Arrowbell Company is a growing company. Two years ago, it decided to expand in order to increase its production capacity. The company anticipates that the expansion program can be completed in another two years. Financial information for Arrowbell is as follows.
ARROWBELL COMPANY
Sales and Net Income
Year Sales Net Income
2007 $2,568,660 $145,800
2008 2,660,455 101,600
2009 2,550,180 52,650
2010 2,625,280 86,800
2011 3,680,650 151,490
ARROWBELL COMPANY
Balance Sheet
December 31, 2011 and 2010
2011 2010
Assets
Current assets:
Cash $ 250,480 $ 260,155
Accounts receivable (net) 760,950 690,550
Inventories at lower-of-cost-or-market 725,318 628,238
Prepaid expenses 18,555 20,250
Total current assets 1,755,303 1,599,193
Plant and equipment:
Land, buildings, machinery, and equipment 3,150,165 2,646,070
Less: Accumulated depreciation 650,180 525,650
Net plant and equipment 2,499,985 2,120,420
Other assets:
Cash surrender value of life insurance 20,650 18,180
Other 40,660 38,918
Total other assets 61,310 57,098
Total assets $4,316,598 $3,776,711
Liabilities and Stockholders' Equity
Current liabilities:
Notes and mortgages payable, current portion $ 915,180 $ 550,155
Accounts payable and accrued liabilities 1,160,111 851,080
Total current liabilities 2,075,291 1,401,235
Long-term notes and mortgages payable, less current portion
above 550,000 775,659
Total liabilities 2,625,291 2,176,894
Stockholders' equity:
Capital stock, par value $1.00; authorized, 800,000; issued
and outstanding, 600,000 (2011 and 2010) 600,000 600,000
Paid in excess of par 890,000 890,000
Retained earnings 201,307 109,817
Total stockholders' equity 1,691,307 1,599,817
Total liabilities and stockholders' equity $4,316,598 $3,776,711
(P 10-6 CONTINUED)
414 CHAPTER 10
9781285276106, Financial Reporting and Analysis, Charles H. Gibson - © Cengage Learning.
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ARROWBELL COMPANY
Statement of Cash Flows
For Years Ended December 31, 2011 and 2010
2011 2010
Cash flows from operating activities:
Net income $ 151,490 $ 86,800
Noncash expenses, revenues, losses, and gains included in
income:
Depreciation 134,755 102,180
Increase in accounts receivable (70,400) (10,180)
Increase in inventories (97,080) (15,349)
Decrease in prepaid expenses in 2011, increase in 2010 1,695 (1,058)
Increase in accounts payable and accrued liabilities 309,031 15,265
Net cash provided by operating activities 429,491 177,658
Cash flows from investing activities:
Proceeds from retirement of property, plant, and equipment 10,115 3,865
Purchases of property, plant, and equipment (524,435) (218,650)
Increase in cash surrender value of life insurance (2,470) (1,848)
Other (1,742) (1,630)
Net cash used for investing activities (518,532) (218,263)
Cash flows from financing activities:
Retirement of long-term debt (225,659) (50,000)
Increase in notes and mortgages payable 365,025 159,155
Cash dividends (60,000) (60,000)
Net cash provided by financing activities 79,366 49,155
Net increase (decrease) in cash $ (9,675) $ 8,550
Required
a. Comment on the short-term debt position, including computations of current ratio, acid-test ratio, cash ratio, and operating cash flow/current maturities of long-term debt and current notes payable.
b. If you were a supplier to this company, what would you be concerned about?
c. Comment on the long-term debt position, including computations of the debt ratio, debt/equity, debt to tangible net worth, and operating cash flow/total debt. Review the statement of operating cash flows.
d. If you were a banker, what would you be concerned about if this company approached you for a long-term loan to continue its expansion program?
e. What should management consider doing at this point with regard to the company's expansion program?