Ian Manufacturing Company was organized five years ago and manufactures toys. Its most recent three years' balance sheets and income statements are reproduced below:

A reconciliation of retained earnings for years ended June 30, Year 4, and Year 5, follows:

Additional Information:
1. All sales are on account.
2. Long-term liabilities are owed to the company's bank.
3. Terms of sale are net 30 days.

Required:
a. Compute the following measures for both Years 4 and 5:
(1) Working capital.
(2) Current ratio.
(3) Acid-test ratio.
(4) Accounts receivable turnover.
(5) Collection period of receivables.
(6) Inventory turnover.
(7) Days to sell inventory.
(8) Debt-to-equity ratio.
(9) Times interest earned.
b. Using Year 3 as the base year, compute an index-number trend series for:
(1) Sales.
(2) Cost of goods sold.
(3) Gross profit.
(4) Marketing and administrative costs.
(5) Net income.
c. Based on your analysis in (a) and (b), prepare a one-page report yielding a recommendation on whether to grant a loan to Ian Manufacturing. Support your recommendation with relevant analysis.

Transcribed Image Text:

IAN MANUFACTURING COMPANY Balance Sheets June 30, Year 5, Year 4, and Year 3 Year 5 Year 4 Year 3 Assets Cash Accounts receivable, net Inventory Other current assets Plant and equipment, net Total assets 183,000 142,000 5,000 160,000 15,000 16,000 60,000 52,000 4,000 70,000 2,000 308,000 $202,000 80,000 97,000 6,000 110.000 Liabilities and Equity Accounts payable Federal income tax payable Long-term liabilities Common stock, $5 par value110,000 Retained earnings $147,800 50,400 22,000 28,000 22,400 80,000 49,600 30,000 120,000 14,400 73,000 110,000 60,200 94,200 Total liabilities and equity$502,000 $308,000 $202,000 IAN MANUFACTURING COMPANY Condensed Income Statements For Years Ended June 30, Year 5, Year 4, Year 3 Year 5 Year 4 Year 3 Net sales .. Cost of goods sold Gross profit Marketing and administrative costs Operating income Interest cost Income before income tax Income tax. Net income $1,684,000 $1,250,000 $1,050,000 (927,000) (810,000) (512,000) 538,000 (670,000) (396,700) 467 760) 70,240 2,240) 68,000 (28,000) 45,000 21,600 40,000 757,000 440,000 87,000 (12,000) 75,000 (30,000) 43,300 (7,300) 36,000 (14,400) IAN MANUFACTURING COMPANY Statement of Retained Earnings For Years Ended June 30, Year 5 and Year 4 Year 5 Year 4 Balance, beginning Add: Net income.. Subtotal Deduct: Dividends paid Balance, ending 60,200 $49,600 21,600 71,200 (11,000) (11,000) 94,200 60,200 45,000 105,200