Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line
ID: 2498686 • Letter: V
Question
Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of high-impact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfinished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors.
Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be any problem getting a loan to pay off his accounts payable—providing that on his most recent financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements.
Jurgen would like to apply for a $125,000 six-month loan bearing an interest rate of 8% per year. The unaudited financial reports of the company appear below.
1a. Based on the above unaudited financial statement of the current year calculate the following. (Round your answers to 2 decimal places.)
Last year Jurgen purchased and installed new, more efficient equipment to replace an older heat-treating furnace. Jurgen had originally planned to sell the old equipment, but found that it is still needed whenever the heat-treating process is a bottleneck. When Jurgen discussed his cash flow problems with his brother-in-law, he suggested to Jurgen that the old equipment be sold or at least reclassified as inventory on the balance sheet because it could be readily sold. At present, the equipment is carried in the Property and Equipment account and could be sold for its net book value of $120,000. The bank does not require audited financial statements.
Calculate the follwing if the old machine is considered as inventory. (Round your answers to 2 decimal places.)
Based on the 2a above would the company qualify for the loan? (Yes/No)
Calculate the following if the old machine is sold off. (Round your answers to 2 decimal places.)
Based on the 2c above would the company qualify for the loan? (Yes/No)
Venice InLine, Inc., was founded by Russ Perez to produce a specialized in-line skate he had designed for doing aerial tricks. Up to this point, Russ has financed the company with his own savings and with cash generated by his business. However, Russ now faces a cash crisis. In the year just ended, an acute shortage of high-impact roller bearings developed just as the company was beginning production for the Christmas season. Russ had been assured by his suppliers that the roller bearings would be delivered in time to make Christmas shipments, but the suppliers were unable to fully deliver on this promise. As a consequence, Venice InLine had large stocks of unfinished skates at the end of the year and was unable to fill all of the orders that had come in from retailers for the Christmas season. Consequently, sales were below expectations for the year, and Russ does not have enough cash to pay his creditors.
Well before the accounts payable were due, Russ visited a local bank and inquired about obtaining a loan. The loan officer at the bank assured Russ that there should not be any problem getting a loan to pay off his accounts payable—providing that on his most recent financial statements the current ratio was above 2.0, the acid-test ratio was above 1.0, and net operating income was at least four times the interest on the proposed loan. Russ promised to return later with a copy of his financial statements.
Jurgen would like to apply for a $125,000 six-month loan bearing an interest rate of 8% per year. The unaudited financial reports of the company appear below.
Explanation / Answer
1a ) i) Current Ratio = Current Asset/ Current Liabilities
So current ration would be 495 /286=1.73
ii) Acid Test Ratio = (Current Asset- Inventory - Prepaid Exp) / Current Liabilities
(495- 290 -35) /286 = 0.59
iii) Net Operating Income to Interest converage = Net Operating Income / Interest
Net Operating Income = 30 Thousand, Interst is 125000*8%*6/12 =5K
=30/5 = 6 Times
1 b) Based on statement made by loan officer , company will not get loan as both ratio are lower than the bank requirement.
2) If old mashinery of 120 thounsand considered as inventory :
current ratio = Current Asset/ Current Liabilities
So current ration would be (495+120) /286= 2.15
Acid Test Ratio = (Current Asset- Inventory - Prepaid Exp) / Current Liabilities
So it makes no difference as (495+120- 290-120 -35) /286 = 0.59.
2b) Still company is not meeting acid test ratio.
2 c) If Old Mashinery is sold off : It will reduce inventory but will add cash hence revised current asset = 615
Current Ratio = 615 /286= 2.15
Acid Test Ratio : (Current Asset- Inventory - Prepaid Exp) / Current Liabilities
(615-290 -35) /286 = 1.01.
In this case both criteria are meeting i.e. Current ratio more than 2 and acid test ration more than 1. Hence Yes, company will qualify for loan.
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