is above than industry standard h) Return on sales Net income Sales $270 $7,000 3.9% $240 $6,000 4.0% The profit margin is as per industry standard Conclusion: The current ratio is above 2 and Quick ratio is below 1 (below requirement) The interest coverage is better than industry standard The profit margin is as per industry standard Considering these factors loan can be given to the firm