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Comment on the short-term debt position including

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Reference no: EM13479191

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 sles 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


12/31/2011 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 10,250
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 2,776,711
Liabilities and Stockholders%u2019 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
5,550,000 775,659
Total liabilities 2,625,291 2,176,894
Stockholders%u2019 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%u2019 equity 1,691,07 1,599,817
Total liabilities and stockholders%u2019 equity 4,316,598 3,776,711
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 -87,080 -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 -1,849
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



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%u2019s expansion program?

Reference no: EM13479191

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