Midwest Inc. is a medium-size company that has been in business for 20 years. The industry has become very competitive in the last few years, and Midwest has decided that it must grow if it is going to survive. It has approached the bank for a sizable five-year loan, and the bank has requested Midwest€™s most recent financial statements as part of the loan package. The industry in which Midwest operates consists of approximately 20 companies relatively equal in size. The trade association to which all of the competitors belong publishes an annual survey of the industry, including industry averages for selected ratios for the competitors. All companies voluntarily submit their statements to the association for this purpose. Midwest€™s controller is aware that the bank has access to this survey and is very concerned about how the company fared this past year compared with the rest of the industry. The ratios included in the publication and the averages for the past year are as follows:
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 3.5 times
Return on common stockholders€™ equity 20%
The financial statements to be submitted to the bank in connection with the loan follow.

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, 2010, or for the year ending December 31, 2010, whichever is appropriate.
2. Briefly evaluate Midwest€™s ratios relative to the industry averages.
3. Do you think that the bank will approve the loan? Explain youranswer.

Transcribed Image Text:

Midwest Inc. Statement of Income and Retained Eamings For the Year Ended December 31, 2010 (thousands omitted) Sales revenue Cost of goods sold S 420,500 S 120,500 (85,000) S 35,500 8,600) $ 26,900 Gross profit Selling, general, and administrative expenses Income before interest and taxes Interest expense Income before taxes Income tax expense Net income $ 14,900 12,400 $ 27300 11.200) 16,100 Retained earnings, January 1, 2010 Dividends paid on common stock Retained earnings, December 31, 2010 Midwest Inc. Comparative Statements of Financial Position (thousands omitted) December 31, 2010 December 31,2009 Assets Current assets: $ 1,790 1,200 400 8,700 350 S 12,440 S 560 $ 2,600 1.700 600 7400 400 12,700 S 400 Cash Marketable securities Accounts receivable, net of allowances Prepaid items Total current assets Property, plant, and equipment Land $ 12,000 12,000 Buildings and equipment, net of 87,000 $ 99,000 $112,000 82,900 $ 94,900 $108,000 Total property, plant, and equipment Total assets Liabilities and Stockholders' Equity Current liabilities Short-term notes Accounts payable Salaries and wages payable Income taxes payable S 800 6,040 1,500 1,560 $ 9.900 36,000 S 600 6,775 1,200 1,025 $ 9.600 S 36,000 Total current liabilities Long-term bonds payable Stockholders' equity: Common stock, no par S 50,000 16,100 S 66,100 $112,000 S 50,000 12,400 S 62,400 Retained earnings Total stockholders' equity Total liabilities and stockholders' equity