Problem 24-3 Larkspur Corporation was formed 5 years ago through a public subscr

Question

Problem 24-3 Larkspur Corporation was formed 5 years ago through a public subscription of common stock, Daniel Brown, who owns 15% of the common stock, was one of the organizers of Larkspur and is its current president. The company has been successful, but it currently is experiencing a shortage of funds. On June 10, 2018, Daniel Brown approached the Topeka National Bank, asking for a 24-month extension on two $34,980 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,060 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Larkspur's cash flow problems are due primarily to the company's desire to finance a $298,500 plant expansion over the next 2 fiscal years through internally generated funds The commercial loan officer of Topeka National Bank requested the following financial reports for the last 2 fiscal years. LARKSPUR CORPORATION BALANCE SHEET MARCH 31 2018 2017 Assets Cash Notes receivable Accounts receivable (net) Inventories (at cost) Plant & equipment (net of depreciation) $18,050 147,320 132,920 105,990 1,445,010 $1,849,290 $12,590 130,790 125,940 49,780 1,412,350 $1,731,450 Total assets wn Accounts payable Notes payable Accrued liabilities Common stock (130,000 shares, $10 par) Retained earningsa $78,710 76,570 3,810 1,301,250 388,950 $1,849,290 $90,810 61,260 1,880 1,293,620 283,880 $1,731,450 Total liabilities and stockholders' equity aCash dividends were paid at the rate of $1 per share in fiscal year 2017 and $2 per share in fiscal year

Explanation / Answer

(1)Current Ratio

Current Ratio = Current Assets / Current Liability

2017

Current Ratio      

= ($12590 + $130790 + $125940 + $49780) / ($90810 + $61260 + $1880)

= $319,100 / $153950

=2.07 Times

2018

Current Ratio      

= ($18050 + 147320 + 132920 + 105990) / (78710 + 76570 + 3810)

= $404280 / 159090

= 2.54 Times

(2)Acid Test Ratio

Acid Test Ratio = (Current assets – Inventory) / Current Liabilities

2017

= ($319100 – 49780) / 153950

= 1.75 Times

2018

= ($404280 – 105990) / 159090

= 1.87 Times

(3)Inventory Turnover (2018)

= Cost of goods sold / Average Inventory

= $1528300 / [ (105990 + 49780)/2]

= 19.62 Times

(4)Return on Assets

= Net Income / Average Total Assets

2017

= $302598 / [ (1731450 + 1690000)/2]

= 17.69%

2018

= $362382 / [ (1849290 + 1731450)/2]

= 20.24%

(5) Sales Revenue - Percentage Change

= [ (3,000,740 - 2,718,060 ) / 2,718,060 ] * 100

= 10.4%

(5) Cost of goods sold - Percentage Change

= [ (1528300 – 1433820) / 1433820 ] * 100

= 6.6%

(5) Gross Margin - Percentage Change

= [ (1472440 – 1284240) / 1284240 ] * 100

= 14.7%

(5) Net Income after tax - Percentage Change

= [ (362382 – 302598) / 302598 ] * 100

= 19.8%

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