4-11. (Financial analysis) The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm's sales were $600,000 for the year just ended, and its total assets exceeded $400,000. The company was started by Mr. Jarmon just 10 years ago and has been profitable every year since its inception. The chief financial officer for the firm, Brent Vehlim, has decided to seek a line of credit totaling $80,000 from the firm's bank. In the past, the company has relied on its suppliers to finance a large part of its needs for inventory. However, in recent months tight money conditions have led the firm's suppliers to offer sizable cash discounts to speed up payments for CHAPTER 4 • Evaluating a Firm's Financial Performance purchases. Mr. Vehlim wants to use the line of credit to replace a large portion of the firm's payables during the summer, which is the firm's peak seasonal sales period. The firm's two most recent balance sheets were presented to the bank in support of its loan request. In addition, the firm's income statement for the year just ended was provided. These statements are found in the following tables: I. P. Jarmon Company, Balance Sheet for 12/31/2017 and 12/31/2018 Cash Marketable securities Accounts receivable Inventory Prepaid rent Total current assets Net plant and equipment Total assets Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stockholders' equity Total liabilities and equity 2017 2018 $ 15,000 $ 14,000 6,000 6,200 42,000 33,000 51,000 84,000 1,200 1,100 $115,200 $138,300 286,000 270,000 $401,200 $ 48,000 15,000 6,000 $ 69,000 160,000 172,200 $401,200 $408.300 $ 57,000 13,000 5,000 $ 75,000 150,000 183,300 $408,300 I. P. Jarmon Company, Income Statement for the Year Ended 12/31/2018 Sales (all credit) Less cost of goods sold Gross profit Less operating and interest expenses General and administrative $30.000 Interest 10,000 Depreciation 30,000 Total Earnings before taxes Less taxes Net income available to common stockholders Less cash dividends Change in retained earnings $600,000 460.000 $140,000 70,000 $ 70,000 14.700 $ 55,300 44.200 $ 11.100 Mike Ameen, associate credit analyst for the Merchants National Bank of Midland, Michigan, was assigned the task of analyzing Jarmon's loan request. a. Calculate the financial ratios for 2018 corresponding to the industry norms provided as follows: Current ratio Acid-test ratio Debt ratio RATIO NORMS 1.8 0.9 0.5 (Continued) 138 PART 1 ⚫ The Scope and Environment of Financial Management RATIO NORMS Times interest earned 10.0 Average collection period 20.0 Inventory turnover (based on cost of goods sold) 7.0 Return on common equity 12.0% Operating return on assets 16.8% Operating profit margin 14.0% Total asset turnover 1.20 Fixed asset tumover 1.80 b. Which of 166 of 619 dustry norms do you feel should be most crucial in determining whether the bank should extend the line of credit? c. Prepare Jarmon's statement of cash flows for the year ended December 31, 2018. Interpret your findings. d. Use the information provided by the financial ratios and the cash flow state- ment to decide if you would support making the loan. 137

4-11. (Financial analysis) The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm's sales were $600,000 for the year just ended, and its total assets exceeded $400,000. The company was started by Mr. Jarmon just 10 years ago and has been profitable every year since its inception. The chief financial officer for the firm, Brent Vehlim, has decided to seek a line of credit totaling $80,000 from the firm's bank. In the past, the company has relied on its suppliers to finance a large part of its needs for inventory. However, in recent months tight money conditions have led the firm's suppliers to offer sizable cash discounts to speed up payments for CHAPTER 4 • Evaluating a Firm's Financial Performance purchases. Mr. Vehlim wants to use the line of credit to replace a large portion of the firm's payables during the summer, which is the firm's peak seasonal sales period. The firm's two most recent balance sheets were presented to the bank in support of its loan request. In addition, the firm's income statement for the year just ended was provided. These statements are found in the following tables: I. P. Jarmon Company, Balance Sheet for 12/31/2017 and 12/31/2018 Cash Marketable securities Accounts receivable Inventory Prepaid rent Total current assets Net plant and equipment Total assets Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stockholders' equity Total liabilities and equity 2017 2018 $ 15,000 $ 14,000 6,000 6,200 42,000 33,000 51,000 84,000 1,200 1,100 $115,200 $138,300 286,000 270,000 $401,200 $ 48,000 15,000 6,000 $ 69,000 160,000 172,200 $401,200 $408.300 $ 57,000 13,000 5,000 $ 75,000 150,000 183,300 $408,300 I. P. Jarmon Company, Income Statement for the Year Ended 12/31/2018 Sales (all credit) Less cost of goods sold Gross profit Less operating and interest expenses General and administrative $30.000 Interest 10,000 Depreciation 30,000 Total Earnings before taxes Less taxes Net income available to common stockholders Less cash dividends Change in retained earnings $600,000 460.000 $140,000 70,000 $ 70,000 14.700 $ 55,300 44.200 $ 11.100 Mike Ameen, associate credit analyst for the Merchants National Bank of Midland, Michigan, was assigned the task of analyzing Jarmon's loan request. a. Calculate the financial ratios for 2018 corresponding to the industry norms provided as follows: Current ratio Acid-test ratio Debt ratio RATIO NORMS 1.8 0.9 0.5 (Continued) 138 PART 1 ⚫ The Scope and Environment of Financial Management RATIO NORMS Times interest earned 10.0 Average collection period 20.0 Inventory turnover (based on cost of goods sold) 7.0 Return on common equity 12.0% Operating return on assets 16.8% Operating profit margin 14.0% Total asset turnover 1.20 Fixed asset tumover 1.80 b. Which of 166 of 619 dustry norms do you feel should be most crucial in determining whether the bank should extend the line of credit? c. Prepare Jarmon's statement of cash flows for the year ended December 31, 2018. Interpret your findings. d. Use the information provided by the financial ratios and the cash flow state- ment to decide if you would support making the loan. 137

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter11: Long-term Assets

Section: Chapter Questions

Problem 4TP: Malone Industries has been in business for five years and has been very successful. In the past...

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