Problem: P24-3, Ratio Computations and Additional Analysis, File 24p-3 Sandburg Corporation was formed 5 years ago through a public subscription of common stock. Robert Frost, who owns 15% of the common stock, was one of the organizers of Sandburg and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, Robert Frost approached the Spokane National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2007 and September 30, 2007. Another note of $6,000 is due on March 31, 2008, but he expects no difficulty in paying this note on its due date. Frost explained that Sandburg’s cash flow problems are due primarily to the company’s desire to finance a $300,000 plant expansion over the next 2 fiscal years through internally generated funds. The Commercial Loan Officer of Spokane National Bank requested financial reports for the last 2 fiscal years. These reports are reproduced below: SANDBURG CORPORATION Statement
of Financial Position March 31 Assets 2007 2006 Cash $18,200 $12,500 Notes receivable 148,000 132,000 Accounts receivable (net) 131,800 125,500 Inventories (at cost) 95,000 50,000 Plant & equipment (net of depreciation) 1,449,000 1,420,500 Total assets $1,842,000 $1,740,500 Liabilities and Owners’ Equity Accounts payable $69,000 $91,000 Notes payable 76,000 61,500 Accrued liabilities 9,000 6,000 Common stock (130,000 shares, $10 par) 1,300,000 1,300,000 Retained earningsa 388,000 282,000 Total liabilities and owners’ equity $1,842,000 $1,740,500 a Cash dividends were paid at the rate of $1.00 per share in fiscal year 2006 and $2.00 per share in fiscal year 2007 SANDBURG CORPORATION Income Statement For The Fiscal Year Ended March 31 2007 2006 Sales $3,000,000 $2,700,000 Cost of goods sold 1,530,000 1,425,000 Gross margin 1,470,000 1,275,000 Operating expenses 860,000 780,000 Income before income taxes 610,000 495,000 Income taxes 244,000 198,000 Net income after income taxes $366,000 $297,000 Depreciation charges on the plant and equipment of $100,000 and $102,500 for the fiscal years ended March 31, 2006 and 2007, respectively, are included in cost of goods sold. Instructions: Fill in the provided matrix and utilize it as the matrix for “VLOOKUP” formulas within the cells below. Column 4 Column 5 2007 2006 Average inventory – 2007 Average total assets Total Assets = Mar 31, 2002 Total Assets = Mar 31
, 2006 Total Assets = Mar 31
, 2007 Cost of goods sold Current assets Current liabilities Dividends Depreciation Gross margin Income before taxes Income taxes (40%) Inventories = EOY 2006 Inventories = EOY 2007 Net income after taxes Operating expenses Sales (a) Compute the following items for Sandburg Corporation: (1) Current ratio for fiscal years 2006 and 2007. (2) Acid-test (quick) ratio for fiscal years 2006 and 2007. (3) Inventory turnover for fiscal year 2007. (4) Return on assets for fiscal years 2006 and 2007. (Assume total assets
were (5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2006 to 2007. Omit “000” from the values. (b) Identify and explain what other financial reports and / or financial analyses might be helpful to the commercial loan officer of Spokane National Bank in evaluating Robert Frost’s request for a time extension on Sandburg’s notes. (c) Assume that the percentage changes experienced in fiscal year 2007 as compared with fiscal year 2006 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Sandburg’s desire to finance the plant expansion from internally generated funds realistic? Discuss. (Omit the ‘000s.) (d) Should Spokane National Bank grant the extension on Sandburg’s notes considering Robert Frost’s statement about financing the plant expansion through internally generated funds? Discuss.