Question

(Ratio Computations and Additional Analysis) Bradburn 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 Bradburn 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 $35,000notes,whicharedueonJune30,2018,andSeptember30,2018.Anothernoteof$6,000 is due on March 31, 2019, but he expects no difficulty in paying this note on its due date. Brown explained that Bradburn’s cash flow problems are due primarily to the company’s desire to finance a \(300,000 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

BRADBURN CORPORATION BALANCE SHEET MARCH 31
Assets	2018	2017
Cash	\) 18,200	\( 12,500
Notes receivable	148,000	132,000
Accounts receivable (net)	131,800	125,500
Inventories (at cost)	105,000	50,000
Plant & Equipment (net of depreciation)	1,449,000	1,420,500
Total assets	\)1,852,000	\(1,740,500
Liabilities and Stockholders’ Equity
Accounts payable	\) 79,000	\( 91,000
Notes payable	76,000	61,500
Accrued liabilities	9,000	6,000
Common stock (130,000 shares, \)10 par)	1,300,000	1,300,000
Retained earnings*	388,000	282,000
Total liabilities and stockholders’ equity	\(1,852,000	\)1,740,500

*Cash dividends were paid at the rate of $1pershareinthefiscalyear2017and$2 per share in the fiscal year 2018.

BRADBURN CORPORATION INCOME STATEMENT FOR THE FISCAL YEARS ENDED MARCH 31
	2018	2017
Sales revenue	\(3,000,000	\)2,700,000
Cost of goods sold*	1,530,000	1,425,000
Gross margin	1,470,000	1,275,000
Operating expenses	860,000	780,000
Income before income taxes	610,000	495,000
Income taxes (40%)	244,000	198,000
Net income	\( 366,000	\) 297,000

Depreciation charges on the plant and equipment of $100,000and$102,500 for fiscal years ended March 31, 2017, and 2018, respectively, are included in the cost of goods sold.

Instructions

b)Identify and explain what other financial reports and/or financial analyses might be helpful to the commercial loan officer of Topeka National Bank in evaluating Daniel Brown’s request for a time extension on Bradburn’s notes.

Short answer

Bradburn's liquidity can be tested by day to day sales in accounts receivable turnover and day to day sales in inventory.

Step-by-step solution

Meaning of Liquidity Ratio

The liquidity ratio indicates a person's capacity to pay off debtswhen they become due. To put it another way, this ratio indicates how rapidly a corporation can turn its present assets into cash in order to pay down its liabilities on time. Liquidity and short-term solvency are frequently used simultaneously.

Explaining other financial reports and financial analyses which might be helpful

The following are the other financial reports and financial analyses which might be helpful to the commercial loan officer of Topeka National Bank:

1. The amount of cash provided by operating operations, other sources of cash, and the use of cash to meet long-term resources and long-term credit needs will be highlighted in the statement of cash flows.
2. Forecasted financial statements for 2019, including a forecasted statement of cash flows. An investigation into Bradburn's entire budget would also be beneficial. These items will be used to present management's operational forecast for the coming year.
3. Additional ratios such as day sales in receivables, account receivable turnover, and day sales in inventory are used to test Bradburn's liquidity.
4. Bradburn is being investigated to see how much leverage he is using.