LOG Problem 13-7A Comparison with Industry Averages 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 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 395 Midwest Inc. Comparative Statements of Financial Position (thousands omitted) December 31, 2017 December 31, 2016 Assets Current assets: Cash Marketable securities Accounts receivable, net of allowances Inventories Prepaid items Total current assets $ 1.790 1,200 400 8,700 350 $ 12,440 $ 2,600 1.700 600 7.400 400 $ 12,700 (Continued) Chapter 13 Financial Statement Analysis December 31, 2016 December 31, 2017 $ 580 400 Long-term investments Property, plant, and equipment Land $ 12.000 $ 12,000 87.000 $ 90,000 $112.000 82.900 $ 94,900 $108,000 Buildings and equipment, net of accumulated depreciation 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 Total current liabilities Long-term bonds payable Stockholders' equity Common stock, no par Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 800 6,040 1,500 1,560 $ 9,900 $ 36,000 $ 600 6,775 1 200 1,025 $ 9.600 $ 36,000 $ 50,000 16.100 $ 66,100 $112.000 $ 50.000 12,400 $ 62.400 $100,000 Midwest Inc. Statement of Income and Retained Earnings For the Year Ended December 31, 2017 (thousands omitted) Sales revenue $ 420,500 Cost of goods sold (300,000) Gross profit $ 120,500 Selling, general, and administrative expenses 185.000) Income before interest and taxes $ 35,500 Interest expense 18.600) Income before taxes $ 26,900 Income tax expense (12,000) Net income $ 14,900 Retained earnings, January 1, 2017 12.400 $ 27,300 Dividends paid on common stock (11.200) Retained earnings, December 31, 2017 $ 16,100 Required 1. Prepare a columnar report for the controller of Midwest Inc. comparing the industry as ages for the ratios published by the trade association with the comparable ratios for Midw For Midwest, compute the ratios as of December 31, 2017, or for the year ending Decem 31, 2017, 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 your