The Arrowbell Company is a growing company. Two years ago, it decided to expand in order to increase its production capacity. The company anticipates that the expansion program can be completed in another two years. Financial information for Arrowbell is on the following pages.
Required a. Comment on the short-term debt position, including computations of current ratio, acid-test ratio, cash ratio, and operating cash flow/current maturities of long-term debt and current notes payable.
b. If you were a supplier to this company, what would you be concerned about?
c. Comment on the long-term debt position, including computations of the debt ratio, debt/equity, debt to tangible net worth, and operating cash flow/total debt. Review the statement of operating cash flows.
d. If you were a banker, what would you be concerned about if this company approached you for a long-term loan to continue its expansion program?
e. What should management consider doing at this point in regard to the company’s expansion program?
|
ARROWBELL COMPANY |
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|
Year |
Sales |
Net Income |
|
1998 |
$2,568,660 |
$145,800 |
|
1999 |
2,660,455 |
101,600 |
|
2000 |
2,550,180 |
52,650 |
|
2001 |
2,625,280 |
86,800 |
|
2002 |
3,680,650 |
151,490 |
|
ARROWBELL COMPANY |
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|
2002 |
2001 |
|
|
Assets |
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|
Current assets: |
||
|
Cash |
$ 250,480 |
$ 260,155 |
|
Accounts receivable (net) |
760,950 |
690,550 |
|
Inventories at lower-of-cost-or-market |
725,318 |
628,238 |
|
Prepaid expenses |
18,555 |
20,250 |
|
Total current assets |
1,755,303 |
1,599,193 |
|
Plant and equipment: |
||
|
Land, buildings, machinery, and equipment |
3,150,165 |
2,646,070 |
|
Less: Accumulated depreciation |
650,180 |
525,650 |
|
Net plant and equipment |
2,499,985 |
2,120,420 |
|
Other assets: |
||
|
Cash surrender value of life insurance |
20,650 |
18,180 |
|
Other |
40,660 |
38,918 |
|
Total other assets |
61,310 |
57,098 |
|
Total assets |
$4,316,598 |
$3,776,711 |
|
Liabilities and Stockholders’ Equity |
||
|
Current liabilities: |
||
|
Notes and mortgages payable, current portion |
$ 915,180 |
$ 550,155 |
|
Accounts payable and accrued liabilities |
1,160,111 |
851,080 |
|
Total current liabilities |
2,075,291 |
1,401,235 |
|
Long-term notes and mortgages payable, |
||
|
less current portion above |
550,000 |
775,659 |
|
Total liabilities |
2,625,291 |
2,176,894 |
|
Stockholders’ equity: |
||
|
Capital stock, par value $1.00; authorized, |
||
|
800,000; issued and outstanding, |
||
|
600,000 (1997 and 1996) |
600,000 |
600,000 |
|
Paid in excess of par |
890,000 |
890,000 |
|
Retained earnings |
201,307 |
109,817 |
|
Total stockholders’ equity |
1,691,307 |
1,599,817 |
|
Total liabilities and stockholders’ equity |
$4,316,598 |
$3,776,711 |
|
ARROWBELL COMPANY |
||
|
2002 |
2001 |
|
|
Cash flows from operating activities: |
||
|
Net income |
$151,490 |
$ 86,800 |
|
Noncash expenses, revenues, losses, |
||
|
and gains included in income: |
||
|
Depreciation |
134,755 |
102,180 |
|
Increase in accounts receivable |
(70,400) |
(10,180) |
|
Increase in inventories |
(97,080) |
(15,349) |
|
Decrease in prepaid expenses |
||
|
in 2002, increase in 2001 |
1,695 |
(1,058) |
|
Increase in accounts payable |
||
|
and accrued liabilities |
309,031 |
15,265 |
|
Net cash provided by operating activities |
429,491 |
177,658 |
|
Cash flows from investing activities: |
||
|
Proceeds from retirement of |
||
|
property, plant, and equipment |
10,115 |
3,865 |
|
Purchases of property, plant, and equipment |
(524,435) |
(218,650) |
|
Increase in cash surrender |
||
|
value of life insurance |
(2,470) |
(1,848) |
|
Other |
(1,742) |
(1,630) |
|
Net cash used for investing activities |
(518,532) |
(218,263) |
|
Cash flows from financing activities: |
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|
Retirement of long-term debt |
(225,659) |
(50,000) |
|
Increase in notes and mortgages payable |
365,025 |
159,155 |
|
Cash dividends |
(60,000) |
(60,000) |
|
Net cash provided by financing activities |
79,366 |
49,155 |
|
Net increase (decrease) in cash |
$ (9,675) |
$ 8,550 |