Question

(Financial

analysis​)

The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The​ firm's sales were

​$600,000

for the year just​ ended, and its total assets was

​$408,300.

The company was started by Mr. Jarmon just 10 years ago and has been profitable every year since its inception. The chief financial officer for the​ firm, Brent​ Vehlim, has decided to seek a line of credit totaling

​$80,000

from the​ firm's bank. In the​ past, the company has relied on its suppliers to finance a large part of its needs for inventory.​ However, in recent months tight money conditions have led the​ firm's suppliers to offer sizable cash discounts to speed up payments for purchases. Mr. Vehlim wants to use the line of credit to replace a large portion of the​ firm's payables during the​ summer, which is the​ firm's peak seasonal sales period.The​ firm's two most recent balance sheets were presented to the bank in support of its loan request. In​ addition, the​ firm's income statement for the year just ended was provided.

. Mike​ Ameen, associate credit analyst for the Merchants National Bank of​ Midland, Michigan, was assigned the task of analyzing​ Jarmon's loan request.

T.P. Jarmon Company, Balance Sheet for 12/31/2017 and 12/31/2018
ASSETS	2017		2018
Cash	$15,000		$14,000
Marketable securities	6,000		6,200
Accounts receivable	42,000		33,000
Inventory	51,000		84,000
Prepaid rent	1,200		1,100
Total current assets	$115,200		$138,300
Net plant and equipment	286,000		270,000
Total assets	$401,200		$408,300
LIABILITIES AND OWNERS' EQUITY
Accounts payable	$48,000		$57,000
Notes payable	15,000		13,000
Accruals	6,000		5,000
Total current liabilities	$69,000		$75,000
Long-term debt	160,000		150,000
Common stockholders' equity	172,200		183,300
Total liabilities and equity	$401,200		$408,300

T.P. Jarmon Company, Income Statement for the Year Ended 12/31/2018
Sales (all credit)			$600,000
Less cost of goods sold			460,000
Gross profit			$140,000
Less operating and interest expenses
General and administrative	$30,000
Interest	10,000
Depreciation	30,000
Total			$70,000
Earnings before taxes			$70,000
Less taxes			14,700
Net income available to common stockholders			$55,300
Less cash dividends			44,200
Change in retained earnings			$11,100

a. Calculate the financial ratios for

2018

corresponding to the industry norms provided in the popup​ window:

RATIO	NORM
Current ratio	1.80
​Acid-test ratio	0.90
Debt ratio	0.50
Times interest earned	10.00
Average collection period	20.00
Inventory turnover​ (based on cost of goods​ sold)	7.00
Return on common equity	12.0	​%
Operating return on assets	16.8	​%
Operating profit margin	14.0	​%
Total asset turnover	1.20
Fixed asset turnover	1.80

.

b. Which of the ratios reported in the industry norms do you feel should be most crucial in determining whether the bank should extend the line of​ credit?

c. Prepare​ Jarmon's statement of cash flow for the year ended December​ 31,

2018.

d. Use the information provided by the financial ratios and the cash flow statement to decide if you would support making the loan.

a. Calculate the financial ratios for

2018

.The current ratio is???

RATIO	NORM
Current ratio	1.80
​Acid-test ratio	0.90
Debt ratio	0.50
Times interest earned	10.00
Average collection period	20.00
Inventory turnover​ (based on cost of goods​ sold)	7.00
Return on common equity	12.0	​%
Operating return on assets	16.8	​%
Operating profit margin	14.0	​%
Total asset turnover	1.20
Fixed asset turnover	1.80

Answer 1

a) Ratios

Note

1, In acid test ratio Inventory & Prepaid exepences are not included in Current assets as they are not quick assets.

2.In all turnover ratios average is taken.

Ratios		Industry	T.P. Jarmon company ( Computed)
Current ratio		1.8	1.84
Acid test ratio		0.9	0.71
Debt ratio		0.5	0.55
Time interest earned		10	8
Avreage collection period		20	22.8125
Inventory turn over		7	6.8148
Return on common equity		12.00%	30.17%
Operating return on assets		16.80%	19.77%
Operating profit margin		14.00%	13.33%
Total asset turnover		1.2	1.482
Fixed asset turnover		1.8	2.15

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