Warford Corporation was formed five years ago through a public subscription of common stock. Lucinda Street, who owns 15% of the common stock, was one of the organizers of Warford and is its current president. The company has been successful but currently is experiencing a shortage of funds. On June 10, Street approached Bell National Bank, asking for a 24-month extension on two $30,000 notes, which are due on June 30, 2001, and September 30, 2001. Another note of $7,000 is due on December 31, 2001, but Street expects no difficulty in paying this note on its due date. Street explained that Warford’s cash flow problems are due primarily to the company’s desire to finance a $300,000 plant expansion over the next two fiscal years through internally generated funds.
The commercial loan officer of Bell National Bank requested financial reports for the last two fiscal years. These reports are reproduced below and on the following page.
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WARFORD CORPORATION |
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2000 |
2001 |
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Assets: |
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Cash |
$ 12,500 |
$ 16,400 |
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Notes receivable |
104,000 |
112,000 |
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Accounts receivable (net) |
68,500 |
81,600 |
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Inventories (at cost) |
50,000 |
80,000 |
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Plant and equipment (net of depreciation) |
646,000 |
680,000 |
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Total assets |
$881,000 |
$970,000 |
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2000 |
2001 |
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Liabilities and Owners’ Equity: |
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Accounts payable |
$ 72,000 |
$ 69,000 |
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Notes payable |
54,500 |
67,000 |
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Accrued liabilities |
6,000 |
9,000 |
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Common stock (60,000 shares, $10 par) |
600,000 |
600,000 |
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Retained earnings** |
148,500 |
225,000 |
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Total liabilities and owners’ equity |
$881,000 |
$970,000 |
Cash dividends were paid at the rate of $1.00 per share in fiscal year 2000 and $1.25 per share in fiscal
year 2001.
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WARFORD CORPORATION |
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2000 |
2001 |
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Sales |
$2,700,000 |
$3,000,000 |
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Cost of goods sold* |
1,720,000 |
1,902,500 |
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Gross profit |
980,000 |
1,097,500 |
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Operating expenses |
780,000 |
845,000 |
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Net income before taxes |
200,000 |
252,500 |
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Income taxes (40%) |
80,000 |
101,000 |
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Income after taxes |
$ 120,000 |
$ 151,500 |
Depreciation charges on the plant and equipment of $100,000 and $102,500 for fiscal years ended March
31, 2000 and 2001, respectively, are included in cost of goods sold.
Required a.Calculate the following items for Warford Corporation:
1. Current ratio for fiscal years 2000 and 2001
2. Acid-test (quick) ratio for fiscal years 2000 and 2001
3. Inventory turnover for fiscal year 2001
4. Return on assets for fiscal years 2000 and 2001
5. Percentage change in sales, cost of goods sold, gross profit, and net income after taxes from fiscal year 2000 to 2001
b.Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Bell National Bank in evaluating Street’s request for a time extension on Warford’s notes.
c.Assume that the percentage changes experienced in fiscal year 2001, as compared with fiscal year 2000 for sales, cost of goods sold, gross profit, and net income after taxes, will be repeated in each of the next two years. Is Warford’s desire to finance the plant expansion from internally generated funds realistic? Explain.
d. Should Bell National Bank grant the extension on Warford’s notes, considering Street’s statement about financing the plant expansion through internally generated funds? Explain.