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 as follows.
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ARROWBELL COMPANY |
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|
Year |
Sales |
Net Income |
|
2005 |
$2,568,660 |
$145,800 |
|
2006 |
2,660,455 |
101,600 |
|
2007 |
2,550,180 |
52,650 |
|
2008 |
2,625,280 |
86,800 |
|
2009 |
3,680,650 |
151,490 |
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ARROWBELL COMPANY |
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|
2009 |
2008 |
|
|
Assets |
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Current assets: |
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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 |
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Plant and equipment: |
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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 |
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Other assets: |
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Cash surrender value of life insurance |
20,650 |
18,180 |
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Other |
40,660 |
38,918 |
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Total other assets |
61,310 |
57,098 |
|
Total assets |
$4,316,598 |
$3,776,711 |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Notes and mortgages payable, current portion |
$915,180 |
$550,155 |
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Accounts payable and accrued liabilities |
1,160,111 |
851,080 |
|
Total current liabilities |
2,075,291 |
1,401,235 |
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Long term notes and mortgages payable, less current portion above |
550,000 |
775,659 |
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Total liabilities |
2,625,291 |
2,176,894 |
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Stockholders’ equity: |
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Capital stock, par value $1.00; authorized, 800,000; issued and outstanding, 600,000 (2009 and 2008) |
600,000 |
600,000 |
|
Paid in excess of par |
890,000 |
890,000 |
|
Retained earnings |
201,307 |
109,817 |
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Total stockholders’ equity |
1,691,307 |
1,599,817 |
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Total liabilities and stockholders’ equity |
$4,316,598 |
$3,776,711 |
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ARROWBELL COMPANY |
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|
2009 |
2008 |
|
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Cash flows from operating activities: |
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|
Net income |
$151,490 |
$86,800 |
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Noncash expenses, revenues, losses, and gains included in income: |
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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 2009, increase in 2008 |
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 |
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Cash flows from investing activities: |
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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 |
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Net cash used for investing activities |
518,532 |
218,263 |
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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 |
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 with regard to the company’s expansion program?