Financial Ratios. Warford Corporation was formed 5 years ago through a public subscription of common stock. Lucinda Street, who owns 15 percent of the common stock, was one of the organizers of Warford and is its current president. The company has been successful, but it is currently experiencing a shortage of funds. On June 10, Street approached the Bell National Bank, asking for a 24-month extension of two $30,000 notes, which are due on June 30, 20X2, and September 30, 20X2. Another note of $7,000 is due on December 31, 20X2, but Street expects to have no difficulty in paying this note on its due date. Street explained that Warford’s cash flow problems are primarily due to the company’s desire to finance a $300,000 plant expansion over the next two fiscal years through internally generated funds.
The commercial loan officer of Bell National Bank requested financial reports for the last two fiscal years. These reports are reproduced below.
Warford Corporation Income Statement For the Fiscal Years Ended March 31, 20X1 and 20X2
20X1 20X2
Sales $2,700,000 $3,000,000
Cost of goods solda 1,720,000 1,902,500
Gross margin $ 980,000 $1,097,500
Operating expenses 780,000 845,000
Net income before taxes $ 200,000 $ 252,500
Income taxes (40%) 80,000 101,000
Income after taxes $ 120,000 $ 151,500
” Depreciation charges of $100,000 on the plant and equipment and $102,500 for fiscal years ended March 31, 20X1 and 20X2, respectively, are included in cost of goods sold.
Warford Corporation Statement of Financial Position March 31, 20X1 and 20X2
20X1 20X2
ASSETS
Cash $ 12,500 $ 16,400
Notes receivable 104,000 112,000
Accounts receivable (net) 68,500 81,600
Inventories (at cost) 50,000 80,000
Plant and equipment (net of depreciation) 646,000 680,000
Total assets $881,000 $970,000
LIABILITIES AND OWNERS’ EQUITY
Accounts payable $ 72,000 $ 69,000
Notes payable 54,500 67,000
Accrued liabilities 6,000 9,000
Common stock (60,000 shares, $10 par) 600,000 600,000
Retained earningsa 148,500 225,000
Total liabilities and owners’ equity $881,000 $970,000
“ Cash dividends were paid at the rate of $1 per share in fiscal year 20X1 and $1.25 per share in fiscal year 20X2.
Calculate the following items for Warford Corporation: (a) current ratio for fiscal years 20X1 and 20X2; (b) quick (acid-test) ratio for fiscal years 20X1 and 20X2; (c) inventory turnover for fiscal year 20X2; (d ) return on assets for fiscal years 20X1 and 20X2; and (e) percentage change in sales, cost of goods sold, gross margin, and net income after taxes from fiscal year 20X1 to 20X2. (CMA, adapted).