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Chapter 2 Modern Building Supply Essay

1154 words - 5 pages

Modern Building Supply sells various building materials to retail outlets. The company has just approached Linden 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:
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.:.
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:
Current ratio . . . . . . ...view middle of the document...

3. From your analysis in (1) and (2) above, what problems or strengths do you see for Modern
Building Supply? Make a recommendation as to whether the loan should be approved.

SOLUTION:

| | | |This Year |Last Year |
| 1. |a. |Current assets (a) |$2,060,000 |$1,470,000 |
| | |Current liabilities (b) | 1,100,000 |    600,000 |
| | |Working capital (a) − (b) |$  960,000 |$  870,000 |
| | | | | |
| |b. |Current assets (a) |$2,060,000 |$1,470,000 |
| | |Current liabilities (b) |$1,100,000 |$600,000 |
| | |Current ratio (a) ÷ (b) |1.87 |2.45 |
| | | | | |
| |c. |Cash + marketable securities + accounts receivable + short-term notes (a) |$740,000 |$650,000 |
| | |Current liabilities (b) |$1,100,000 |$600,000 |
| | |Acid-test ratio (a) ÷ (b) |0.67 |1.08 |
| | | | | |
| |d. |Sales on account (a) |$7,000,000 |$6,000,000 |
| | |Average receivables (b) |$525,000 |$375,000 |
| | |Accounts receivable turnover (a) ÷ (b) |13.3 |16.0 |
| | | | | |
| | |Average collection period: 365 days ÷ accounts receivable turnover |27.4 days |22.8 days |
| | | | | |
| |e. |Cost of goods sold (a) |$5,400,000 |$4,800,000...

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