aspero, inc. has sales of approximately $500,000 per year. Aspero requires a sho

Question

aspero, inc. has sales of approximately $500,000 per year. Aspero requires a short-term loan of $100,000 to finance its working capital requirements. two banks are considering aspero's loan request but each bank requires certain minimum conditions be satisfied. bank america requires at least a 25% gross margin on sales, and bank boston requires a 2:1 current ratio. the following information is available for aspero for the current year:

- sales returns and allowances are 10% of sales
- purchases returns and allowances are 2% of purchases
- sales discounts are 2% of sales
- purchase discounts are 1% of purchase
- ending inventory is $138,000
- cash is 10% of accounts receivable
- credit terms to aspero's customers are 45 days
- credit terms aspero receives from its suppliers are 90 days
- purchases for the year are $400,000
- ending inventory is 38% greater than beginning inventory
- accounts payable are the only current liability

Required
assess whether aspero, inc. meets the credit constraint for a loan from either or both banks. show computations.

Explanation / Answer

Purchase= 400000 Sales return= 50000 Purchase return= 8000 Sales discount= 10000 Purchase discount= 4000 closing stk= 138000 opening stk= 100000 cash= 6164.38 A/R= 45x(500000/365)= 61643.8 A/P= 90x(400000/365)= 98630.137 gross profit= 138000+500000-100000-400000+8000-50000= $96000 gross profit/sales= 96000/500000= 19.2% Required gross profit/sales= 96000/500000= 19.2% Current ratio= (61643.8+6164.38)/98630.137= .687 aspero, inc. does not meets the credit constraint for a loan from both banks

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