Indigo Corporation was formed 5 years ago through a public subscription of commo
ID: 2527763 • Letter: I
Question
Indigo 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 Indigo 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 $34,740 notes, which are due on June 30, 2018, and September 30, 2018. Another note of $6,020 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Indigo’s cash flow problems are due primarily to the company’s desire to finance a $297,240 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.
INDIGO CORPORATION
BALANCE SHEET
MARCH 31
2018
2017
INDIGO CORPORATION
INCOME STATEMENT
FOR THE FISCAL YEARS ENDED MARCH 31
2018
2017
(a) Compute the following items for Indigo Corporation. (Round answer to 2 decimal places, e.g. 2.25 or 2.25%.)
2017
2018
INDIGO CORPORATION
BALANCE SHEET
MARCH 31
2018
2017
Cash $18,040 $12,400 Notes receivable 147,260 131,030 Accounts receivable (net) 132,340 125,790 Inventories (at cost) 105,650 49,690 Plant & equipment (net of depreciation) 1,445,350 1,431,190 Total assets $1,848,640 $1,750,100 Liabilities and Owners’ Equity Accounts payable $79,080 $91,660 Notes payable 75,330 61,330 Accrued liabilities 16,660 11,510 Common stock (130,000 shares, $10 par) 1,290,130 1,306,340 Retained earningsa 387,440 279,260 Total liabilities and stockholders’ equity $1,848,640 $1,750,100 aCash dividends were paid at the rate of $1 per share in fiscal year 2017 and $2 per share in fiscal year 2018.Explanation / Answer
1. Current Ratio = current assets / current liabilities
Current assets = cash + notes receivable + accounts receivable + inventories
Current liabilities = accounts payable + notes payable + accrued liabilities
Current Ratio 2017 =(12400+131030+125790+49690)/(91660+61330+11510)=1.94:1
Current Ratio 2018 = (18040+147260+132340+105650)/(79080+75330+16660)=2.36:1
2. Acid-test (quick) ratio = quick assets / current liabilities
Quick assets = cash + notes receivable + accounts receivable
Current liabilities = accounts payable + notes payable + accrued liabilities
Acid test ratio 2017 = (12400+131030+125790)/(91660+61330+11510)=1.64:1
Acid test ratio 2018= (18040+147260+132340)/(79080+75330+16660)=1.74:1
3. Inventory turnover = cost of goods sold /Average inventory
Inventory turnover for 2018= (1533470-102670)/((49690+105650)/2)=18.42 times
Return on assets = net income /Average total assets
Return on assets 2017= 292962/((1750100+1673770)/2)=17.11%
Return on assets 2018=351468/((1750100+1848640)/2)=19.53%
5. Percentage change in 2018 = (value in 2018 - value in 2017)/value in 2017
Sales revenue =(2971790-2699340) /2699340 =10.09%
Cost of goods sold = ((1533470-102670)-(1433480-100490))/(1433480-100490)=7.34%
Gross margin = ((1438320+102670)-(1265860+100490))/(1265860+100490)=12.78%
Net income after sales =(351468-292962)/292962=19.97%
(note: inclusion of depreciation in cost of goods sold affects cost of goods sold and gross profit).