The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm's sales were $600,000 for the year just ended, and its total assets exceeded $400,000. The company was started by Mr. Jarmon just 10‹years ago and has been profitable every year since its inception. The chief financial officer for the firm, Brent Vehlim, has decided to seek a line of credit totaling $80,000 from the firm's bank. In the past, the company has relied on its suppliers to finance a large‹ part of its needs for inventory. However, in recent months tight money conditions have led the firm's suppliers to offer sizable cash discounts to speed up payments for purchases. Mr. Vehlim wants to use the line of credit to replace a large portion of the firm's payables during the summer, which is the firm's peak seasonal sales period.

The firm's two most recent balance sheets were presented to the bank in support of its loan request. In addition, the firm's income statement for the year just ended was provided. These statements are found in the following tables:

T. P. Jarmon Company, Balance Sheet for 12/31/2014 and 12/31/2015

T. P. Jarmon Company, Income Statement for the Year Ended 12/31/2015

Mike Ameen, associate credit analyst for the Merchants National Bank of Midland, Michigan, was assigned the task of analyzing Jarmon's loan request.
a. Calculate the financial ratios for 2015 corresponding to the industry norms provided as follows:
RATIO
Current ratio ....................................................... 1.8
Acid-test ratio .................................................... 0.9
Debt ratio ......................................................... 0.5
Times interest earned ........................................... 10.0
Average collection period .................................... 20.0
Inventory turnover (based on cost of goods sold) .......... 7.0
Return on common equity .................................. 12.0%
Operating return on assets .................................. 16.8%
Operating profit margin ..................................... 14.0%
Total asset turnover ........................................... 1.20
Fixed-asset turnover .......................................... 1.80
b. Which of the ratios reported in the industry norms do you feel should be most crucial in determining whether the bank should extend the line of credit?
c. Prepare Jarmon's statement of cash flows for the year ended December 31, 2015. Interpret your findings.
d. Use the information provided by the financial ratios and the cash flow statement to decide if you would support making the loan?

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2014 15,000 6,000 42,000 51,000 14,000 6,200 33,000 84,000 Cash Marketable securities Accounts recevable Inventory Prepaid rent Total current assets Net plant and equipment Total assets Accounts payable Notes payable Accrued expenses Total current liabilities $115,200 86,000 $138,300 48,000 15,000 57,000 13,000 69,000 160,000 172200 75,000 150,000 Common stockholders' equity Total liabilities and equity Sales (all credit) Cost of goods sold Gross profit Operating and interest (expenses) $600,000 460,000 $140,000 General and administrative expense ($30,000) (10,000) 130,000) Interest expense Depreciation expense Total Earnings before taxes Taxes Net income available to common stockholders Cash dividends Change in retained earnings 70,000 70,000 27,100 42,900 31,800