The T.P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm’s sales were $600, 100 for the year just ended, and its total assets exceeded $500,000. The company was started by My. Jarmon just 10 years ago and has been profitable every year since its inception. The chief financial officer for the firm, Brent Behlim, has decided to seek a line of credit from the firm’s bank totaling $86,000. 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 purchases. Mr. Vehlim wants to use the line of credit to supplant 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. Jan Fama, associate credit analyst for the Merchants National Bank of Midland, Michigan, was assigned the task of analyzing Jarmon’s loan request. Calculate the following ratios for 2013 Which of the ratios calculated in part (a) do you think should be most crucial in determining whether the bank should extend the line of credit? Use the information provided by the financial ratios and industry-norm ratios to decide if you would support making the loan.

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Description: The T.P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm’s sales were $600, 100 for the year just ended, and its total assets exceeded $500,000. The company was started by My. Jarmon just 10 years ago and has been profi

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The T.P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm’s sales were $600, 100 for the year just ended, and its total assets exceeded $500,000. The company was started by My. Jarmon just 10 years ago and has been profitable every year since its inception. The chief financial officer for the firm, Brent Behlim, has decided to seek a line of credit from the firm’s bank totaling $86,000. 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 purchases. Mr. Vehlim wants to use the line of credit to supplant 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. Jan Fama, associate credit analyst for the Merchants National Bank of Midland, Michigan, was assigned the task of analyzing Jarmon’s loan request.
1. Calculate the following ratios for 2013
2. Which of the ratios calculated in part (a) do you think should be most crucial in determining whether the bank should extend the line of credit?
3. Use the information provided by the financial ratios and industry-norm ratios to decide if you would support making the loan.

Ratio Norms
Current ratio
1.80
Acid-test ratio
0.90
Debt ratio
50.0%
Times interest earned
10.00
Average collection period
20.0
Inventory turnover (based on cost of goods sold)
7.00
Return on equity
12.0%
Operating return on assets
16.8%
Operating profit margin
14.0%
Total asset turnover
1.20
Fixed asset turnover
1.80

T.P. Jarmon Company Balance Sheets
2012
2013
Cash
$15,100
$13,900
Marketable securities
6,000
6,210
Accounts receivable
41,900
33,000
Inventory
51,100
83,900
Prepaid rent
1,190
1,100
Total current assets
$115,290
$138,110
Net plant and equipment
286,100
269,900
Total assets
$401,390
$408,010
2012
2013
Accounts payable
$48,100
$57,100
Notes payable
15,000
12,900
Accruals
5,990
5,000
Total current liabilities
$69,090
$75,000
Long-term debt
160,100
150,000
Common stockholders' equity
172,200
183,010
Total liabilities and owners' equity
$401,390
$408,010
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T. P. Jarmon Company
Income Statement for 2013
Sales (all credit)
Less: Cost of goods sold
$600, 100
(460,100)
Gross profit
$140,000
Less: Operating and interest expenses
General and administrative
$(3
Interest
(9,900)
Depreciation
(29,900)
Total
S(69,800)
Earnings before taxes
$70,200
Less: Taxes
(27,200)
Net income available to common stockholders
$43,000
Less: Cash dividends
(31.800)
Change in retained earnings
$11,200
(Click on the icon
in order to copy its contents into a spreadsheet.)

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