(Ratio Computations and Additional Analysis) Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers of Bradburn and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $35,000 notes, which are due on June 30, 2013, and September 30, 2013. Another note of $6,000 is due on March 31, 2014, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’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 Topeka National Bank requested financial reports for the last 2 fiscal years. These reports are reproduced below and on page 1562.
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BRADBURN CORPORATION |
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Assets |
2013 |
2012 |
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Cash |
$ 18,200 |
$ 12,500 |
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Notes receivable |
148,000 |
132,000 |
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Accounts receivable (net) |
131,800 |
125,500 |
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Inventories (at cost) |
105,000 |
50,000 |
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Plant & equipment (net of depreciation) |
1,449,000 |
1,420,500 |
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Total assets |
$1,852,000 |
$1,740,500 |
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Liabilities and Stockholders’ Equity |
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Accounts payable |
$ 79,000 |
$ 91,000 |
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Notes payable |
76,000 |
61,500 |
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Accrued liabilities |
9,000 |
6,000 |
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Common stock (130,000 shares, $10 par) |
1,300,000 |
1,300,000 |
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Retained earningsa |
388,000 |
282,000 |
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Total liabilities and stockholders’ equity |
$1,852,000 |
$1,740,500 |
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BRADBURN CORPORATION |
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2013 |
2012 |
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Sales revenue |
$3,000,000 |
$2,700,000 |
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Cost of goods solda |
1,530,000 |
1,425,000 |
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Gross margin |
1,470,000 |
1,275,000 |
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Operating expenses |
860,000 |
780,000 |
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Income before income taxes |
610,000 |
495,000 |
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Income taxes (40%) |
244,000 |
198,000 |
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Net income |
$ 366,000 |
$ 297,000 |
Instructions
(a) Compute the following items for Bradburn Corporation.
(1) Current ratio for fiscal years 2012 and 2013.
(2) Acid-test (quick) ratio for fiscal years 2012 and 2013.
(3) Inventory turnover for fiscal year 2013.
(4) Return on assets for fiscal years 2012 and 2013. (Assume total assets were $1,688,500 at 3/31/11.)
(5) Percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 2012 to 2013.
(b) Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown’s request for a time extension on Bradburn’s notes.
(c) Assume that the percentage changes experienced in fiscal year 2013 as compared with fiscal year 2012 for sales and cost of goods sold will be repeated in each of the next 2 years. Is Bradburn’s desire to finance the plant expansion from internally generated funds realistic? Discuss.
(d) Should Topeka National Bank grant the extension on Bradburn’s notes considering Daniel Brown’s statement about financing the plant expansion through internally generated funds? Discuss.