Midwest Inc. is a medium-size company that has been in business for 20 years. The industry has
Question:
Ratio Industry Average
Current ratio .......................................................................................1.20
Acid-test (quick) ratio .........................................................................0.50
Inventory turnover .............................................................................35 times
Debt-to-equity ratio ............................................................................0.50
Times interest earned ........................................................................25 times
Return on sales .....................................................................................3%
Asset turnover .....................................................................................3.50 times
Return on common stockholders equity .........................................20%
The financial statements to be submitted to the bank in connection with the loan follow.
Midwest Inc.
Statement of Income and Retained Earnings
For the Year Ended December 31, 2014
(thousands omitted)
Sales revenue .......................................................................................$ 420,500
Cost of goods sold ................................................................................(300,000)
Gross profit ...........................................................................................$ 120,500
Selling, general, and administrative expenses .....................................(85,000)
Income before interest and taxes .........................................................$ 35,500
Interest expense .........................................................................................(8,600)
Income before taxes................................................................................$ 26,900
Income tax expense ..................................................................................(12,000)
Net income ................................................................................................$ 14,900
Retained earnings, January 1, 2014 ...........................................................12,400
$ 27,300
Dividends paid on common stock .............................................................(11,200)
Retained earnings, December 31, 2014 ...................................................$ 16,100
Required
1. Prepare a columnar report for the controller of Midwest Inc. comparing the industry averages for the ratios published by the trade association with the comparable ratios for Midwest. For Midwest, compute the ratios as of December 31, 2014, or for the year ending December 31, 2014, whichever is appropriate.
2. Briefly evaluate Midwests ratios relative to the industry averages.
3. Do you think that the bank will approve the loan? Explain your answer.
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
Step by Step Answer:
Financial Accounting The Impact on Decision Makers
ISBN: 978-1285182964
9th edition
Authors: Gary A. Porter, Curtis L. Norton